Archive for January 13th, 2020

A monetary policy framework for all seasons?

January 13, 2020

Mark Carney of Bank of England in this speech argues that Inflation targeting has been a framework for all seasons in UK:

To set the stage for today’s discussions, I would like to do two things. First, I will review the conduct and performance of inflation targeting during my time as Governor. This period, which roughly coincides with the post-crisis recovery and which has seen more than its share of shocks and structural developments,
provides some insights to the ability of inflation targeting to deliver price stability and support macroeconomic outcomes. I will suggest that, so far at least, inflation targeting has proven to be a framework for all seasons, an essential part of a robust foundation for economic prosperity.

Conclusion:

To conclude, the flexibility in the UK monetary policy framework means that the MPC has been able to support the UK economy through the changing of the seasons.

Despite the economy being buffeted by diverse and sizable shocks since the recovery began, inflation has averaged 1.7%; GDP growth has generally been robust, averaging around 2%, and above the subdued rate of potential supply growth. The wide margin of spare capacity present after the crisis was absorbed,
unemployment is at multi-decade lows and employment at an all-time high. Real wages have finally returned to relatively strong rates of growth. Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.

This performance underscores that the bar for changing the regime is high. But it is nonetheless healthy to review it periodically, and that review is supported by the Bank’s active research agenda. Today’s workshop is organised with that in mind, and we appreciate all your contributions to help focus our research efforts.

There is an old saying that there is no such thing as bad weather, just inappropriate clothing. With the economic climate changing, let’s ensure that the Bank remains well suited to deliver its mission to maintain price and financial stability in support of the Good of the people of the United Kingdom

Hmm…

I would actually argue that more than the framework, central bankers have been really flexible to bring all kinds of changes in the monetary policy.

Found and busted: Rs 2000 fake note printing gang

January 13, 2020

This blog is super interested in all kinds of money news including the counterfeiting ones.

This news caught my eye:

(more…)

Bankers as Immoral? The Parallels between Aquinas’s Views on Usury and Marxian Views of Banking and Credit

January 13, 2020

Thomas Lambert of University of Louisville in this interesting paper looks at history of thought on banking:

Throughout history, the performance, practices and ethics of bankers and banking in general have received mixed reviews in both popular and scholarly writings. Early writings by philosophers, clerics, and scribes played a crucial role in the perceptions of banking and banking occupations. Thomas Aquinas’s thoughts and writings were greatly influenced by the Romans’ and Aristotle’s opinions on usury and the charging of interest, and Aquinas was in a position to have his opinions implemented in policy and practice.

Marx noted how banking and credit were used to expand the production and sales of a capitalistic economy beyond certain limits, although his focus was mostly on credit extended to businesses. At the same time, he wrote about how the credit system could lead to economic crises as well as to the concentration and centralization of capital. While lending is motivated by profit, and while households are not coerced into borrowing money, the justice of a system which exploits workers and at the same time encourages them to borrow money in order to maintain a certain standard of living can be viewed as unfair and immoral.

The value of goods, according to Aquinas and Marx, should mostly reflect the value of labor embodied in them, and for that reason, labor should be compensated fully for its work.

For these reasons, Aquinas and Marxian economists offer somewhat similar views on both the labor theory of value as well as on the morality of certain banking practices. If credit and the banking system also bring about crisis and the greater concentration and centralization of capital, then the morality of
these outcomes also needs to be examined.

Morality has been off economic discussions for a while. It has become so so important today..

How does information management and control affect bank stability: Evidence from FDR’s Bank Holiday

January 13, 2020

Haelim Anderson and Adam Copeland in this NY Fed paper:

How does information management and control affect bank stability? Following a national bank holiday in 1933, New York state bank regulators suspended the publication of balance sheets of state-charter banks for two years, whereas the national-charter bank regulator did not.

We use this divergence in policies to examine how the suspension of bank-specific information affected depositors.

We find that state-charter banks experienced significantly less deposit outflows than national-charter banks in 1933. However, the behavior of bank deposits across both types of banks converged in 1934 after the introduction of federal deposit insurance.

Interesting. One would imagine that deposits flows would be higher for more transparent banks but opposite is the case.

Implications? Mindful of too much transparency in times of crisis..

