Archive for the ‘Central Banks / Monetary Policy’ Category

Taking monetary policy to the people may be the only way for central banks to remain independent…

October 26, 2016

Howard Davies argues how central bank actions and need to be independent is  being increasingly questioned. More ironically. most of these pressures are coming in economies which have lectured the other world on need for central bank independence.

He says reaching out to people is one way to keep pressures off:

There is a powerful argument to be made that central banks, insulated from short-term political pressures, have been careful stewards of price stability, and have served the global economy well. It is not obvious that returning to politically administered interest rates would have any benefits beyond the immediate term.

Still, we must accept that central banks’ large-scale quantitative easing takes them into uncharted territory, where the boundary between monetary and fiscal policy is blurred. In the UK, for example, the Treasury decides on the level of economic intervention, while the BoE determines the timing and method of implementation. So, the central bank’s independence is not absolute.

Central bankers must demonstrate that they understand the political pressures and unusual circumstances that zero, or even negative, interest rates create. Savers are bitterly complaining that they are being penalized for their prudence; refusing to debate this and other implications of current monetary policies is not an acceptable response.

Independence demands higher degrees of accountability and transparency, whereby policies are explained to the public. To its credit, the BoE has been showing the way forward with a series of open forums around the UK. Taking monetary policy to the people is time-consuming, but it is essential if the necessary political consensus to sustain independence is to be maintained.

First central banks make policies which increasingly hurt people and then reach them to keep pressures from government at bay. But how much can public understand what is really going on? Monetary policy has become so technical that even experts find it difficult to explain what they are doing.

Bank of England open forums are welcome though. It has led to some interesting pieces of information especially on history. They have acted as a good fodder for this blog…

The significance of MPC and its first decision are overstated…

October 21, 2016

On one hand, hunger issues continue to be ignored despite its obvious importance. But on other things related to Indian central bank continue to be written and debated extensively without much importance.

EPW edit says much is written about recent monetary policy decision (sorry resolution).  But the overall gains are overstated and hyped:

The government, which has long sought a rate cut from the RBI but did not obtain one, is certainly pleased. Industrial capital, experts, and sections of the business press have also welcomed the reduction in the repo rate hoping that it will induce private sector investment. However, the risk of high inflation in the near future remains, from possible global increases in fuel prices as well as domestic demand surges following the roll-out of pay increases for government servants. However, the view that monetary policy will by itself affect inflation tendencies, or that it will induce investment in the economy is misplaced. Inflation is caused by many factors largely outside the RBI’s control, and investment is essentially a function of the state of long-term profit expectations, which is not promising at the present. To expect that the cut in the repo rate at this time will magically “restart the investment cycle” is excessively optimistic.

The MPC’s decision has pleased the government but to expect the committee to be a significant forum in which a democratically elected government can intervene in monetary policy is an overestimation of its role and importance. In its current form, the MPC is but an addition to the larger framework where an independent central bank focuses on targeting inflation within a certain range. The MPC is “entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.” It is to be held accountable for this role, and the minutes of its meetings will be made available to the public. Even as these moves for transparency are important international practices to adopt, the MPC’s mandate for which it is to be held accountable is itself a truncated one.

Inflation targeting is distinct from the multiple-indicator approach that was followed by the RBI earlier, which looked at not only inflation but various quantity and rate variables such as credit, output, and the exchange rate, among others. Inflation targeting has grown out of regulatory frameworks in economies with developed institutions and financial markets, and clear sources of inflation. These economies have sizeable financial markets and services. Earlier, such a single-target approach to monetary policy was not considered very useful in economies like India, where financial markets are far from developed, and inflation sources are vulnerable to food and fuel shocks, making it difficult to identify a “core” stable inflation to target. Two previous governors of the RBI—Y V Reddy and D Subbarao—were not in favour of switching to the inflation targeting approach. Yet this approach has been adopted.

Inflation targeting continues to be considered the “gold standard” of monetary policy in advanced economies. This is even after central banks following such a policy mechanism failed to diffuse asset price bubbles that led to the 2008 global financial crisis. It is largely this mainstream intellectual push in economic policy research that has aided the near universalisation of this rule-based approach to monetary policy in central banks worldwide. The Fiscal Responsibility and Budget Management Act, 2003 that targets low fiscal deficits is already constraining public expenditure on employment generation, food security, healthcare, and education. With inflation control as the primary target of the RBI, further constraints on provisioning of public goods and services are inevitable.

 This is a really old debate.

