Archive for March 2nd, 2023

New worries for central bankers

March 2, 2023

IMF’s recent FInance and Development issue (March 2023) is focused on central banks and monetary policy.

Gita Bhatt, the editor of the magazine summarises several articles/views in the issue:

“The job of the central bank is to worry.” That’s how Alice Rivlin, vice chair of the Federal Reserve Board in the 1990s, described the work of monetary policymakers. Back then, central bankers had one main concern: to keep inflation in check.

Now, inflation is one of several worries facing central banks. A rapidly changing economic backdrop leaves less maneuvering room for policy, while structural forces—from deglobalization to climate change, aging populations, and the advent of digital money—have greatly complicated the underlying policy challenge. Central bank mandates and even their independence are under increasing political pressure. These new forces and others raise questions about how monetary policy may have to change going forward.

In our latest issue of Finance & Development magazine, distinguished contributors offer insights on how central bankers can navigate an increasingly complex world.

The IMF’s Gita Gopinath details how economists need improved tools after existing models missed the recent inflation surge. Masaaki Shirakawa, former governor of the Bank of Japan concurs, noting that it’s time to reconsider the foundation and framework for monetary policy, paying attention to national differences. Princeton’s Markus Brunnermeier argues that in a post-pandemic world with higher inflation, lower growth, and more debt, central banks are still pursuing policies modelled for the days of tepid inflation, low interest rates, and robust growth.

How, then, should central bank frameworks and mandates change? Less is more, says Raghuram Rajan, former governor of the Reserve Bank of India. He explains why central banks should refocus on their primary role, price stability, while respecting financial stability. For Giancarlo Corsetti of the European University Institute, exceptional circumstances such as the pandemic may call for monetary and fiscal authorities to work together—but only temporarily and never at the cost of their independence. 

David G. Blanchflower and Andrew T. Levin of Dartmouth college suggest ways central bankers can avoid the temptation of groupthink, which can threaten their credibility. Academics Greg Kaplan, Benjamin Moll, and Giovanni Violante show how new economic models help us understand monetary policy’s influence on income and wealth distribution. Using a series of surveys, University of Chicago’s Michael Weber reveals how better monetary policy communications can shape expectations.

Elsewhere in the issue, we hear from other central bankers. The European Central Bank’s Philip Lane discusses euro area inflation and the challenge of shrinking its balance sheet. Lesetja Kganyago, governor of the South African Reserve Bank, Sukudhew Singh, former Deputy governor at Bank Negara Malaysia, and Leonardo Villar, governor of Colombia’s central bank provide their take on the interaction of fiscal and monetary policy, foreign exchange intervention, and inflation targeting, respectively. In a wide-ranging interview, Karnit Flug, former governor of the Bank of Israel, and its first female head, talks about the importance of central bank accountability and transparency.

Economics as a discipline is evolving in a highly uncertain era—one that demands reflection on models, customs, and assumptions. I hope you find this issue thought-provoking and one that helps spark further debate.


History matters: The ideas of Paul David

March 2, 2023

Timothy Guinnane , William A. Sundstrom and  Gavin Wright pay tribute to Paul David:

Paul David, who passed away in January 2023, was a major figure in redefining economic history; an early practitioner of cliometrics – exploring historical economies through rigorously specified models and quantitative evidence; and a strong advocate of the view that historical research should be fundamental to the economics discipline – that ‘history matters’. This column, written by a Stanford colleague and two former students, outlines some of his many contributions to our understanding of economic progress, not least the diffusion of new technologies. His account of the persistence of the QWERTY keyboard despite its technical disadvantages is one of the most cited articles in all of economics.

Using Youtube for stock manipulation

March 2, 2023

Sebi has issued two orders against youtubers engaged in stock manipulation:

Interesting cases of how youtube is being used to influence certain share prices and how SEBI is cracking on them. What times for regulators!

Seven reflections on Japan’s economy, monetary policy and the Bank of Japan

March 2, 2023

Masazumi Wakatabe, Deputy Governor of the Bank of Japan has an interesting speech on Japan’s economy and monetary policy.

The seven reflections are:

  • It is all about teamwork
  • Expect and prepare for the unexpected, but do not expect perfect foresight
  • Maintain focus, but adapt to changes
  • Research is essential, and economics is essential to research, but that is not the whole story
  • Japan offers exciting research topics
  • Communication is absolutely necessary, extremely important, but really difficult
  • Learn from the past, and prepare for the future

Japan offers exciting research topics:

Japan has been a source of fascinating research topics. The most well-known one is the zero lower bound (ZLB) or effective lower bound. Unfortunately, the Bank had to face this ZLB sooner than other central banks. Through my experience at the Bank, I am more convinced than ever that central banks need enough room for the inflation rate so that interest rates do not go down below zero.

Another important topic is how inflation expectations are formed (Chart 3). Standard New Keynesian models used in modern macroeconomics assume the convergence of the inflation rate with the inflation target. This assumes that inflation expectations are well-anchored to the target rate or converging to it soon. It reminds me of the classic joke about economists when confronted with a can on a desert island: “Let us assume there is a can opener.” In reality, inflation expectations are somewhat adaptive, formed through experience. This is especially important in the context where central banks have been trying to anchor inflation expectations at the target level.

Let me discuss the topic that interests me most. Why is deflation bad? It may seem obvious to the general public, but it is puzzling for economists, who tend to think of the economy in terms of real variables. This goes straight to the question why central banks should care about price stability. Alan Greenspan, former chair of the Federal Reserve, once voiced concernsabout deflation: deflation would sap pricing power from firms, so that business dynamism would be lost (Greenspan 2002; Watanabe 2022, pp. 285-87). In fact, since Japanese firms were unable to raise their selling prices under prolonged deflation, they could not increase wages and had to make enormous efforts to curb costs. Japan has also experienced a long period of stagnation with deflation or low inflation. One under-explored topic of great importance is what the effects of prolonged stagnation on the growth trend — sometimes known as hysteresis — exactly are.

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