Our study has important implications for policy today. Following the financial crisis of 2007-09, policymakers have attempted to promote the market discipline of financial institutions by enhancing public disclosure, with the goal of improving financial stability. Our work highlights, however, that after implementing rules requiring greater public disclosure during normal times, regulators should bear in the mind the value of suppressing information about individual institutions in times of crisis.

 

The Dilemma of Central Banking: To follow Keynesian, Fisherian or Neo Fisherian

January 13, 2020

Nice Proj Synd piece by Miao Yangling:

Neoclassical thinkers in the tradition of Alfred Marshall, Knut Wicksell, and Irving Fisher believe that real interest rates are determined by real economic forces. Money (or monetary policy) is neutral, and the rate of interest is that which equilibrates saving and investment, as determined by time preference and returns, respectively. (Hence, the title of Fisher’s 1930 book on the topic is: The Theory of Interest, as Determined by Impatience to Spend Income and Opportunity to Invest It.) Using the neoclassical framework, one can identify a range of structural factors – from demographic changes driving up savings to slower technological progress reducing demand – to explain the secular decline in interest rates.

By contrast, according to John Maynard Keynes’s “Liquidity Preference Theory,” interest is best understood as a reward for parting with liquidity for a specified period of time. As such, it is not about saving in general, but about the saving of money in particular. The interest rate, then, is determined jointly by the supply of liquidity and economic agents’ preference for money.

In normal times, these two schools of thought run in parallel and can coexist. Keynes focused on the nominal rate, while Fisher focused on the real rate; Keynes emphasized the short term, and Fisher the long run. Keynes’s principle of monetary non-neutrality in the short run does not directly conflict with Fisher’s principle of neutrality in the long run. Usually, when central banks act in a Keynesian manner by cutting nominal rates, real rates will fall, owing to the sticky-price effect.

Yet, with interest rates now stuck near or at the zero-lower bound (ZLB), these two views might collide: a nominal-rate cut will elicit an immediate one-for-one reduction in inflation expectations, leaving the real rate unchanged. Some economists refer to this change in expectations as the “neo-Fisherian effect,” because the traditional Fisher effect – whereby inflation tracks the nominal rate by a factor of one to one – is supposed to happen only in the long run. A Fisherian effect will not happen if inflation expectations remain well anchored. But once rates are trapped at or near the ZLB, inflation expectations begin to fall; the usual Keynesian effect comes to be dominated by the neo-Fisherian effect.

Hence, a distinct feature of the ZLB is that it is where Fisher crowds out Keynes. Central banks can cut nominal rates to zero or into negative territory all they want, but real rates will remain unchanged. The more Keynesian a central bank acts (by trying to stimulate demand through rate cuts), the more Fisherian the economy becomes, at least in terms of inflation expectations. And when this happens, monetary policy becomes not just impotent but potentially harmful.

To be sure, the neo-Fisherian perspective is controversial in academic circles. But even if there is no perverse Fisherian effect, interest-rate pegging or a situation in which rates are involuntary trapped at the ZLB could still amplify shocks. For central banks, avoiding these conditions can pose a dilemma. Should they cut rates when necessary, even if doing so might bring on a Fisherian trap?

Look beyond Mon Policy:

An overdose of monetary policy may create conditions of monetary “non-neutrality” by pushing down the equilibrium real rate. This can happen through at least two channels. The first is the financial boom-bust cycle. Persistently low interest rates encourage risk-seeking, and can result in financial imbalances and debt build-ups. When the music stops, central banks must reduce rates even further to counter the inevitable bust. The second channel is resource misallocation, which can happen when too much liquidity inhibits Schumpeterian “creative destruction” by offering a lifeline to uncompetitive firms.

Resolving the dilemma will require a fundamental change in the design and implementation of economic policy. We need far better policy coordination at the national and international levels. At the country level, monetary policy cannot be the “only game in town.” Not only should fiscal policy and structural reforms play a larger role, but macroprudential policy should be made a top priority, in order to contain financial boom-bust cycles.

At the international level, a well-integrated financial safety net would help reduce the need for self-insurance through safe assets. One good way to pool resources would be to enhance the International Monetary Fund’s firepower through quota reforms. A  new and improved international monetary system won’t be built in a day, but we have to start somewhere.

Hmm..


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