Filippo Ippolito, Ali K. Ozdagli and Ander Perez add another dimension to the monetary policy transmission channels. This one adds floating rates to the discussion.
Archive for the ‘Central Banks / Monetary Policy’ Category
One very wise (and largely forgotten) former central banker once remarked that when a central bank makes record profits when others are struggling, it is signs of serious concern. As most of this free income is passed onto the govt, it raises questions over independence and all that..
David Howden of Mises writes on similar thing happening with Federal Reserve:
A superb paper by George S. Tavlas of Bank of Greece. Far more useful than several of those macro/monetary policy papers.
He tracks what led the Friedman/Schwartz duo to become monetarists. Friedman actually favored use of fiscal policy for stabilisation till 1940s. Then in the 1950s role of monetary factors started to make sense. There was also a huge role played by a FDIC economist Clark Warburton who has of course been forgotten. In many ways, Friedman’s core ideas came from Warburton:
A nice paper which sums up quite a bit of US monetary history since formation of the Fed. It is written by monetary historians Robert Hetzel and Gary Richardson.
The United States Congress created the Federal Reserve System in 1913. The System consists of the Federal Reserve Board in Washington, D.C.; 12 Federal Reserve Banks; and thousands of member commercial banks. This entry describes the evolution of the System and of monetary policy from its foundation through 2013.
A nice post on how the big guys just changed their views over Fed policy despite lack of any evidence.
The hawkish swing is dramatic. In April 40% of respondents thought the Fed should wait for core inflation to rise. In December, even though core inflation had not risen at all, only 19% didn’t think the Fed should raise immediately. What’s going on?
Much of macro does not make sense. One just goes with the times..
I remember writing on Fed exit policy way back in 2009-10. Fed chair Bernanke had listed several ways for the exit way ahead of its time. It has taken nearly five years for atleast some type of exit to happen. And even now one does not know how far the exit will go.
Riksbank economists have a note on the topic.
Data and statistics are a cornerstone of the Riksbank’s work. In recent years, the supply of data has increased dramatically and this trend is set to continue as an ever-greater amount of activities are stored automatically in different ways. This data revolution, which has given rise to concepts such as Big Data, challenges traditional thinking while placing new demands on processing and analysis. New analytical methods for Big Data are developing rapidly and there are now several applications that are of interest to central banks. To remain at the cutting edge, the Riksbank is working on an information supply strategy to ensure that relevant data and statistics are available for the decisions taken both today and in the future.
The opportunities and challenges regarding Big Data were discussed at a workshop organised by the Riksbank at the beginning of September. The conclusions from the workshop are presented in this Economic Commentary.
They say a modern central bank needs to have an info strategy. Perhaps that is the only thing that matters to central banks now..
There is a lot of clamour over the upcoming new regime for setting interest rates in India. This will shift the basis of setting rates from average cost basis to marginal cost basis. So far banks were pricing their loans on average cost basis. As average costs take longer to change, it took that much more time to pass on changes to loan rates. With marginal cost in play, things will be much faster.
Let’s see how this will work using stylised balance sheets. A bank’s bal sheet looks like this:
Rules based monetary policy has been the talk of the town for a while. The debate is getting shriller as US polity is debating on giving Fed a rules based mon policy mandate.
Though, rules based policy looks like a better model than discretion based, we don’t understand there is discretion in making those rules as well. How does one decide what the rule should be? Usually it is the Taylor rule which is suggested as a way to make these rules. But Taylor rule is based on inflation and potential output, both of whose calculation is discretion based.
Tommy Behnke writes on this problem:
First of all, Happy Diwali to all the viewers of this blog. Hope you all had a great time and continuing to have one on a really extended set of holidays.
It has been a while since this blog last posted. What better way to start than to point a speech linking Diwali with central banking. I had pointed earlier how Central Bank of Trinidad and Tobago celebrates Diwali keeping all these mythological stories as its theme. Earlier ones were on Ramayana and this year it is on Lord Shiva:
Simon Johnson, the long standing warrior against big banks and fancy finance suggests to reinstate Glass Steagall Act.
The best argument for a modern Glass-Steagall act is the simplest. We should want a lot more loss-absorbing shareholder equity. And, to reinforce this, we should want to make the largest banks simpler and more transparent, with “strong structural firewalls” as Dennis Kelleher, of Better Markets, puts it. Of course, in that context, we should ensure that various activities by “shadow banks” (structures that operate with bank-like features, as Lehman Brothers did) are properly regulated.
Building support for legislation to simplify the biggest banks would greatly strengthen the hand of those regulators who want to require more shareholder equity and better regulation for the shadows. These policies are complements, not substitutes.
Just 20 years back, there was so much noise about removing Glass Steagall Act. And it was of course removed and banks allowed to get into all other activities. Discussions have moved back to square one now..
Linkages are obvious. But we usually do not see a speech where one talks about financial centres.
Thomas J. Jordan chief of Swiss National Bank gives a speech on the topic. Most don’t know but Swiss have had three financial centres – Geneva, Basel and Zurich. Eventually, Geneva emerged as the preferred one.