Archive for the ‘Central Banks / Monetary Policy’ Category

A new museum in Paris is all about money

August 23, 2019

DW profiles the new money museum in Paris.

They say money makes the world go around, and apparently, it also makes for a good museum: The “Cité de l’économie et de la monnaie” “(which translates as city of economy and money) is a new museum which opened this summer in Paris. Called Citéco for short, it’s appropriately located in the central building of the Banque de France.

While the setting of the museum could hardly be more dignified­­ — a castle-like villa built by the banker Émile in the late 19th century — its content is playful. Excerpts from Charlie Chaplin’s 1915 short film The Bank flicker in the former vault. A work of art by the French artist Christian Champin welcomes the visitors: Djibrila, a cow sculpture made of metal waste, is intended to point out the problem of overproduction around the globe.

While one might imagine a museum about economics to be a bit dull, in fact, the opposite is true. Citéco boasts more than 50 videos and 20 video games, as well as photographs and sculptures in its collection. There’s even an eye-catching one-meter-high sculpture made of hundreds of feathers, pearls, shells and coins, which at some point served as a means of payment. The museum aims to prove that a complex economic history can be explained in an original and playful way.

 

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CRR and SLR as macroprudential tools: Some Historical Lessons

August 22, 2019

Nice paper by Eric Monnet (Banque de France) and Miklos Vari (IMF):

Liquidity regulations similar the current Basel III Liquidity Coverage Ratio (LCR) have been used from the 1930s to the 1980s in many countries as monetary policy tools. They took the form of required deposits at the central bank (“cash reserve requirements”) or minimum holdings of liquid securities (“securities reserve requirements”). As with the LCR, these two types of liquidity requirements (cash and securities) were computed as a percentage of short-term deposits.

India obviously had Cash Reserve Ratio since 1935 and SLR since 1949 and continues to have both these ratios.

Our paper presents three contributions.

First, based on detailed readings of historical central banks’ reports and documents, we describe how and why liquidity ratios were used in many
countries (especially Europe) from the 1930s to the 1980s , following the American experience. By emphasizing the distinction between “securities-reserve requirements” and “cash-reserve requirements,” we provide details on central bank practices whose history is largely unknown, and shed light on the dual nature of liquidity ratios as prudential and monetary policy tools.

Second, we show how “securities reserve requirements” were at the crossroad of monetary policy and sovereign debt management. It explains why they were phased out by central banks in the 1980s, as they had been associated with the so-called “financial repression” era (Reinhart and Sbrancia (2015)). Securities-reserve requirements were typically used in a period when banks held a large share of government bonds, and they reinforced such phenomenon. Central banks increased liquidity ratios during times of restrictive monetary policy in order to prevent banks from selling government securities, which were the main type of assets eligible to fulfill the requirement. As such, banks were discouraged to shift their assets from government securities to corporate loans.

Third, we build a theoretical model, and show that the mechanisms previously described can be rationalized with a simple model of the interbank market. By this, our paper introduces a new mechanism in the current literature on liquidity regulation and sheds new light on the history of monetary policy.

Hmm. Even without CRR and SLR, RBI has been using macropru policies much before they became buzzword. See these 2010 speeches by Shyamala Gopinath of RBI and James Caruna of BIS. 

SLR in particular has long been seen as a villain and something which led to financial repression. Several RBI Governors and other officials have written to either remove SLR or bring it to zero. Similar story was played in West too but much earlier than RBI.

Price stability or financial stability? Central Bank’s (and RBI’s) difficult balancing act

August 21, 2019

My new article in moneycontrol where I reflect on the recent speech by the Governor of RBI.

Price Stability and Financial Stability continue to pose challenges for central banks throughout their history…

How banks lobby and capture regulations..

August 21, 2019

Superb paper by Deniz O Igan and Thomas Lambert:

In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes.

The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis.

While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.

I think in other sectors regulatory capture is not as straight forward. In financial sector it is blatant. You see central bankers and securities regulators join financial firms pretty freely.

