Archive for June 16th, 2021

When should policymakers reach for the history books? Some examples from the 20th century

June 16, 2021

Catherine Schenk in BankUnderground blog:

Since the Great Financial Crisis started in 2007 there has been renewed interest in using the past as a basis for policy responses in the present, but how useful is history and how is it best used? Certainly, the old chestnut that ‘those who neglect the past are sure to repeat it’ is a valid warning, but how to select the appropriate historical examples and draw the right lessons is a more nuanced exercise that is explored in this post.

    • Galbraith (1990): ‘the extreme brevity of the financial memory’ makes financial markets susceptible to unstable euphoria.
    • Greenspan (1997): ‘regrettably, history is strewn with visions of such ‘new eras’ that, in the end, have proven to be a mirage. In short, history counsels caution’.
    • Macmillan (2008): ‘the past can be used for almost anything you want to do in the present’.
    • Bernanke et al (2019): ‘Financial crises recur in part because memories fade’.

Perhaps we need to think beyond just crises when we consider how history can be helpful to central bankers. The essence of economic history is to highlight the importance of institutions and the political and social context of economic outcomes. Knowing about how policies were developed in the past can enhance our understanding of the changing context of policy implementation. To do this, uncovering in the archives the options that were rejected might be as important as assessing the impact of policies that were adopted. More broadly, historical case studies can be used as a training ground for central bank staff and broaden their conceptual or theoretical imagination by challenging current ideas of what central banks are for and what their priorities should be. This may become increasingly important as the central banking orthodoxy from the past 30 years begins to break down.

Central banks will need flexible minds to face future challenges. Finally, of course, economic historians create long-term data sets to provide the raw material to test and inform shifts in economic policy. The Bank’s Millenium of Macroeconomic Data is a good example of this. In 2009 at age 94, Paul Samuelson’s advice to economists was ‘Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come’.

Catherine lists several books which point to lessons for today. In the end:

In sum, history provides a playground for policymakers to apply data or scenarios to their policymaking and to provide inspiration for thinking outside the box. But the pursuit of lessons from economic history must be carefully calibrated to the underpinning institutional setting – this nuance calls for greater collaboration between economic historians and central bankers.

10 questions and answers about the distributional effects of monetary policy

June 16, 2021

Björn Andersson, Mikael Apel and Iida Häkkinen Skans of Riksbank (Sweden central bank) in this paper look at 10 questions around distributional aspects of mon pol:

Income disparities have remained roughly unchanged since 2015, but have increased in the longer term. The increased income disparities are due to the incomes of those who are not working having increased much less than wage incomes, while capital incomes have increased significantly for those with the highest incomes. The coronavirus pandemic is likely to increase income disparities. It is more difficult to analyse what has happened to the differences in wealth in Sweden because there have been no statistics since 2007.

An expansionary monetary policy affects the economy broadly. A fall in interest rates has an effect on the economy that, in principle, benefits all households but in different ways and to different degrees. Higher asset prices mean, among other things, that income from capital gains increases and that this goes to people at the top of income distribution to the greatest extent. The fact that more people are employed and receive wage income instead of different kinds of benefits means that income increases to a relatively large extent for people in the lower part of the income distribution. It is therefore difficult to know what the overall effect on the income distribution  will be.

The Riksbank does not have an assigned  task connected to distribution policy other than that of keeping prices stable, which does, in fact, include a distribution dimension. This is because high and volatile inflation would cause arbitrary redistribution of income and wealth. The active use of monetary policy for distributional policy purposes would be difficult for several reasons, not least because it affects the economy broadly. A less expansionary monetary policy could certainly contribute to slowing down asset prices but this would be at the cost of higher unemployment. Although the overall final result could be a more even distribution, the situation would, in practice, be worse for groups that are already weak.

 

CBDCs beyond borders: Allowing tourists to use CBDC?

June 16, 2021

Raphael Auer, Codruta Boar, Giulio Cornelli, Jon Frost, Henry Holden and Andreas Wehrli in this BIS survey:

Central bank digital currencies (CBDCs) could ease current frictions in cross-border payments – and particularly so if central banks factor an international dimension into CBDC design from the outset. Based on a survey of 50 central banks in the first quarter of 2021, this paper explores initial thinking on the cross-border use of CBDCs.

While most central banks have yet to take a firm decision on issuing a CBDC, the survey responses show a tentative inclination towards allowing use of a future CBDC by tourists and other non-residents domestically. They have a cautious approach to allowing use of a CBDC beyond their own jurisdiction. Concerns about the economic and monetary implications of cross-border CBDC use and about private sector global stablecoins are taken seriously.

At the wholesale level, 28% of surveyed central banks are considering options to make CBDCs interoperable by forming multi-CBDC arrangements. This involves arrangements that enhance compatibility, interlink or even integrate multiple CBDCs into a single payments system. Finally, almost 14% of respondents are considering an active role for the central bank in FX conversion.

 

Saas, bahu, and ASHA: Information diffusion in rural Bihar

June 16, 2021

Mousumi Dutta, Saswata GhoshZakir Husain in this Ideas4India article:

India has made significant progress in improving maternal and child health outcomes, and the contribution of ASHAs – female community health workers – in promoting healthcare-seeking behaviour is widely acknowledged. In this context, Dutta et al. discuss findings from their study in rural Bihar and highlight two key issues: mothers-in-laws acting as mediators in the interaction between ASHAs and women of reproductive age, and the limited success in influencing educated women from affluent families.


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