Should India have these developed world policy frameworks before becoming anywhere closed to developed? Or is it that these frameworks will lead to a developed economy?

History shows that though these ideas of monetary and fiscal rules/targets have been there for a while, countries have been really random at  implementing them. It is only post 1990s that both monetary and fiscal targets became not orthodoxy amidst economists but even policymakers. For most parts of their history, the developed world has spent and stimulated as per its wishes. Likes of Ha Joon Chang nicely call it as kicking the ladder.

There are merits and demerits on both sides. What should be followed is not blind aping of the western ideas. But to look at local contexts and make policies accordingly.

Fed’s rising focus on racial diversity and will it be reduced to an employment targeting central bank?

October 20, 2016

One has been so bored of reading FOMC statements that they are almost being ignored. The usual thing about inflation and unemployment is so much an overkill.

But Conor Sen points to this interesting new development. Fed is increasingly concerned about racial diversity in employment and reporting them as well. These are signs that Fed is going to be a more diverse place for employment as well:

The Federal Reserve gave two indications last week that one of its next structural pushes will be toward incorporating more diversity into how it conducts its business. For a variety of reasons, this evolution is likely to lead to a monetary policy with a more dovish bias than the institution has had in the past.

The first sign came in the release of the minutes from the September Fed meeting. For the third meeting in a row, the Fed commented on racial unemployment disparities, pointing out that “the unemployment rates for African Americans and Hispanics remained above the rate for whites.” The Fed also noted that for ages 25 to 64, the employment-to-population ratio was higher for whites than for blacks and Hispanics.

The second sign came in comments made by Minneapolis Fed President Neel Kashkari. “We cannot have confidence we are achieving maximum employment if we don’t understand what’s happening beneath the surface. … Understanding the composition of maximum employment is actually very important to us achieving the mandate that Congress has given us,” he said. Kashkari, whose parents immigrated to the U.S. from India, has previously said he will spend a day in the life of a struggling black family in order to better understand that experience.

This incorporation of demographic data in policy making isn’t the only way the Fed is looking to account for diversity. The Fed has increasingly been criticized by congressional Democrats for a lack of diversity on its staff. None of the Fed’s 12 regional branches has ever been led by a black or Hispanic president. Fed Chair Janet Yellen has pledged to increase diversity among the Fed’s ranks as it looks for a new Atlanta Fed president. With Louisiana, Mississippi, Alabama and Georgia, the Atlanta Fed branch includes four of the six states with the highest proportion of blacks in the country.


In the end, he says Fed is likely to look more at employment diversity than inflation as latter is hardly a concern now:

The future looks to be one with a more diverse Fed concerned more with achieving full employment in a variety of ways and less on elevated inflation, a focus that increasingly appears to be a relic of history.

This will be quite something if it happens.

And here in India, our central bank does not even think of regional representation in its overall policies. Though, in terms of employment Indian central bank could be more diversely employed given India’s affirmative policies. But the overall utility of this better representation can still be questioned. Does it really help address the wide regional and community differences in policies? On the face of it, it atleast does not seem to be the case..

250 years of the bond-equity correlation in UK – from positive to negative

October 20, 2016

The word correlation seems to have magical powers till you enter a statistics class. The class rubbishes the claim “correlation implies causation” and with it dies all the magic associated with the word. So whenever you read the word correlation, your reactions are mixed.

This post by Matt Roberts Sklar of BoE Blog Bank Underground shows 250 years of correlation between bonds and equities.  Interestingly, the correlation was positive till 1990s and has been negative ever since:

For most of the 18th-20th centuries, government bonds usually behaved like a risky asset. When equity prices fell, bond yields rose, i.e.  bond and equity returns were positively correlated (bond prices move inversely to yields). But since the mid-2000s, bond and equity returns have been negatively correlated, i.e. bonds became a hedge for risk. Before this, the last time this correlation was near zero for a prolonged period was the long depression in the late 19th century.

Bond-equity correlation

Source: Thomas and Dimsdale (2016) and author calculations.
Line shows ten year trailing correlation of monthly returns.

The change in the bond-equity correlation since the mid-2000s partly reflects investors being less worried about inflation risks. As well as demand-type shocks being more prevalent than supply-type shocks, the introduction of credible inflation targeting has helped anchor inflation expectations and reduced the likelihood of high inflation risks. Investors may also have become more focussed on bad states of the world.

