Archive for the ‘Central Banks / Monetary Policy’ Category

Fossil-Fuel exporters must rethink monetary policy

February 28, 2020

One would imagine a topic like monetary policy to be classified under Economics and Finance in Project Syndicate.But this piece on monetary policy is classified under Sustainability!

Rabah Arzeki (Chief Economist of the World Bank’s MENA Region) argues that fossil fuel exporters should rethink mon pol:

Although many fossil-fuel exporters have recognized the need to diversify their economies, very few have succeeded. But the regulatory and technological changes now sweeping the global energy market may make the need for such a transition more urgent. Central banks should therefore work on the longer end of the yield curve to facilitate longer-term investment and economic diversification.

In addition, central banks’ response to the risk of stranded assets may influence how fossil-fuel exporters invest their wealth. Many oil exporters have accumulated vast financial assets. These countries’ strategic allocation of such assets is all the more important given the mounting risks to their main source of wealth. By looking beyond the business-cycle horizon, central banks can play a critical role in facilitating these countries’ investments in non-fossil-fuel assets.

In the face of the challenge posed by climate change, the focus of monetary policy often seems very short term. Central bankers must break this “curse of horizons” and take decisive steps to address fossil-fuel-related risks. They need to reflect on and communicate the existential threat of stranded reserves and capital, advocate the adoption of appropriate structural policies, pursue a suitable interest-rate policy, and provide supportive financial policies to encourage both economic diversification and changes in strategic asset allocation. Combating climate change while maintaining global financial stability requires nothing less.

I had posted about Australia which is a coal exporter and needs to rejig its strategy as well..

Three Ds of climate change risks for financial sector..

February 27, 2020

Christine Lagarde, President of ECB in this speech warns on climate change risks for the financial sector. She says there are 3 Ds of risks:

Climate change constitutes a major challenge, causing both threats and opportunities that will significantly affect the economy and the financial sector, depending on which carbon emission scenario eventually unfolds.

That is why central banks need to devote greater attention to understanding the impact of climate change, including its implications for inflation dynamics. At the ECB, the ongoing review of our monetary policy strategy creates an opportunity to reflect on how to address sustainability considerations within our monetary policy framework.

Today, however, I will focus my remarks on climate change-related risks for the financial sector. Broadly speaking, the main risks fall into three categories: risks stemming from disregard, from delay and from deficiency.


The transition to a carbon-neutral economy provides opportunities, not just risks. By shifting the horizon away from the short term and contributing to a more sustainable economic trajectory, the financial sector can become a powerful force acting in our collective best interest. The future path for carbon emissions and the climate is uncertain, but it remains within our power to influence it. As Lyndon B. Johnson said, “yesterday is not ours to recover, but tomorrow is ours to win or lose”.


How Did We Get Here? From Observing Private Currencies to Exploring Central Bank Digital Currency

February 27, 2020

Jesse Leigh Maniff of Kansas City Fed takes us through the long history of payments which has moved from private to government and back to private:

The increasing deflationary influence of consumer digital access services

February 27, 2020

David M. Byrne and Carol A. Corrado of Federal Reserve in this paper:

Consumer digital access services—internet, mobile phone, cable TV, and streaming—accounted for over 2 percent of U.S. household consumption in 2018. We construct prices for these services using direct measures of volume (data transmitted, talk time, and hours of programming). Our price index fell 12 percent per year from 1988 to 2018 while official prices moved up modestly. Using our digital services index, we estimate total personal consumption expenditure (PCE) prices have risen nearly 1/2 percentage point slower than the official index since 2008. Importantly, the spread between alternative and official PCE price inflation has increased noticeably over time.


Sweden’s Riksbank to test technical solution for the e-krona

February 26, 2020

Gradually Sweden is getting closer to e-krona:

The Riksbank is conducting a pilot project with Accenture aimed at developing a proposal for a technical solution for an e-krona. The objective is to create, in an isolated test environment, a digital krona that is simple and user-friendly. The technical solution will be based on Distributed Ledger Technology (DLT), often referred to as block-chain technology. The main aim of the pilot is for the Riksbank to increase its knowledge of central bank-issued digital krona.


Is RBI undermining its MPC by using unconventional tools like OT and LTRO?