Philippines economy: Weaving an unprecedented 20 year growth story (without much hype)

August 21, 2019

There is much hype around Indian economy and how high its growth has been all these years. There are some others who manage it without much hype.

Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (their central bank) in this speech highlights how Philippines economy has been growing for 20 years:

Let me begin with our growth story thus far in the Philippines. Our economy has experienced uninterrupted growth for over 20 years since 1999 despite challenges such as the 2004 fiscal crisis and the 2007 global financial crisis-that is 81 consecutive quarters of continuous growth, with annual growth averaging 6.4 percent in the past five years (2014-2018).

Growth in recent years has become more broad-based.

On the demand side,  private consumption remained robust in the first quarter of 2019, as in the previous quarters through the years. This is further supported by rising contribution from investments from 2010 up to present.

On the supply side, services remain the main driver of growth-but the industry sector has also stepped up in recent years.

Meanwhile, the government’s economic managers remain optimistic about achieving our GDP growth target of 6 to 7 percent this year despite the lower than expected 5.6 percent growth in the first quarter of this 2019.

Private consumption is expected to remain robust, aided by remittance inflows and sustained “cooling” inflation. Private capital formation, on the other hand, should likewise contribute more significantly to economic growth, with construction and investments in durable equipment expected to remain solid in light of the government’s projects and other infrastructure programs.

The International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) share these expectations. In fact, all three forecast that the Philippine economy will grow by about 6.2 to 6.5 percent this year.

This has been due to three measures:

The bold reforms and initiatives in the past three years have prompted the government to capitalize on and sustain these gains. It is because of this that we believe the Philippine growth momentum will be sustained moving forward.

First is the government’s ambitious infrastructure program-“Build, Build, Build” which aims to boost the economy’s mobility and connectivity, enabling equitable growth and development. At present, there are 75 high-impact national government infrastructure, with 46 projects (61 percent) already in the implementation stage. 

The government is expected to invest over PhP 4.6 trillion (or US$90 billion at PhP52:USD1) in public infrastructure from 2019 to 2022.

Second, is the recent passage of reforms aimed at strengthening our investment climate. The Ease of Doing Business and Efficient Government Service Delivery Act, the revised Corporation Code, and the Philippine Innovation Act support the government’s agenda of improving competitiveness and ease of doing business in the country, promoting transparency and cutting red tape in the government for a more conducive business environment.

At present, the Philippines’ current standing has improved based on different third-party assessors. For instance, the Philippines’ ranking rose from 68th to 56th place under the 2018 Global Competitiveness Report.

It also received an upgrade in its sovereign credit rating from Standard & Poor’s to “BBB+” from “BBB.” These favorable standings are also boosted by the improved business sentiment and the stable consumer outlook based on the BSP’s latest round of expectations surveys.  

Finally, the continued demand for Philippine skills locally and abroad are evident in the growth of our BPO industry and strong remittance inflows. This further highlights the importance of our country’s most prized resource-our labor force. Based on our estimates, production efficiency has improved over the years with the incremental capital-output ratio (ICOR) declining steadily. As you know, the higher the ICOR, the less efficient the production process is.

Recognizing the skills of our workforce, the government has invested heavily in various social programs such as the Universal Health Care Act and the Access to Quality Tertiary Education Act (RA No. 10931).

You may not know this but 40% of our budget goes to social services.

He goes on to highlight the role central bank has played and is playing to maintain the momentum.

India and its policymakers make much noise about how growth rates have been higher during their tenure and getting into a lot of mud slinging. They make it look as if India is the only country growing and they are the sole reasons for this growth. Examples from smaller countries such as Philippines tells us none of this is needed really.

Central Bank independence vs Central bank accountability to society: Why Czechs have preferred low inflation?

August 20, 2019

Nice speech by Mojmír Hampl, former Vice Governor of Czech National Bank. He says central bank independence is more than just codifying it in law. The central bankers have to act independently and be accountable to society they serve.

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What drives Trump to nominate Judy Shelton at Federal Reserve? Try push countries towards Fixed exchange rates?