At the same time, there has been a structural increase in demand for ‘safe assets’, with more investors demanding safe government bonds for reasons unrelated to their expected cashflows. This has been exacerbated during and since the financial crisis, with deterioration in risk sentiment leading to episodic ‘flight to safety’.  And the addition of QE and forward guidance to the monetary policy toolbox may mean long-term bonds react differently to previously.

The long historical perspective is interesting.

We usually think of stock and bond prices correlations like this. Say inflation goes up. Markets then expect central bank to increase rates and as a result bond yields go up and prices fall. In equity markets, the expectation is that valuation of firms will be lower in future down due to higher interest rates. So, the equity prices also decline. Thus, we see a positive correlation in the two assets.

But this monetary policy thing is recent development in 250 year history even if central banks are not. After all BoE came up in 1694, much before this data which is from 1750s. So to see this positive correlation even back in 1750s is interesting. Even more as during those times inflation was relatively stable due to commodity/gold standard. Prices hardly changed and inflation was hardly a risk. The shocks then mist be more around due to crop failures, sudden  rise in price of gold/silver , banking panics etc.

So say there is a banking panic this would have led both bond and stock investors shunning both and prices declining.

I would imagine this correlation has changed mainly due to increased central bank adventurism. In case of a shock people know central banks will infuse liquidity mainly via buying more bonds. Thus bonds are never really out of favor and only equities suffer.

There is a lot of interesting stuff in this one graph..


Mark Carney: Britain’s celebrity central banker

October 19, 2016

George Pickering student of economic history at the LSE and Mises University has an interesting piece. He talks about Mark Carney who has emerged as a big celebrity central banker:

An awed hush descended over the crowd, as the most powerful man in the British economy prepared to give his response. Sitting at the front of the room, Bank of England governor Mark Carney surveyed his audience, paused to consider the question for a moment, and then finally decided on his answer: “Pizza.”

The event in question took place last month, when Mr. Carney visited Whitley Academy in Coventry, a small provincial city in the English midlands, where he was questioned by a group of 12–18 year old pupils on everything from his favourite kinds of food (pizza, for the record) and chocolate, to his favourite television programmes, to whether he preferred dogs or cats. The event was part of the BBC’s “School Report” initiative, which aims to give young people a taste of what it’s like to work for Britain’s state-sponsored news and entertainment monolith. As well as Mr. Carney, BBC School Report has also allowed pupils to meet with celebrities such as Angelina Jolie. But even in such illustrious company, the pupils’ meeting with the man in charge of the world’s oldest central bank left them impressed with how “informal” and even “cool” he was.

They aren’t alone. Ever since he was appointed to the position in 2013, the personality and antics of the UK’s monetary policy czar have delighted and captivated the press. In the eyes of the British public, everything from his square jaw to the accent stemming from his far-off and exotic homeland of Canada, makes Mr. Carney appear closer to some sort of Hollywood celebrity than to the technocratic coterie of crumpled grey suits who preceded him in the post. Over the past year in particular, Mr. Carney has happily cultivated for himself a degree of national visibility from which many of his predecessors would have shied, even when the media’s adulation of the BoE governor seems to centre as much around personality as it does around policy. After he cut interest rates to their lowest level in history this summer, for example, the media were delighted to photograph him conspicuously attending a music festival just days later, replete with brightly coloured polo shirt and a “glitter tattoo” on his face. In the immediate aftermath of Britain’s vote to leave the European Union, which Carney loudly proclaimed to be the “toughest day” he’s ever faced as BoE governor, he was nevertheless sure to be photographed chatting with famous actors at Wimbledon. London’s Evening Standard even went so far as to call him “the biggest babe in banking,” on account of his “George Clooney good looks.”

As absurd and amusing as this all may be, it nevertheless represents a development which could provide clues to what the future of the British political landscape might look like. When placed in the context of the disarray and chaos engulfing Britain’s political system at present, Mark Carney’s self-conscious ascent into the elite club of “celebrity” central bankers, could have more to it than first meets the eye.

Ironically, Post Brexit it is these starry qualities which are keeping Britain at bay. But for how long will it last?

It is interesting how the fortunes of the two central banks – England and India- intertwined in 2013. The same piece could easily have been written for  India as well. I mean the Indian media reporting fawning was as atrocious and fawning as in British lands. Just that India has thankfully escaped but the torture and entertainment  continues even now..

Why was there a graveyard inside the Bank of England?

October 17, 2016

As central banks are getting highly predictable and laughable, they are turning to other ways to keep people ( and bloggers like me) interested. One way is to keep bringing some interesting trivia to people’s attention.