February 26, 2020

Blogging was on a mini break.

Blogging resumes with this new moneycontrol piece (behind paywall). I argue how RBI is influencing interest rate decisions outside the Monetary Policy Committee.


50 years of Norway discovering oil

February 20, 2020

Nice speech by Norges Bank Governor Øystein Olsen:

“We are now moving into the final phase of a period where domestic raw materials and energy sources have provided an essential basis for economic expansion. Hereafter, growth must increasingly rely on the production of finished goods in areas where we do not have a natural advantage.”[1]

The same could be said about the challenges facing the Norwegian economy today. But this quote is from 50 years ago – from the annual address by central bank governor Erik Brofoss on 16 February 1970.

The 50th anniversary of the first oil discovery on the Ekofisk field was commemorated in October last year. Aptly enough, this took place on the same day as the Government Pension Fund Global (GPFG) topped NOK 10 000 billion.

In the governor’s address on the economic situation, there was no mention of what was to become Norway’s main revenue source over the next half-century.

In hindsight, it can be said that what was to be his last annual address may not have been the most prescient. To be sure, it was still highly uncertain at that time how much oil and gas were actually hidden under the ocean floor 320 kilometres southwest of Stavanger. Not to mention, the value of that natural resource was much lower than today.


In the quote from 1970, Erik Brofoss predicted a shift away from a resource-based economy. Fifty years later the structural shift is underway. Brofoss was optimistic about the way ahead, and he was clear about what the main source of progress is as he formulated in his speech:

“Now is the time to reap the fruits of our efforts in general education and vocational training to boost human capital.”

Brofoss had high hopes for the coming generations of well-educated young people.

The young workers in Brofoss’ day are now retired, or close to retirement. In the coming years, the dependency ratio will increase. The aim must therefore be to make structural changes without further declines in labour force participation.

We also have reason to be optimistic despite an ageing population. We still have a highly skilled workforce. We have an economic policy framework that has served us well for nearly 20 years. In addition, our room for manoeuvre puts us in an enviable position. Last, but not least, we have a business sector that has already proved its adaptability, which can now also build on the expertise gained in oil production and services.

The Norwegian economy has fared well through the first phase of the structural shift away from an oil-driven economy. The sharpest downswing in oil activities may be behind us. The overall downward potential is smaller than a few years ago, and the business sector is less dependent on oil.

But structural changes take time. Companies have to seek out new markets, new businesses need to be established and workers have to move into new jobs. As long as the transition to a less oil-dependent economy is gradual, the business sector will have the chance to adapt. The challenges will be much greater if there are abrupt changes in operating conditions or policies.

Brofoss was mistaken about one point. The final phase would come many decades later than he anticipated, but is now drawing near.   

Central bank governors tend to get it right, sooner or later. Come what may!


Though, not applicable to Norway’s case but if central bank governor get things right later, fair bit of damage is done by then!

Evolution of US payments in the last 20 years

February 20, 2020

A useful summary by


History of Frankfurt Stock exchange and linkages to monetary system

February 19, 2020

Super speech as always by Jens Weidmann:

People looking to realise their full economic potential need a stable currency.

That is something merchants already knew back in the Middle Ages, when they flocked to Frankfurt’s trade fair to trade in goods. Indeed, they came equipped with a variety of different coins. But what rates were they supposed to exchange their coins at? This question led a group of merchants, in 1585, to ask the city to set the rates. And Frankfurt actually went further still. It established a bourse to review the exchange rates at regular intervals. This move marked the “birth” of the Frankfurt Stock Exchange.[1]

More than 400 years later – in 1999, to be precise – many European currencies were replaced by a single currency. The euro has simplified trade in the internal market further still. The euro’s central promise back then, though, just as it is today, was to be stable money for people in the euro area.

That is why price stability is the primary objective of monetary policy. Since 1999, the average inflation rate in Germany has actually been even lower than the rate observed in the D-Mark era. This has truly been a success story, even if the two periods are difficult to compare.


Looking to the future and the willingness to modernise are important not only for monetary policy, they are also crucial for the financial markets. Back in the 18th century, Frankfurt evolved into a financial centre of international renown – thanks to the newly established trade in government bonds. However, Frankfurt bankers long wanted nothing to do with shares, which resulted in Frankfurt being eclipsed by Berlin in the 19th century.