August 19, 2019

All kinds of things happening.

Barry Eichengreen writes that Trump wishes to go back to the earlier days when exchange rates were fixed. Why? The idea is to compress US Trade deficit by raising tariffs. However,  other countries allow currencies to depreciate netting out the effects of tariff. This means countries should be pushed to fix their exchange rates which leads to nomination of Judy Shelton who is a major votary of gold standard:

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Central Bank of Iceland vs Iceland’s largest fishing exporter: Case of lost reputation

August 16, 2019

Central banks are embroiled in all kinds of things.

Iceland government imposed capital controls in 2008 crisis with central bank incharge of their enforcement.

Jon Danielsson of London School of Economics in this article points how things went wrong for the central bank:

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Network Analysis of NEFT Transactions in India

August 16, 2019

Shashi Kant and Sarat Chandra Dhal of RBI in Aug-2019 Bulletin article do network analysis of NEFT transactions in India:

Since the global crisis in 2008, network models have emerged as a tool for analysis of interbank financial exposures. The recent literature has accordingly emphasised the role of network analysis of interbank payment transactions in complementing the existing framework for financial stability analysis (Caccioli et al., 2018). Where central banks are the operators of payment and settlement infrastructure, as in India, a comparative advantage is that it is relatively easier to acquire clean, structured and accurate data that are crucial for network analysis.

Surprisingly, therefore, there has been little research on the interconnectedness of participating entities in the payment system in India. The motivation for
this study is to bridge this gap as a first attempt in the Indian context. We use the National Electronic Fund Transfer (NEFT) system as a case study. Operated by the Reserve Bank of India (RBI), it is India’s largest payment system by volume and a game changer in the retail payments sphere.

We examine the network topology of the NEFT system and analyse financial interconnectedness using network metrics of centrality. Using bilateral transaction information for each participating institution aggregated for March and April months of 2019, we build a network graph depicting the linkages. We use these data to explore the connections between various groups of banks in order to identify patterns. We also seek prominent players in the payment network in order of their systemic importance using a non-parametric methodology (Jaramillio et al., 2014). 

In summary, our findings show that out of the public sector, private sector and foreign banks that constitute around 83 per cent and 87 per cent of the
total transactions by value on NEFT in the month of March and April respectively, the flow from private sector to public sector banks is very large, with public
sector banks being net receivers in the system. We also present evidence of strong connections between public and public sector, and between private sector
banks, nascent role of co-operative banks and newly established payment banks in NEFT. 

Lots of amazing pictures of networks..

Monetary transmission in Australia: Fairly efficient even at lower interest rates

August 16, 2019

Australian central bank has cut policy rates in June and July meetings by 25 bps. The policy rate is at 1% currently.

In this speech, Christopher Kent, Assistant Governor (Financial Markets) speaks about how interest rates are being lowered everywhere including Australia. The transmission in Aus has been quite efficient with most %age of rate cuts passed on to people:

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Turkey central bank fires its chief economist and other departmental heads

August 13, 2019

Central bankers continue to be under pressure and be ousted from their job. An Indian parliamentarian openly says he had asked the Finance Minister to sack RBI Governor without naming the person. He says the “RBI Governor was no good and should be sacked outright.”

However, the government anger on central bank is not limited to Governor or Deputy Governor. It could be hit at the central bank staff too. After all the staff was advising the senior team.

This is what we are learning from Turkey.

They just fired the the Governor, but were not happy. They have even dismissed its chief economist and several other departmental heads:

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Public Trust and Central Banking

August 12, 2019

Mario Marcel, Governor of the Central Bank of Chile in this speech talks about how central banks can restore public trust.

I underscore the importance of public trust as foundation of modern monetary policy and for the legitimacy of independent central banks in performing their broader mandates. This is ingrained in the agenda of our Annual Conference this year: new challenges to central bank independence, the management of central bank credibility, and the designing of the best communication strategies for an effective monetary policy.

There was a time when central banks spoke about discretion vs rules, macro models, inflation expectations and so on. Now it is all about trust, credibility. integrity etc etc..