An example is this bit from Bank of England. Bank of Engalnd established in 1694 soon outgrew its original location. It then took up a graveyard nearby:

The Bank of England moved to its current site on Threadneedle Street in 1734.  We quickly outgrew our first building so to expand further we bought a church that was situated next-door.

The church was deconsecrated and demolished, but its graveyard was left in place.  This later became the Bank’s Garden Court..

There is then a story of a really tall employee who wanted to be buried in the same graveyard. His coffin was found later as the building was redone:

The Bank was completely rebuilt in the 1920s and ‘30s, and Jenkins’s coffin was found when the Garden Court was dug up.  Along with the other coffins found, it was moved to Nunhead Cemetery near Peckham, South London.  However, Jenkins’ coffin proved to be too long to fit in the vaults there, so arrangements were made for it to be placed in the catacombs..

So there are no longer any graves in or under our Garden Court today.  At least, not to our knowledge…

Scary stuff…
One can decide what is scarier. The Bank’s ever adventurous monetary policy or working late night at the Bank with your office being closer to the Garden Court…

Indian central bank cuts rates: Would expert reactions be same if govt appointed a Finance Ministry official as central bank chief?

October 4, 2016

Indian central bank threw a googly to most experts by cutting repo rate in today’s policy. Most experts/analysts expected a status quo for sometime but got a rate cut in the first meeting of the new Governor (This piece argues markets expected a rate cut!).

This was also the first time when we had an MPC deciding rates. So the statement was titled as: Resolution of the Monetary Policy Committee (MPC). Usually the word central banks use is decision but here it is resolution which means a firm decision. Interesting choice of word usage.

Then came the usual analysis. The only change was the decision, sorry resolution given by the committee:

Six members voted in favour of the monetary policy decision. The minutes of the MPC’s meeting will be published on October 18, 2016. The next meeting of the MPC is scheduled on December 6 and 7, 2016 and its resolution will be announced on December 7, 2016.

All central bank chiefs/committees want to create an impression of a hawk. They do not want to be seen as cutting rates in the first meeting itself of both the new chief and the new committee. But the new regime does not care for any such image.

Meanwhile, the Indian financial media and experts continues to spin stories on the Indian central bank. Calling it growth batting, dovish and so on. Just a while ago we were told how the new appointment would be a continuation of hawkish policies. It is amazing how there is no case of any introspection whatsoever.

One was just curious to ask this question. Given this decision, would media and experts reactions be same if govt appointed a Finance Ministry official as head of central bank? Or even if it appointed MPC members from finance ministry. It is highly unlikely as then talks of compromising independence etc would have started. The same news would have changed to Finmin insiders at RBI and so on.

It is less and less to do with economics per se. More and more is about the image management by the media.

One is also reading how this was the shortest media interaction ever. Some have pointed how the new chief just wanted to exit the conference hall asap. This is itself a dramatic turn around from the previous regime which had glamorised the whole thing way beyond imagination. This is a welcome development as things at central bank will hopefully be low key from hereon. But this means less noise for the media which just is so interested in central bank matters.

It is a case of mixed and confused signals really. The central bank will most likely try and minimise the noise around it but the media just wants to maximise given the hangover of the previous regime.

Interesting times..

Wells Fargo or the Federal Reserve: Who’s the Bigger Fraud?

October 4, 2016

It is interesting. Indian media jus

Ron Paul, the fierce Fed critic ups the ante against the institution. He cites the Alexander vs. Pirate story:


Mauritius’s long history of banking..

October 4, 2016

Nice speech by Mr. Rameswurlall Basant Roi of Central Bank of Mauritius. It is on occasion of Bank of China opening a branch in the island country.

He says Mauritius was a regional finance hub in 17th century:


Why study economics (and some lessons for Indian central bank?)

September 28, 2016

Stanley Fischer, Vice chair of FOMC gives a convocation speech at Howard University:


Using Behavioral insights in monetary policy…

September 26, 2016

Mark Calabria of Cato has a nice short paper reviewing the literature on the topic.


Bank of Japan to control the Japanese yield curve!!

September 22, 2016

One is completely fed up of the tactics being deployed by central bankers worldwide to keep controlling and planning the financial economy. I did read news of yield curve control by Bank of Japan here and there in the morning, But somehow thought it must be some rumor or one of those crazy suggestions to keep hings going.

But it is true. Bank of Japan indeed is going to control the yield curve!:


Indian financial media continues to spin stories on Indian central bank….

September 21, 2016

One does not like writing such posts but just can’t help it. There is only so much one can ignore.

