Archive for the ‘Central Banks / Monetary Policy’ Category

Messed up macro..

March 25, 2015

A discerning friend retaliated strongly to yesterday’s post on the confusion amidst econs around Rupee valuation. The reaction was ” Do economists know value of anything? They are a highly overvalued commodity themselves”. :-)

TO add to the frustration, Robert Skidelsky has a piece on messed up macro:


Richard Fisher, Often Wrong but Seldom Boring, Leaves the Fed

March 24, 2015

AN interesting tribute to Richard Fischer who retired from Dallas Fed.

There is little doubt that he was truly a cowboy central banker  in true Texan style. His speeches were easily one of the best with lots of anecdotes and humor.

Krugman adds to the article.

All the best for your future Mr. Fisher. You surely entertained us if nothing else..

Are low bond yields a problem?

March 23, 2015

Prof Shiller says based on his research so far low bond yields do not show a crisis. But never say never:

I have been thinking about the bond market for a long time. In fact, the long-term bond market was the subject of my 1972 PhD dissertation and my first-ever academic publication the following year, co-authored with my academic adviser, Franco Modigliani. Our work with data for the years 1952-1971 showed that the long-term bond market back then was pretty easy to describe. Long-term interest rates on any given date could be explained quite well as a certain weighted average of the last 18 quarters of inflation and the last 18 quarters of short-term real interest rates. When either inflation or short-term real interest rates went up, long-term rates rose. When either fell, so did long-term rates.

We now have more than 40 years of additional data, so I took a look to see if our theory still predicts well. It turns out that our estimates then, if applied to subsequent data, predicted long-term rates extremely well for the 20 years after we published; but then, in the mid-1990s, our theory started to overpredict. According to our model, long-term rates in the US should be even lower than they are now, because both inflation and short-term real interest rates are practically zero or negative. Even taking into account the impact of quantitative easing since 2008, long-term rates are higher than expected.

But the explanation that we developed so long ago still fits well enough to encourage the belief that we will not see a crash in the bond market unless central banks tighten monetary policy very sharply (by hiking short-term interest rates) or there is a major spike in inflation.

Bond-market crashes have actually been relatively rare and mild. In the US, the biggest one-year drop in the Global Financial Data extension of Moody’s monthly total return index for 30-year corporate bonds (going back to 1857) was 12.5% in the 12 months ending in February 1980. Compare that to the stock market: According to the GFD monthly S&P 500 total return index, an annual loss of 67.8% occurred in the year ending in May 1932, during the Great Depression, and one-year losses have exceeded 12.5% in 23 separate episodes since 1900.

It is also worth noting what kind of event is needed to produce a 12.5% crash in the long-term bond market. The one-year drop in February 1980 came immediately after Paul Volcker took the helm of the Federal Reserve in 1979. A 1979 Gallup Poll had shown that 62% of Americans regarded inflation as the “most important problem facing the nation.” Volcker took radical steps to deal with it, hiking short-term interest rates so high that he created a major recession. He also created enemies (and even faced death threats). People wondered whether he would get away with it politically, or be impeached.

Regarding the stock market and the housing market, there may well be a major downward correction someday. But it probably will have little to do with a bond-market crash. That was the case with the biggest US stock-market corrections of the last century (after 1907, 1929, 1973, 2000, and 2007) and the biggest US housing-market corrections of all time (after 1979, 1989, and 2006).

It is true that extraordinarily low long-term bond yields put us outside the range of historical experience. But so would a scenario in which a sudden bond-market crash drags down prices of stocks and housing. When an event has never occurred, it cannot be predicted with any semblance of confidence.

Keep watching. We have seen many things in last few years which were least imagined in the fancy finance world..

Financial inclusion – issues for central banks…

March 19, 2015


The Impossible Trinity: Where does India stand?

March 18, 2015

Rajeswari Sengupta of IGIDR has a paper on the topic.


Making sense of India’s Any Time Monetary Policy..

March 17, 2015

Abheek Barua of HDFC Bank tries to make sense of the sudden rate cuts post budget (which this blog called as ATM policy).

He cites 3 hypotheses:


Is a strong currency better than a weak currency?

March 13, 2015

Scott Wolla of St Louis Fed has a piece on the topic. He argues the case for USD but is applicable for most (if not all) currencies.

The main idea is in terms of currency, difficult to say whether strong or weak currency is good for economy:


Why Understanding Money Matters in Greece…(Issuing Tax anticipation notes)

March 10, 2015

Robert W. Parenteau and Marshall Auerback look at the real purpose of money and go into history for the same.

They says real purpose of fiat money is to allow govts to pay for its expenses:


Does Australia need two central banks?

March 4, 2015

The hype over how much central banks can achieve continues. Instead if relying their limitation we keep looking for ways to glorify them.

William Pesek of Bloomberg  points to how Australian economy is a two-speed one. One part of economy (housing) is booming and other (unemployment) is problematic. First wants a tighter policy and second an easier one. In the end RBA did nothing:

Does Australia need two central banks? The dilemma that faced Reserve Bank of Australia GovernorGlenn Stevens on Tuesday certainly begs the question: The argument for hiking rates was almost as compelling as the one for cutting them.

In the end, Stevens did neither, surprising markets that were betting on a 25 basis-point cut in the 2.25 percent overnight cash rate. The decision will strike many peers around the region, who have been racing to slash borrowing costs, as odd. With Australia facing the highest unemployment rate in 12 1/2-years, slumping business spending and deflation spreading around the globe, a little moreRBA stimulus would seem in order.

That’s until you consider the out-of-control housing market, which is in the grip of an irrational exuberance arguably beyond anything the U.S. experienced in the mid-2000s. In February alone, Sydney homes surged 14.7 percent from a year earlier, the fastest pace in five months. According to economist Lindsay David, author of the new book “Print: The Central Bankers Bubble,” Sydney land prices rose 512 percent faster than inflation between 2001 and 2011, while the city’s population only grew 16 percent. Perth in the West outpaced inflation by 1,094 percent with population growth of 28 percent. Stevens is damned if he responds to slowing growth (which would add more fuel to the property bubble) and damned if he doesn’t (the first recession in over 20 years may be on his watch).


A much better deal would be to let markets function on their own. By relying on central bank for cues, people just delay certain decisions they would have taken.

And then most such articles then simply blame it all on the government. First expectations are raised from central banking. If central bank is in a fix and unable to react, blame it on the govt. Eith tales or heads, central bank wins:

What’s a savvy, respected central banker to do? Stevens can hardly clone himself to do two jobs — one to cap the exuberance in asset markets, one to shield the nation from hardship. The problem, as is often observed, is Australia’s two-speed economy. One features the mining-heavy regions — Queensland and resource-rich western states — which until recently have thrived on China’s voracious appetite for iron ore and coal. High salaries there have propped up property markets that have more in common with the casinos of Melbourne and Perth than rational exchanges. (To make things worse, rich Chinese buyers have helped drive values higher and higher.) Meanwhile, workers in much of the rest of the country are falling behind.

The more these three moving economic parts diverge, the more inequality grows and the less monetary policy matters. As Stevens said on Feb. 13: “The economy needs a bit more growth than we currently have. The board is also very conscious of the possibility that monetary policy’s power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past.”

In that context, the RBA’s decision to stand pat could be its way of pressuring Prime Minister Tony Abbott. Even as households struggle, Abbott’s 17-month-old administration has been paralyzed by questions about his leadership. He has focused more on trimming the national budget than the hard task of diversifying the economy’s growth engines and bringing them into closer alignment. He killed the previous government’s effort to tax miners to redistribute wealth to depressed areas. He’s done little to invest in education, training or better infrastructure — all crucial to improving Australia’s competitiveness.

Government gridlock has left addressing rising unemployment to the RBA’s blunt interest-rate tool. This isn’t a unique problem, of course. Stevens, says Ben Alexander of Ardea Investment Management in Sydney, faces “a familiar dilemma for central banks. The Bank of England setting monetary policies for London or for all of the U.K.? The European Central Bank for Germany or peripherals? Politicians who can’t or won’t help central banks with fiscal policy — a worldwide problem.  Not easy for central bankers particularly since they are arguably pushing on strings anyway.”

Stevens isn’t entirely helpless. “Australia doesn’t need two RBAs,” says Lindsay. It needs economic managers with “a backbone stronger than a chicken wing.” Steeper fees for foreign buyers are one option. So-called macroprudential policies are another. As I’ve argued before, Australia should be slapping harsh curbs on leverage, requiring much larger downpayments and lower loan-to-valuation ratios.

Still, the best remedy for the RBA and the nation is for Abbott’s government to regain focus and get control over its disparate economies. Australia must rediscover the liberalizing instincts that dominated Canberra in the 1980s and 1990s and transition back to a non-mining economy. Rather than prune programs, Canberra should increase research and development spending to create high-paying jobs in science, technology, engineering and education. Also, let’s stop downplaying the potential of tourism, high-end manufacturing and other trade-related sectors that atrophied as mining boomed over the last 15 years. Only after the basic structure of the economy is properly aligned can the RBA hope to have an impact with monetary policy. That’s not a job for Stevens, but for a government that, like Australia’s economy, has lost its way.


On one hand they wish for less and less “govt intervention” and on the other keep asking for more and more “govt support”. Both are different we are told..

Does Indian President even understand the new inflation targeting framework?

March 3, 2015

This is really the lousiest of all possible agreements. It looks like a leaked document of sorts.

After so much noise and hype, the least that was expected was a proper document on a government letterpad with seal. Instead of the finance secretary, the agreement should have been signed by the finance minister. After all it says finance ministry signs on behalf of the President of India which should have followed some protocols to show sincerity towards the cause. And then do Indian President and government officials know anything about this agreement?


Is Japan Zimbabwe?

March 3, 2015

Axel Merk of Merk investments thinks so:

He actually thinks there is not much difference. It is a matter of time before Japan blows up:


How do you spell Fed? (DUI – Driving under the influence..)

March 3, 2015

Prof. Burton Abrams of Univ of Delaware has a piece on this.

Alcohol is central to understanding central banking:


Deflation bogeyman may be, but inflation bogeyman surely?

March 3, 2015

Martin Feldstein has a piece on the deflation bogeyman for western central banks.

Inflation rates have dipped because of low oil and commodity prices:


Does the hawk-dove distinction still matter in the modern Fed?

March 2, 2015

Interesting article by Tim Sablik of Richmond Fed.

Comparing Fed/central bank members as birds goes back to war generals:


The real questions US Senate should have asked FOMC Chair Janet Yellen..

February 27, 2015

Brendan Brown of Mises Institute has a nice piece.

He calls the recent meeting a missed opportunity to grill Fed chair and hold the central bank of the mega mess:


Ukraine has the highest inflation in the world today..

February 26, 2015

Prof. Steve Hanke, the hyperinflation tracker  writes on this.

He says going by recent estimates, Ukraine is the 57th hyperinflation episode in history:


Central Banks and the King Midas touch…

February 25, 2015

One big lesson from the recent crisis should have been to ignore whatever econs and their inspired central banks have been telling us for some years now. Their role should have been marginalised. But the dependence on them and their wisdom has only risen.

We were told by celebrated econs that how central banks could have avoided great depression only if they eased their policy for an extended period of time. This became a wisdom of sorts and accepted at a wide scale. We could have only known the utility if this wisdom if there was another such crisis and had to wait for nearly eighty years for such an event to occur. And as the event struck, the ideas were implemented in frenzy. This was to ensure if Lords of Finance part II is written, it has just the opposite results. Alas we now know the limitations of this frenziness. It is all over the place.

In this spirit, it is interesting to read this speech by Kirsten Forbes of BoE. She invokes the lessons from King of Midas and how central banks behaved like one:

When the legendary King Midas initially received the power to turn everything he touched into gold, he deemed it highly successful; the benefits of being able to create immense wealth with simply the touch of his finger far outweighed any costs. During the financial crisis, many central banks used less glamorous tools to create base money – sharp reductions in interest rates and quantitative easing. These measures played a critically important role in helping economies stabilize and recover.

King Midas soon realized, however, that this power of wealth creation came with unexpected side effects – from making his food inedible to turning his daughter into a lifeless statue. As these costs accumulated, King Midas eventually wished to give up his “golden touch” and return to normality. Similarly, is the current UK policy of near-zero interest rates beginning to generate substantial costs? Is there a point where any costs accumulate such that they outweigh the benefits? Could near-zero interest rates become less “golden”?

And then we have a similar kind of story. What were cited as the benefits of low rates have become limitations as well.

But the Ms. Forbes story is incomplete. It is actually the case that central bankers behave like King Midas most of the time. They wash their hands but then quickly forget the lessons and become the king again. Whether rates are low or high, they try and behave like King Midas. The whole idea is to show that there is some magic to their actions and things will indeed turn into gold. They have a huge audience in the name of market players and media which keeps wishing for the magic. The monetary policies have become a huge magic show of kinds in the process.

In reality central banks are like those tailors which designed clothes for the king with economy being the king.  Only to realise the king had no clothes really. If the illusion works, they are called as magicians and all kinds of awards are honored.  As reality sicks in, the yesteryear heroes are discarded and new ones created. The game of illusion goes on.

As academicians, they keep warning us over the monetary illusion but there is a huge demand for being an illusionist. The aura and power of being the king is too tempting for anyone to ignore.

So the game shall continue…

Bank of England’s multiple challenges..

February 25, 2015

Bank of England is fighting many a battle and is trying hard to keep itself in the game. UK economy’s dependence on financial sector is like putting all eggs in one basket. As most eggs are wither broke or cracked, BoE and Govt are trying to play a rescue act.

It just issued these guidelines which will punish top bankers if they are found messing around:

The Prudential Regulation Authority (PRA) has today set out how it will hold senior managers in banks, building societies and designated investment firms to account if they do not take reasonable steps to prevent or stop breaches of regulatory requirements in their areas of responsibility.

In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published its report “Changing Banking for Good” setting out recommendations for legislative and other action to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013.

The Banking Reform Act introduced new powers which allow the PRA and Financial Conduct Authority (FCA) to impose regulatory sanctions on individual senior managers when a bank breaches a regulatory requirement if the senior manager responsible for the area where the breach occurred cannot demonstrate that they took reasonable steps to avoid or stop it.

The PRA has today published guidance for banks clarifying how it will exercise this new power; including examples of the kind of actions which may constitute reasonable preventive steps and how firms and individuals may evidence them.

The Banking Reform Act also creates a separate offence which could result in individual senior managers being held criminally liable for reckless decisions leading to the failure of a bank. This new criminal offence will, however, be subject to the usual standard of proof in criminal cases (‘beyond reasonable doubt’).

Before the crisis, such things done by central banks and that too in UK were just such a taboo. I mean how could you ask bankers to behave? Markets shall take care..

In another initiative, it has launched a fancy program – One Bank research. So was it a multiple bank agenda earlier?:

The Bank of England today launched its new One Bank Research Agenda – an ambitious and wide-ranging framework to transform the way research is done at the Bank. 

The Agenda aims to improve the coordination and openness of our research across all policy areas, to ensure the Bank makes the best use of our data, and to cultivate an extensive research community that spans the Bank and beyond.

After in-depth consultation with researchers across the Bank and the wider academic community, the Bank has developed five core themes to guide its research: Policy frameworks and interactions; Evaluating regulation, resolution and market structures; Policy operationalisation and implementation; New data, methodologies and approaches; and Response to fundamental change.

They are sharing a lot of historical data under this and should be good for researchers.

the Bank published a supporting discussion paper as well as a high level summary of the five research themes, and released a number of new Bank datasets for use by external researchers. 

Finally, to catalyse interest in the One Bank Research Agenda, the Governor today announced two new competitions sponsored by the Bank – a data visualisation competition using the newly released Bank datasets, and a One Bank research paper competition.

The Governor summarised today’s launch of the One Bank Research Agenda, saying: “Economies are complex, dynamic and constantly evolving systems that are underpinned by social interactions and behavioural change, shaped by fundamental forces like technology and globalisation and supported – or at times disrupted – by finance.

Policymakers need research to help understand these phenomena and to craft our responses to them. And research can make some of its most effective contributions by speaking to the priorities of policy.

Research can help us to discover insights and build them into our policymaking processes.

By focussing on a clear set of research priorities, by opening up our datasets, and by creating tighter links between policymakers and researchers, both within the Bank and across the broader research community, we can advance our mission – promoting the good of the people of the United Kingdom.”

Becoming more and more multiple indicator targeting central bank. The new research themes are also on similar lines.

China’s GIFT city model..

February 25, 2015

Finance is hot again. Despite the west having  serious troubles over regulating their finance sector, the eastern world remains excited.

Indian FinMin recently released a paper on Finance SEZs  where the special zone will have complete freedom in finance. Just like in trade, SEZs are allowed near complete freedom same thing can be applied to Finance SEZs as well. This is of course keeping GIFT city in mind, Indian PM’s pet project when he was the CM of Gujarat.

Interestingly, China has already done something on those lines (how come they are always ahead when we make most of the noise and hype??). Prof. John Whalley has a piece on this:


The calamity behind formation of Fed — an Austrian school perspective..

February 20, 2015

As audit the Fed movement picks up heat, we need to again go back to historical reasons for setting up the central bank. Those who agree with the idea argue Fed has become way too powerful and has created enormous damage with its mon pol. So if we cant end the fed let us audit it. Those who are against the move, say just leave the Fed.

The Austrian school a long critic of central banking and Fed, are surely enjoying this. Long ignored by economists, their arguments are coming to fore pretty naturally given the errors central banks have made across the world.



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