From Stagnation to Modern Growth in England

Guillaume Vandenbroucke of St Louis Fed in this economic synopsis discusses modern economic growth in England:

Modern economic growth—the sustained increase of real gross domestic product (real GDP) per capita—is a relatively recent phenomenon in world history. But what led an economy to transition from stagnation to modern growth? Population and land availability contributed to the shift, but in what ways? 

In this essay, I describe the “pre-modern growth period” of England’s history and its transition to modern growth. I document population and GDP trends surrounding the Black Death pandemic of the early 14th century and the role of technological progress, specifically in agriculture.

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The Malthusian theory could, potentially, explain the transition from stagnation to modern growth, as displayed in Figures 1-3. But if one accepts this theory, instead of being exactly offset by the reduction of land per person (Figure 1), technological progress in agriculture would’ve had to have been fast enough to overcome this reduction. Such an explanation raises the following two questions: Where did the new technology come from? And why the continued emphasis on agriculture? A better theory must account for the declining importance of agriculture and the rising role of industry in modern economies. 

One such theory is as follows:

First, industrialization and the advent of machines (capital) make land less important in production. Second, ideas, scientific discoveries, and technological innovations are often embodied in new machines, and so capital is the vector through which technology affects the economy. Third, unlike land, machines can be built; and, therefore, when population increases, capital per person can remain constant or increase while land per person decreases. This eliminates the negative effect of land per person in the Malthusian theory. In sum, as England industrialized, it became possible for both population and GDP per capita to increase faster (Figures 2 and 3).

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International Sanctions and Dollar Dominance

Javier Bianchi & César Sosa-Padilla in this new NBER paper:

This paper investigates the implications of international financial sanctions for the reserve currency status of the US dollar. We propose a simple model of a reserve currency, demonstrate how the anticipation of financial sanctions can weaken the dollar’s status, and evaluate the welfare implications.

Changing dominance in monetary policy: monetary dominance to fiscal dominance to financial dominance

Prof Markus Brunnermeier of Princeton University in this IMF article says that there are different schools of thought in monetary economics:

Monetary theory in economics has consisted of various schools of thought rather than a single unified model. Each of these schools emphasizes different forces that drive inflation and recommends a distinct policy response. Different times have raised different challenges—and each required its own policy approach.

Now, a resurgence of inflation requires yet another shift in emphasis in monetary policy. The predominant intellectual framework central banks have followed since the global financial crisis that began in 2008 neither stresses the most pressing looming issues nor mitigates their potential dire consequences in this new climate.

Following a lengthy period of low interest rates and low inflation, the global economy is entering a phase characterized by high inflation and high levels of both public and private debt. Fifteen years ago, central banks saw an urgent need to incorporate financial stability and deflation concerns into their traditional modeling of the economy and developed unconventional tools to deal with both.

He highlights how dominances have changed in the 15 years:

The period following the 2008 crisis was one of monetary dominance—that is, central banks could freely set interest rates and pursue their objectives independent of fiscal policy. Central banks proposed that the core problem was not rising prices, but the possibility that weak demand would lead to a major deflation. As a result, they focused primarily on developing unconventional policy tools to allow them to provide additional stimulus. 

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The pandemic demonstrated that monetary policy does not always control inflation on its own. Fiscal policy also plays a role. More important, the accompanying buildup of public debt raised the possibility of fiscal dominance—in which public deficits do not respond to monetary policy. Whereas low debt levels and the need for stimulus allowed monetary and fiscal authorities to act in tandem following the global financial crisis, the prospect of fiscal dominance now threatens to pit them against one another. 

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Now, in an environment that compels central banks to raise rates to combat inflation, their goals of inflation stability and financial stability conflict. The reliance of the private sector, especially the capital markets, on central bank liquidity has led to a situation of financial dominance, in which monetary policy is restricted by concerns about financial stability. In such an environment, monetary tightening could wreak havoc on the financial sector and further render the economy vulnerable to even small disturbances.

Tough times for central banks…

Silicon Valley Bank implosion: Will the noxious fumes blow over India?

My explainer on the Silicon Valley Bank crisis.

Last Night, Treasury, Federal Reserve and FDIC issued a joint statement.

The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.

Federal Reserve said it is prepapred to address any liquidioty pressures to banks:

To support American businesses and households, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.

The Federal Reserve is prepared to address any liquidity pressures that may arise.

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.