Phew…Did not know this!

The United States as a Global Financial Intermediary and Insurer

February 18, 2020

Alexander Monge-Naranjo of St Louis Fed in St Louis Fed Eco Synopses:


Blockchain structure and cryptocurrency prices

February 17, 2020

Peter Zimmerman of Bank of England in a new working paper:

I present a model of cryptocurrency price formation that endogenizes both the financial market for coins and the fee-based market for blockchain space. A cryptocurrency has two distinctive features: a price determined by the extent of its usage as money, and a blockchain structure that restricts settlement capacity. Limited settlement space creates competition between users of the currency, so speculative activity can crowd out monetary usage. This crowding-out undermines the ability of a cryptocurrency to act as a medium of payment, lowering its value. Higher speculative demand can reduce prices, contrary to standard economic models. Crowding-out also raises the riskiness of investing in cryptocurrency, explaining high observed price volatility.


Post Brexit: London as a financial centre…

February 17, 2020

Nice speech by Jon Cunliffe on London as a financial centre

We are home to the largest and most complex financial centre in the world.

And it is a truly global financial centre, where global capital, liquidity and risk are pooled and managed, with the accumulation of the people, skills and the expertise necessary for such a concentration of international finance.

The City is home to around 250 foreign banks including all of the major investment banks. It is the same story for other financial sectors like asset management and insurance.

Its financial markets are truly global. 50% of the global market in swaps and 43% of forex trading takes place in London.1 Around 2.5 times as many USD are traded in the UK as in the US. It is the world’s second largest centre for asset management. And its role as an innovator in global financial services looks set to
continue. It is a global leader in FinTech.

Post Brexit things will change a bit:


Narratives about the ECB’s monetary policy – reality or fiction?

February 17, 2020

New ECB Board member Isabel Schnabel questions the German criticism of ECB monetary policy. That she is German makes it even more interesting.

In recent years, Germany has experienced one of the longest economic upswings since the Second World War.[1] Since 2010 the German economy has grown at an average annual rate of 2%. Unemployment has fallen to its lowest level since German reunification.

The monetary policy of the ECB has contributed significantly to that expansion. By lowering interest rates and making use of new monetary policy instruments, the ECB has created financing conditions that support investment, growth and job creation across the euro area.

And it was the ECB’s decisive action in 2012 that prevented a break-up of the euro area.

Despite these considerable successes, the public debate about monetary policy has become more heated in parts of the euro area, and especially in Germany.

The conversation is dominated by various narratives, such as the “expropriation” of German savers through “punishment rates”, the “flood of money” that will inevitably lead to massive inflation, and the creation of “zombie firms” as a result of expansionary monetary policy.

In my remarks today, I would like to take a closer look at some of these narratives and discuss them in the light of the facts.

I will demonstrate that the ECB’s current monetary policy stance is necessary in order to achieve sustained price stability in the euro area, and that the use of unconventional monetary policy tools, such as negative interest rates and asset purchases, is largely a consequence of structural changes in the economy that lie beyond the ECB’s control.

I will also discuss the potential side effects of these monetary policy measures and show that many of the fears that are frequently being expressed are based on half-truths and false narratives. The excessive criticism of the ECB is dangerous because it not only jeopardises trust in our single monetary policy, but also undermines European cohesion.

In her interview, she explains:

You want to clear up misunderstandings about the ECB. Would you say that you are now on a type of peacekeeping mission to mediate between the central bank and the German public?

No, that is not what this is about. I am not a mediator between two parties; I am now a member of the ECB’s Executive Board. But in my new role as a board member I am committed to seeking greater public understanding and clearing up misunderstandings. For people to constantly hear that the ECB’s policy is harmful to them is misleading and it undermines their trust. This worries me. 

 Which misunderstanding do you wish to clear up specifically?

The expropriation of savers is the main misconception. Even the term itself is legally incorrect. It would imply that the ECB is taking something away from people that rightfully belongs to them. But that is not the case. 

But rather?

The real interest rate – that is, the interest rate adjusted for inflation – emerges from the economy’s growth potential in the long run. Sweeping macroeconomic trends – such as demographic ageing and weak productivity growth – have caused a worldwide decline in real interest rates. The ECB cannot change these fundamental developments but can only steer its key interest rates around the trend. If it wishes to fulfil its mandate and stimulate the economy at a time when inflation is too low, it has to lower interest rates even further. If the policy rate then approaches zero, it becomes increasingly difficult to attain its objective with conventional tools. We see this constellation all over the world.

You’re suggesting that the ECB is a victim rather than a perpetrator in respect of negative interest rates. Are there any robust economic studies that back this up?

There are countless studies that estimate the equilibrium interest rate, using various methods and delivering different outcomes. But the trend is clear, it is pointing downward. I understand the frustration about low returns on savings, but that is not the whole picture. Borrowers and property owners have benefited, as have the government and employees. Analyses have been conducted on what would have happened without the ECB’s loose monetary policy. They found that economic growth would have been considerably slower, inflation would have been lower and unemployment higher. The one-sided, negative presentation of the consequences of the ECB’s policies is misleading. All in all, Germany has benefited from the ECB’s monetary policy.

You are saying that savers are not being expropriated at all. But the ECB’s negative interest rate policy effectively means that we can forget about traditional forms of investment such as savings accounts or life insurance policies. At the same time, people are being advised to provide for their retirement. How are they supposed to do that? 

If the ECB were to increase interest rates in the current environment, it would be harmful for everyone – not least for savers. I can’t give people any investment tips. But there’s no doubt that, in today’s interest rate environment, it is not especially advisable to put all your funds in savings or time deposit accounts. Politicians also have a duty to inform citizens about the alternatives to interest rate products.


The birds, the bees and the Bank? The birth-rate channel of monetary policy

February 14, 2020

Missed this interesting paper by Bank of England economists published in Dec-2019. They figure that their is a birth rate channel of monetary policy.

In this post on Bank Underground Blog, the authors explain the findings:


Why and how Geography matters in nomination at Federal Reserve Board

February 14, 2020

Interesting post by George Selgin. He points how Geography matters in nomination to the Fed Board:

Although one might suppose that, to be eligible to serve as a Federal Reserve governor, a candidate should know something about monetary policy or banking or both, so far as the law is concerned, only two things clearly matter: a candidate cannot serve more than once, and he or she can’t be from just anywhere.

Few Americans will know that that second requirement exists, why it does, and how it has come to be routinely ignored. Yet the question of geographic eligibility is likely to be raised during upcoming Senate confirmation hearings for two current Fed Board nominees, Judy Shelton and Chris Waller. Hence this brief “Fed Geography Lesson,” written for the sake of those who, should a fuss be raised about where a nominee comes from, wonder what it’s all about.

Unlike other central banking arrangements, the Federal Reserve System consists, not of a single central bank, but of a dozen banks each responsible for a separate territory or district. The system is overseen by a Board of Governors headquartered in Washington, D.C., whose seven members are appointed by the President for terms lasting up to 14 years.

When, in 1913, the Federal Reserve Act was being hammered-out in Congress, certain influential Democratic Congressmen, fearing that the Federal Reserve Board (as the present Board of Governors was then known) might come to be dominated by persons (and Wall Street bankers and their cronies especially) from the East Coast, took preventative action: they had the Act’s 10th Section stipulate, first, that no more than one member of the Board should be from any one Federal Reserve district; and second, that in nominating Board members the President “shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions, of the country.”

This geography constraint has led quite a few nominations to be clocked such as that of Nobel laureate Peter Diamond!:

For most of the Fed’s existence, the Federal Reserve Act’s geographical diversity provisions drew little public attention. But in 2011 they became front-page news when Richard Shelby (R-AL), then ranking member of the Senate Banking Committee, appealed to them, and to the first provision especially, in successfully opposing Nobel Laureate Peter Diamond’s appointment to the Board. Although Diamond was supposed to represent the Chicago Fed district, he had only tenuous ties to it, whereas he’d long resided in Boston, a district that was already being represented at the time by Daniel Tarullo.

Some commentators, including the CMFA’s own Mark Calabria, defended Shelby’s stand, holding it to mark a needed return to strict adherence to the law and to the intentions of the Federal Reserve’s founders. Others, however, including Diamond himself, saw it as mere cover for a strictly partisan act, namely, Republican retaliation for Democrat Senators’ having blocked  Randall Kroszner’s Board reappointment several years before.

Lots of interesting stuff in the post. This aspect of Geography would have mattered in recent Fed nominations but since the post, Trump has made changes…

A Bank of England perspective on gender diversity: past, present and future

February 14, 2020

Lea Peterson, ED of Human Resources at Bank of England tracks the history of gender diversity at Bank of England.

It is ironical that one of the first decisions of BoE took was to choose a woman as the seal of the bank. Yet, it took a few centuries to increase women participation at the central bank:


Sudan dissolves the Boards of Central bank and 11 other state owned banks

February 14, 2020

News from Sudan:

A Sudanese legal committee dissolved the boards of the country’s central bank and 11 other state-owned banks under a law that aims to dismantle the regime of the toppled president Omar al-Bashir, the committee said on Thursday.

The Empowerment Removal Committee also fired the managers of eight of the banks, it said. Badr Eldin Abdelrahim, the central bank governor, remains in his post and new boards will replace the dissolved ones soon, a committee member told Reuters.

Sudan in November passed a law to dismantle the system built by Bashir, who was ousted in April after nearly three decades in power.

Last month, the legal committee formed to apply the law seized the assets of Bashir’s now dissolved National Congress Party.

The committee said on Thursday that it also dissolved the boards of nine government companies and institutions, and that it will appoint commissioners to run two private newspapers whose assets were frozen last month.


Distributed Ledger Technology, Blockchain and Central Banks: RBI economists perspective

February 13, 2020

The Feb-2020 RBI Bulletin has a superb article on the topic. It is written by Nalin Priyaranjan, Mohua Roy and Sarat Dha:

Distributed Ledger Technology (DLT) and blockchain have developed considerably in features and complexity to offer solutions to various industries including the financial sector. Some central banks have undertaken pilot projects to study and understand DLT and explore the potential benefits for their operations and the financial systems. So far most of these projects have been experimental in nature to explore the viability of conducting inter-bank settlements, settlement of digital assets and tokens and cross-border payments across DLT platforms with functionalities of the existing system.

In the Indian context, increasing support from the Reserve Bank of India and the Government of India for innovations and emerging technologies through regulatory sandbox and various other schemes would pave the way for the new economy, enriched with technology centric growth momentum.

The short paper explains key ideas behind blockchain and DLTs nicely:

The terms DLT and blockchain are often used interchangeably. However, it is important to understand the distinction. Blockchain, a linearly connected chain of blocks, is a specific type of DLT, whereas DLT is a decentralised ledger, which may not be a linear chain, among various participants who agree on a common state of the ledger and validates the new information/transactions and updates the ledger. Thus, all blockchains are DLT; however, all DLT platforms are not blockchains (Chart 1). A DLT is not a blockchain if the distributed ledger is not in the form of linearly connected blocks.

Lot of other stuff as well..

Project Stella: ECB and Bank of Japan release joint report on distributed ledger technology

February 12, 2020

ECB and BoJ keep working on the digital currency payments under their Project Stella.

The two central banks have released the 4th joint report:


The Making of a National Currency: Spatial Transaction Costs and Money Market Integration in Spain (1825–1874)

February 11, 2020

This looks like a really interesting paper on monetary history (freely downloadable till 28 Feb 2020).

It is written by Pilar Nogues-MarcoAlfonso Herranz-Loncán and Nektarios Aslanidis:

This article analyzes the integration of the Spanish money market in the nineteenth century. We use a Band-Threshold Autoregression model of prices of bills-of-exchange in ten cities to measure market convergence and efficiency in 1825–1875. While price gaps generally decreased during the period, progress in efficiency was limited to a small group of cities. We suggest that convergence was associated to the reduction in transaction costs, which started well before the railways through improvements in roads and postal services. By contrast, the heterogeneous behavior of efficiency might be associated to economic geography changes and their effects on monetary leadership.

For all you know, a digital national currency will also be made in similar manner. The transaction costs will have to decline and converge to near zero levels…

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