A tale of two countries: Cash demand in Canada and Sweden

August 9, 2019

Superb paper by Walter Engert and Ben S. C. Fung (Bank of Canada) and Björn Segendorf (Riksbank). They try and understand why cash demand is different in the two countries.

First, Sweden and Canada economies are quite similar:

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NZ central bank cuts rates by 50 bps: Uses cartoons from Rugby to communicate (wish it was cricket)

August 8, 2019

I had blogged about how NZ central bank is using cartoons to communicate its decisions to public.

In the recent mon pol decision, it cut policy rates by 50 bps to 1%. It used cartoons from its national sport rugby to communicate. The entire dashboard is as simple as it can get.

But one so wishes pictures were from cricket. What a match and what display by NZ. Can’t still get over it. And yes Happy Bday to Kane Williamson!

When Central European countries gave loans in Swiss Francs and it backfired..

August 7, 2019

Before the 2008 crisis, certain Central Europeans took loans in Swiss Francs given the stability etc. As Swiss entered the crisis and did their own thing, the CHF appreciated given its safe haven status. This led to problems for these countries as the borrowers had to pay more due to CHF appreciation. Some respite was there when Swiss National Bank decided to target their currency to prevent this appreciation. But once they removed the target, the problems again continues. This led to some of these economies to restructure their loans in either Euro or local currency.

For instance, the Slovenian government has decided to restructure in Euro and asked their central bank to face losses if any. They sent a letter to ECB for its view as per the law. ECB replied raising concerns over this move saying it is the role of the government and not Slovenia central bank.

Andreas Fischer and Pınar Yeşin in this SNB working paper look at evidence from other countries:

This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in
Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period.

Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased currency mismatches in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.

 

RBI cuts policy rate by 35 bps!

August 7, 2019

RBI Governor Shaktikanta Das had earlier argued why should be change policy rates in multiples of 25 bps. RBI’s Monetary Policy Committee has gone ahead and changed the status quo and lowered the policy repo rate by 35 bps to 5.4%.

Four members agreed to cut the rate by 35 bps and 2 for 25 bps:

All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.

Four members (Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das) voted to reduce the policy repo rate by 35 basis points, while two members (Dr. Chetan Ghate and Dr. Pami Dua) voted to reduce the policy repo rate by 25 basis points.

 

 

Analysing capital flows: Push factors, pull factors and pipes

August 2, 2019

Missed pointing to this speech by Mark Carney, Governor Bank of England.

He gave the speech in June-2019 and says we need to lower volatility in capital flows:

Today, I want to examine what drives capital flow volatility and, in the process, sketch an agenda for sustainable capital flows in the new world order.

Specifically, what should be the priorities to increase sustainable cross border capital flows? How many are the responsibility of the receiving country? What about the advanced economies who set the tone for the global financial cycle? And to what extent does the structure of the international monetary financial system itself, including the global safety net, determine safe flows?

To begin to answer these questions, the Bank of England is developing a holistic “Capital Flows-at-Risk” framework that assesses the relative contribution of the three drivers of Capital Flows-at-Risk:
 ‘Pull factors’ – domestic conditions and institutions that affect the relative attractiveness of investing in an individual country.
 ‘Push factors’ – that determine global risk appetite and financial conditions, particularly the level and prospects for US monetary policy and financial stability.
 ‘The Pipes’ – the structure of the global financial system itself, particularly the degree to which it dampens or amplifies shocks.

How these three Ps drive capital flows and their volatility plays a crucial role in macro and financial markets stability.

Estimating Jane Austen’s income: insights from the Bank of England archives

August 2, 2019

Central Bank archives are not just about figuring the organisation but several other things.

John Avery Jones, a retired Visiting Professor at the LSE in this post estimates Jane Austin’s income from the Bank of England Archives:

Based on these assumptions, and taking into account such details as that she did not keep anything back for tax on the first receipt which was presumably funded by Henry’s bank, and assuming that she spent the income from the Navy Fives, the income from Mansfield Park would be £310. This is precisely Henry Austen’s figure; perhaps he was not exaggerating on this occasion. On that basis the total tax she paid (before its abolition in 1816) would be about £56. Alternatively if she commenced her profession at the later time the income would be £337, which is almost identical to Professor Fergus’s figure. (On the different assumption that she carried on a trade, which would necessarily have been set up at the time of the receipts from Pride and Prejudice and Sense and Sensibility, the tax would be lower and so would reduce the estimate of earnings from Mansfield Park to £297.)

Her total income from writing in her lifetime was a mixture of taxable receipts and receipts after the abolition of income tax in 1816. These amount, on my estimate, to around £631 before tax (while tax was in force), or £575 after tax, which would be equivalent to just over £45,000 at today’s prices.

Hmm…

Government opens applications for RBI Deputy Governor (Viral Acharya’s replacement)

August 2, 2019

This application should have come much earlier given Viral Acharya had indicated in June that he will not be able to serve beyond 23 July 2019.

Anyways, Government has put up the job advertisement:

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Central Banks should forget about 2% inflation

August 1, 2019

Jeff Frankel in this Proj Syndicate articlec questions central bank’s focus on 2% inflation when they have failed to achieve the target. He says the problem could be with inflation expectations which have hardly been around the 2% mark:

Despite years of monetary stimulus, inflation in the United States, Japan, and the eurozone continues to undershoot central banks’ 2% target. Rather than doubling down on their oft-missed goal, however, perhaps the Fed and other central banks should quietly stop pursuing it aggressively.

…..

Most economists and central bankers, however, fear that their credibility is at stake, and remain fixated on the need to reach the 2% inflation target. In fact, a few economists even want to raise the target from 2% to 4%. One proposal popular among monetary economists is so-called price-level targeting, whereby the Fed would pledge to achieve future inflation that is one percentage point above the 2% goal for every year that it has already fallen short of that target.

But why should these more ambitious inflation goals be credible or achievable when policymakers have failed to reach even the 2% target? Instead, economists should ask why the standard measures of inflationary expectations, such as professional forecasts, have not risen much in recent years.

Perhaps the public’s expected inflation – a central element of economists’ models for a half-century – does not really exist. Or, to be more precise, it may not be well defined when prices are relatively stable. After all, most people pay little attention to the inflation rate when price growth is as low as it has been in recent years.

In a recent paper, Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar, and Mathieu Pedemonte argue that households and firms generally do not have well-informed expectations of future inflation, and often do not know what the inflation rate has been in the recent past. Large policy-change announcements in the US, the United Kingdom, and the eurozone, the authors argue, seem to have only limited effects on the inflation expectations of households and firms. (In a separate paper, two of the authors argue that reading news coverage of the Fed’s Federal Open Market Committee meetings has little effect on American households’ inflation expectations.)

They point out that US households’ expected inflation rate has averaged around 3.5% since the early 2000s – well above the actual rate or professional forecasts. In addition, when they asked hundreds of top executives for their US consumer inflation forecasts over the next 12 months, some 55% said they did not know. Among those who offered an inflation forecast, the average, 3.7%, was again too high.

Moreover, studies in Germany, other eurozone countries, and New Zealand indicate that the public’s inflation expectations are similarly off-target elsewhere. At the same time, the authors say, some standard surveys of the public’s inflation expectations can produce misleadingly reasonable forecasts by “priming” respondents beforehand with a set of choices.

Former Fed Chair Alan Greenspan once defined price stability as “that state in which expected changes in the general price level do not effectively alter business and household decisions” – in other words, inflation is low enough that people don’t think about it in their daily lives. In today’s environment, therefore, policymakers should not be too concerned if the average person does not have well-informed inflation expectations.

Why, then, should central bankers keep banging their heads against the wall of a desired inflation rate? To be sure, monetary authorities should be transparent about their expectations for long-run inflation, as well as for real GDP growth and unemployment. Rather than doubling down on their oft-missed 2% target, however, perhaps the Fed and and other central banks should quietly stop pursuing it aggressively.


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