The positive spinning of news on Indian central bank continues to be a big issue.  Despite central banking exposed widely across the world, we are continuously made to believe of godly powers of people at helm of Indian central bank.

Came across this recent piece which  again tries to spin a story. It argues how the new chief  has had the best start this century as far as bond markets are concerned.


How Beethoven was one of the first investors in stock of Austrian Central Bank…

September 20, 2016

The Oesterreichische Nationalbank or Austrian Central Bank is celebrating its 200 year history.

Its chief Dr Ewald Nowotny gives this interesting speech through the 200 year journey:

Milestone birthdays not only provide an occasion to gather family and friends. They also afford an opportunity to pause for a moment and reflect on one’s past as well as one’s plans and hopes for the future. The 200-year history of our institution has been eventful, to put it mildly. In its first 100 years, the Nationalbank was the central bank of a major power; in its second 100 years, that of a small open economy in the middle of Europe. The fate of the Nationalbank has always been closely entwined with the fate of Austria, for better and for worse.

Central banks never operate in isolation. The most important lesson to be drawn from our 200-year history is that the greatest threat to financial and monetary stability has been, and still is, war.

In fact, it was the twenty odd years of the Napoleonic wars which stood at the origin of the Nationalbank in 1816, as Austria strove to stabilize a currency which had undergone strong inflation and depreciation.

So the “privileged Austrian central bank” was founded as an independent institution with private shareholders. One of the first shareholders was Ludwig van Beethoven – and just for the record: this turned out to have been a very good investment for him.

:-) How good was it? Given state of central banks, one wouldn’t be surprised if Beethoven would call the investment as profitable but of bad taste…

Rest of the speech is the usual bit on World Wars,  European integration and so on. Useful to read..


Reading through Indian economic/monetary history using coins..

September 19, 2016

Prof. Pankaj Tandon who accidentally got into numismatics, now has quite an interesting story to tell.


The trouble with macroeconomics ( a scathing critique by Paul Romer)

September 16, 2016

Finally a central banker admitted the truth. On being asked how monetary policy decisions are taken with all the data and science, Bank of Israel chief replied: “This is art, not science”. Moreover, it is all about how much the central banker can credibly hoodwink the media/experts into accepting that the policy is right. As long as this can be done, nothing else actually matters.

Anyways this post is more about this scathing criticism be Paul Romer on state of macro. There has been a lot of it already but this one will be one of the top most criiticism as it comes from a person who has seen and done it all:


Bank of England trying to draw parallels between finance and cricket..

September 14, 2016

Wow! Bank of England’s One Bank Seminar series has invited former West Indian ace Michael Holding to give a talk.

Michael Holding, former West Indies cricketer and current Sky Sports commentator, will join us for the next One Bank Flagship seminar on 14 September.  

The Bank’s Chief Economist, Andy Haldane, will join Michael to draw parallels between the world of cricket and finance – discussing issues of leadership, diversity and team-building.

Michael, nicknamed Whispering Death due to his silent yet fast bowling prowess, starred on the West Indies team from 1975-1987. During this time he earned 249 wickets in 60 tests, and played a further 102 one day internationals. Michael was named Wisden Cricketer of the Year in 1977, and is also credited with bowling “the greatest over in Test history”, against English batsman Geoff Boycott in 1981. 

Since retiring from his sterling international career, Michael has released two books ‘Whispering Death’ and ‘No Holding Back’ and has moved on to become a popular TV commentator, working with Sky Sports in the UK since 1995.

The seminar starts in a little above 1 hr from the time of posting.

Will be interesting to see this for sure..

Where Do Monetary Rules Come From and How Do They Work?

September 14, 2016

David Glasner has an interesting post on thinking about mon policy rules.


How can the Bank of England serve society and maintain stability in times of change?

September 13, 2016

After years of hubris and nonchalance, Central banks of advanced economies are running for cover. They are increasingly trying to show how they remain relevant and important for the  society.

This release from Bank of England says it all:


Lessons from unconventional monetary policy implemented between 1797 and 1821…

September 12, 2016

Patrick O’Brien and Nuno Palma have some lessons from history of unconventional monetary policy. Actually just as when economists say this time is different, we should be worried. Similarly when they say “this policy is unprecedented”, we should question it as there will mostly be some historical precedent. This is especially true on monetary (and trade) matters, where similar issues have cropped up every now and then. The names may change and even some nature, but the broad idea is likely to have a precedence.

The authors argue the same for unconventional monetary policy: