Archive for the ‘Central Banks / Monetary Policy’ Category

The UK’s productivity problem: hub no spokes

July 16, 2018

Andy Haldane yet again. How he has made a habit of giving such amazing speeches which are so detailed and yet so simple. One could add  the phrase Haldanesque for any such future central banker speeches.

In his recent speech (40 pages), Andy talks about how UK has a productivity problem (there were talks of giving Bank of England a productivity target). Its productivity has stagnated over the years, The break-up statistics show that the largest firms continue to do well but it is mainly the smaller ones which have not withstood the test of times. Thus we see a kind of inequality in productivity distribution as well, where haves thrive and have nots barely survive. He further argues that real problem is that ideas seem to spread slowly across the economy. Thus there is hub but no spoke:

The UK faces perhaps no greater challenge, economically and socially, than its productivity challenge. Meeting that challenge would deliver benefits to workers in improved wages and skills and to companies in greater efficiency and profitability. It would also contribute to closing inequalities of income, wealth and
opportunity which have rightly and increasingly pre-occupied policymakers over recent years.

The UK has a rich, in some respects world-leading, endowment of innovation and talent. This is, however, unevenly spread. Developing an institutional infrastructure, which draws on the UK’s comparative advantage in innovation but which spreads its benefits more widely, would support the long tail of UK companies and the people who work for them. It would help close the pay and productivity gaps between the best and the  rest, the present and the past, the in-crowd and the out. It would put the rhyme back into R&D. The returns to doing so are difficult to quantify precisely. As a thought-experiment, imagine the bottom three quartiles of the UK productivity distribution saw their productivity gap with the quartile above closed. That would boost UK levels of productivity by around 13%.

This would close a large part of the productivity shortfall relative to its pre-crisis trend. And it would make inroads into closing the productivity gap with the
US and Germany. In today’s prices, it would boost the level of UK GDP by around £270 billion. In closing those gaps, a useful intermediate objective would be to create in the UK a leading-edge diffusion infrastructure, to rival and complement its leading-edge innovation infrastructure. This boost our world (and, with luck, our World Cup) rankings. Inclusive innovation could serve as a conduit to inclusive growth. The UK’s innovation hub would get the spokes it needs to reach every sector, every region, every worker. It would be an industrial strategy for everyone.

The speech was given in end of June, so obviously no World Cup is coming home..:-)

Overall, another Haldanesque speech…


Should Cryptocurrencies Be Regulated like Securities?

July 13, 2018

Diego Zuluga makes a case for regulating cryptocurrencies as securities:

  • The rise of ICOs has raised the question of whether cryptocurrencies are securities.
  • Regulating cryptocurrencies as securities would affect who can buy, hold, deal in, and keep custody of cryptocurrencies, and require varying disclosures.
  • Regulatory uncertainty is chilling innovation and increasing volatility in cryptocurrency markets.
  • Regulators should provide clarity on how cryptocurrencies fit within existing laws by adopting a framework that makes a distinction between functional cryptocurrencies, such as bitcoin, which are not securities, and promises of cryptocurrencies, which may in some cases be securities.
  • Securities regulations should only apply to promises of cryptocurrencies that are marketed as investments and tradable on secondary markets before they are functional: those that meet the Howey test legal precedent for determining a security.

So obviously cryptos then are not to be seen as currencies for making payments but to be seen as securities which are like assets. But how do we define a security?


Time to untie the ECB’s hands and revisit its longstanding price-stability objective

July 13, 2018

Stefan Gerlach (Chief Economist at EFG Bank in Zurich and Former Deputy Governor of the Central Bank of Ireland) looks at this evergreen issue of what a central bank should do.

He says ECB should revisit its price stability objective:

As a practical matter, the ECB’s price-stability objective, originally designed to protect the eurozone from Italian-style inflation, has ended up protecting it from German-inspired deflation. But just because the ECB’s mandate has forced it to do the right thing on occasion does not mean that we will be so lucky in the future.

The global financial crisis required advanced economies’ central banks to contend with circumstances that those who crafted their mandates scarcely could have imagined. The fact that things often do not work out as expected is precisely why central banks’ objectives should be written to give policymakers flexibility – or poetic license to bend the rules – when extreme events occur. Otherwise, policymakers will be less effective than they otherwise could be.

Because the ECB’s price-stability mandate is legally codified by the Treaty on the Functioning of the European Union, it cannot be altered without a treaty amendment. But the phrase “below, but close to, 2%” is the ECB’s own, and thus can be changed with the stroke of a pen.

As such, the ECB should consider two alterations. First, it should get rid of the ambiguity inherent in the words “close to,” by setting a point target to provide clarity to the public – and to ECB Governing Council members – about what its monetary policy aims to achieve. Whether that target is 1.8% or 2%, or whether it is surrounded by a range, is less important.

Second, the ECB must clarify how financial stability and business conditions factor into its policy decisions. Many have argued that lengthening the policy horizon by precisely defining “the medium term” would give policymakers room to pursue other objectives temporarily. After all, because financial crises and deep recessions are deflationary, they, too, jeopardize price stability.

With the ECB finally exiting the last crisis, now is a good time to reflect on what lessons it has (or should have) learned. The ECB must not delay in positioning itself for the next downturn.


These discussions and views on central bank objectives never end, do they?

Should central banks get a target to raise productivity?

July 12, 2018

There have been talks in UK to give Bank of England a productivity target

Croaking Cassandra blog points to a survey of economists where all have rejected this idea. The key is not the rejection but to realise that monetary policy and banking regulation are limited in scope.


Erdogan expands clout over Turkey’s central bank

July 11, 2018

All kinds of things happening in Turkey with the new President taking control over the central bank as one of the things.

Comparing financial integration in Britain and France (also 4 ways types of financial history)

July 11, 2018

I just came across this lecture series organised by State Bank of Pakistan (celebrating its 70 years) in the memory of Zahid Husain, the first Governor of the bank. Quite interesting set of speakers since 1975.

The sixth lecture was given by Prof Charles Kindleberger and needless to say it a is a superb read. Prof Kindleberger discusses how financial integration differed in Britain (where finance picked up) compared to France (where it remained limited to Paris).

He points to this interesting work by Charles Jones who said there are 4 ways to write financial history:

  • Orthodox: The problem through time is to curb the tendency to overissue banknotes or overlend.  So, you will ahve authorities rising from time to time to curb this tendency. This leads to rise of a central authority such as a central bank who monpolises banknotes and regulates the credit system.
  • Heroic: Starting a particular innovation or institution which leads to manifold rise in financial activity. Like the industrial banks in India or mortgage markets and so on.
  • Populist: Opposite of orthodox where there is opposition to this centralisation and support for financial activity outside the major centre. This is especially true in case of US where there was support for so called wildcat banking despite its flaws.
  • Statist: This holds that banks were created to serve the needs of the State/Government. Jones mentioned that central banks in Canada, Australia and Argentina fit in this category.

Prof Kindleberger adds that these histories do not remain static and one keeps moving from one form to another. For instance central banks in both England and France started for Statist reasons but then diverged. Bank of England became more orthodox as it tried to curb adventurous financial activity outside of London. Whereas in Paris, there were elements of both Orthodoxy and Populism.

Just fascinating way to categorise research on financial history. Even the whole discussion on financial history of Britain and France is worth a read..



Central Bank of Pakistan celebrating 70 years

July 10, 2018

The central bank of Pakistan (named as State Bank of Pakistan) started amidst high drama on 1 July 1948.

It is celebrating its 70th anniversary. The website has interesting sets of links on SBP’s history..

Banks as potentially crooked secret-keepers…

July 9, 2018

Timothy Jackson and Laurence J. Kotlikoff in this paper:

Bank failures are generally liquidity as well as solvency events. Whether it is households running on banks or banks running on banks, defunding episodes are full of drama. This theater has, arguably, lured economists into placing liquidity at the epicenter of financial collapse. But loss of liquidity describes how banks fail. Bad news about banks explains why they fail. This paper models banking crises as triggered by news that the degree (share) of banking malfeasance is likely to be particularly high.

The malfeasance share follows a state-dependent Markov process. When this period’s share is high, agents rationally raise their probability that next period’s share will be high as well. Whether or not this proves true, agents invest less in banks, reducing intermediation and output.

Deposit insurance prevents such defunding and stabilizes the economy. But it sustains bad banking, lowering welfare.

Private monitoring helps, but is no panacea. It partially limits banking malfeasance. But it does so inefficiently as households needlessly replicate each others’ costly information acquisition. Moreover, if private audits become public, private monitoring breaks down due to free-riding. Government real-time disclosure of banking malfeasant mitigates, if not eliminates, this public goods problem leading to potentially large gains in both non-stolen output and welfare.

Quite similar to the ongoing sentiments in India…

Making Paris an international financial centre via innovations…

July 9, 2018

This blog has pointed multiple times how Paris is making bids to become an  international financial centre post Brexit (one, two, three).

In this speech, Banque de France Governor, François Villeroy de Galhau, highlights how they are using an innovation approach:

Why is the Banque de France involved in financial innovation? Because we are at the crossroads of a European choice and a national ambition. The European choice is that of a federal Eurosystem, with a single monetary policy that is naturally decided centrally but whose implementation is decentralised at the level of each national central bank. The national ambition is to be the central bank for markets within the Eurosystem. For the Banque de France, this is a tradition recognised over the 20 years of the euro, backed by its high-quality teams, and is the first of our Ambitions 2020 strategic plan commitments. This is a win-win situation: for the Eurosystem – which will benefit from many of these innovations – but also for the French economy and the Paris financial centre.


He highlights five recent innovations done by the Banque  from developing a single market for collateral to blockchain technologies.

The Austrian Banking Crisis Of 1931: One Bad Apple Spoils The Whole Bunch

July 6, 2018

The Austrian Banking Crisis of 1931 continues to be of great interest to economic history folks. After all, it is seen as one major reason for spreading of Great Depression from US to Europe shores. Once Credit Ansalt, the major Austrian Bank failed, others followed like a pack of cards.

An interesting paper by Flora Macher revisits the evidence so far and offers a new perspective:

The current literature is inconclusive on the relative importance of foreign and domestic factors in bringing about the Austrian financial crisis in 1931.

This paper has emphasized the importance of a domestic cause behind the Austrian banking crisis in 1931. The universal banking structure heavily exposed the largest banks to Austrian industry through their Konzerns. When Konzern corporations performed badly, as they did during the second half of the 1920s, so did the universal banks. The four banks that came under distress in 1925-31 were all insolvent from 1925 due to the weak performance of their Konzern. The paper has also shown that one bad apple, the UB’s Konzern, spoiled the performance of a whole bunch of other universal banks and caused a systemic crisis in 1931. This finding suggests that the crisis may have been avoidable had the UB’s troubles been adequately managed. Finally, while it remains unresolved whether the CA was illiquid before it decided to seek a bailout, it is certain that after 11 May 1931, the flight of both domestic and foreign creditors contributed to the banks’ illiquidity.

Could this have been avoided? One option would have been allowing the UB to fail. The CA’s, the BCA’s, and the VB’s Konzerns were performing much better in relative terms. Had these banks not been poisoned with the UB’s Konzern, they may have survived. Their absorption of the UB’s failing corporations and their avoidance to acknowledge and write off nonperforming assets were what caused them to fail. At the same time, since the universal banks were closely interconnected through their Konzerns, they were reluctant to let one member go under who might then have undermined the stability of the rest as well. Not choosing this, however, eventually buried them all.

Another option would have been a state bailout of the UB. Had this bank been provided sufficient state support to write off its non-performing assets, it would not have gone bankrupt and would not have had to be merged into other stronger banks whom it would gradually weaken and cause to fail. What made this impossible was that the state was bound by restrictions set by financial markets and the League of Nations, which considered bank bailouts anathema to the orthodox fiscal and monetary principals of the time.


Russian Central Bank says its banknote predicted football future

July 6, 2018

The Russian central bank released a 100 Rouble note to commemorate the FIFA world cup held in its country.

The banknote celebrates the 2018 FIFA World Cup™. The note is printed on polymer. The top part of the note bears a transparent window that contains a holographic element. The design of the note is vertically oriented.

The coat of arms of the Russian Federation is located in the top left corner of the front of the note. The main images of the front side are a boy with a ball under his arm and a goalkeeper diving for a ball.   The main images of the back side are a football as a symbol of the globe and football fans.

On a closer look at the goalkeeper image (see left top corner), it has an amazing similarity to the save by Russian Goalkeeper Igor Akinfeyev!

front side

The Central Bank did not hold back and patted itself on its back for its forecast:


Chhattisgarh: A Numismatic History, a unique film on story of coins

July 6, 2018

Nice to read about this movie titled Chattisgarh which documents coin history in the State.

The film titled Chhattisgarh

Movies make us laugh, cry, jump with joy and grab the nearest pillow in fear. But some movies teach us a lot about life, history and philosophy. One such documentary feature film on The Coins of Chhattisgarh from the collection of Dr. Bhanu Pratap Singh was shot in the month of June.

Think about the history you’re holding in your hand. It could be a coin issued in the memory of win over the western gang king by Kalchuri King Jajalladeva by portraying himself as a lion attacking and defeating such an elephant like enemy or may be a silver punch-marked coin counter struck with Malhar symbol to show a clear sovereignty of the state. Coin collectors are stewards of these treasures and a wise collector can also turn them into an investment.

The collection was beautifully displayed at an exhibition and a film with a story about the kings and the coins issued by them was shot around it.

Would be great to see this movie. The history of coinage in India is such an understudied subject…

Chocolate was used as money in the ancient Maya civilization?

July 6, 2018

Scotty Hendricks reviews a research paper on usage of cacao beans as money in Mayan civilization:


200th anniversary of Denmark Central Bank

July 5, 2018

The central banks of Nordic countries are celebrating their mega anniversaries. Sweden celebrated 350 years recently and now it is turn of Denmark to celebrate 200 years.

Dane central bank governor spoke on the 200th anniversary saying “history of the central bank is history of Denmark”. They also released a booklet with wonderful pictures on the event. There is also a more detailed history of the central bank as well along with useful data in excel.

Nice stuff. Thanks for sharing..

Comparing private and government currency circulation in Sweden, US and Canada…

July 5, 2018

Superb paper by Ben Fung, Scott Hendry, Warren E. Weber (Bank of Canada).

It looks at this history of currency circulation in Sweden and compares it with Canada and US. Just to put things in perspective, in Sweden government currency preceded private currency. Whereas in Canada and US, private notes came before government. They also try and figure what do these experiences mean for digital currencies:

This paper examines the experience of Sweden with government notes and private bank notes to determine how well the Swedish experience corresponds to that of Canada and the United States. Sweden is important to study because it has had government notes in circulation for more than 350 years, and it had government notes before private bank notes. Several differences between the experience of Sweden and that of Canada and the U.S. emerge. (i) Swedish bank notes were safe; in some cases, those of Canada and the U.S. were not. (ii) At certain times, Swedish government notes were not safe; government notes in Canada and the U.S. always were. (iii) Swedish private bank notes were a uniform currency without government intervention. Uniformity required government intervention in Canada and the U.S. (iv) Private notes and government notes coexisted in all three countries until governments took actions to drive private bank notes out of circulation. Using the experience of the three countries, the paper concludes that fiduciary digital currencies will likewise not be perfectly safe without government intervention. Further, the introduction of government digital currency will not drive out existing private digital currencies nor will it preclude private digital currencies from entering the market. Government intervention likely will be required for private and government digital currencies to be a uniform currency.

How much one learns from these papers…

The story of East Germany’s central bank and the destroyed East German Marks notes..

July 3, 2018

Fascinating piece on German monetary history (HT: JP Koning).

It tells this story of East German Mark which suddenly was no more valid as legal tender post unification (older post on the topic here):


Designs of bank notes issued by the Reserve Bank of India since 1967

July 3, 2018

RBI released its Master Circular on Detection and Impounding of Counterfeit Notes.

The Annexure VII of the Circular has a list of design of banknotes by RBI since 1967.  These design changes were done mainly to check counterfeiting notes.

  1. Rs 10 notes: 11 design changes
  2. Rs 20: 6 changes
  3. Rs 50: 8 changes
  4. Rs 100: 8 changes
  5. Rs 200: new denomination
  6. Rs 500 (new series): skips discussion on old series of Rs 500 notes.
  7. Rs 2000: new denomination

The notice also excludes Rs 1000 note as it was declared that it is no more legal tender and a new series was not issued as seen in case of Rs 500. It is also interesting to see that RBI barely made any changes to any of the available denominations (Rs 10, 20, 50 and 100) in 1980s barring Rs 50.


Monetary policy signals: Seperating news from noise…

July 2, 2018

Interesting Bank of Canada Working Paper by Tatjana Dahlhaus and Luca Gambetti.

The authors look at Federal Reserve Monetary Policy signals. They find there is more noise than news:

The FOMC’s emergent use of guidance concerning future policy decisions since the 1990s suggests that monetary policy actions are anticipated to some extent. Agents receive signals from the central bank revealing new information (“news”) about the future path of the policy rate well before changes in the
rate occur, and adjust their expectations accordingly. Signals can be transmitted to the public via statements, press releases or speeches, for example. However, the signal may be disturbed by noise in the sense that agents do not receive a clear signal and, thus, do not understand or interpret the news

Therefore, agents observe only a noisy signal, which can be decomposed into a news shock (future or anticipated monetary policy shock) and a noise shock. The source of noise in monetary policy can be twofold. First, communication about future monetary policy by the central bank could be unclear; e.g., there could be ambiguity in words, sentences, or paragraphs. Second, agents may interpret the signal from the central bank incorrectly due to their preconceived notions about the central bank’s biases based on its track record, i.e., central bank credibility. As time passes, agents learn about past news shocks by
looking at the realized policy rate and can disentangle the real news from noise.

Modelling news and noise in monetary policy imposes a challenge for empirical analysis because standard vector autoregression (VAR) methods fail. Against this backdrop, we apply a non-standard structural VAR framework for monetary policy, which allows us to quantify the impacts of news and noise in monetary
policy communication. Our analysis uses US data over the period from 1994 to 2016.

We find the following: First, on average, US monetary policy signals contain more noise than news. Second, noise can be economically costly since it decreases output and prices. Third, noise affects financial markets by decreasing stock prices and by increasing financial market volatility and excess bond premia.

Summing up, noise seems to be an empirically and economically relevant component of monetary policy. Further, our results suggest caution in the use of forward-looking language in the conduct of monetary policy in the sense that providing information about the future path of the policy rate can be valuable if
clearly communicated and credible.


Well, there was a Rupee Census to estimate coins in circulation in India

July 2, 2018

Random Google search brought my attention to this note prepared by Dr. P.C. Mahalonobis (we are celebrating his 125th birth anniversary in 2018.

The note highlights something named Rupee Census which was prepared to estimate coin circulation in India. But what does Rupee Census mean?

Prof G- Findlay Shirras in his book explains that mere looking at coinage statistics we cannot figure coin circulation in India. As some old coins are demonetised, some others are damaged, some are melted and new coins are issued, we need to estimate all these in the final figure.

Thus, from 1875 onwards, there was this annual exercise called “Rupee Census” to estimate total rupee circulation in the economy. Prof Shirras explains:

Since 1875 an examination of the composition of the rupee circulation is made annually in May. In all treasuries and currency offices, bags of ordinary size,
containing R. 1000 or R. 2000, received in payment of revenue, etc. (i.e. in current circulation, in order to represent as accurately  as possible the description
of coins in current use), are examined in detail, and returns of the number of rupees of each issue are forwarded to the Accountants-General who furnish the provincial returns to the Controller of Currency.The percentage results of the census are published in the Report of the Controller of Currency. 

Hmmm. There were disagreements and subsequent improvements in estimating these values. Prof Shirras himself gave another measure to estimate this more correctly. This in turn led RBI to ask Prof Mahalonobis whether the Shirras method was accurate enouugh or could it be improved…

Not sure what happens today.

Reviewing free banking in different US States and lessons for cryptocurrencies

June 29, 2018

Nice article by Helen Fessenden of Richmond Fed.

The idea of an “unregulated” currency, however, isn’t new. Before the Civil War, the United States ran a vast natural experiment by leaving “free banking” to the states, even while other major economies were adopting central banking. From the demise of the Second Bank of the United StatesOffsite in 1836 until the passage of National Banking ActsOffsite of 1863 and 1864, the United States lacked a federal authority to issue and redeem banknotes, act as a fiscal agent for the federal government, or keep banknote issuance in check. Instead, banking was run by the states, and “free banks” could issue their own banknotes. But just how much did this amount to the kind of free-entry, highly decentralized currency competition that some cryptocurrency backers advocate today?

Helen says free banking experiences differed across States. It was successful in New York and New England. This was largely due to the fact that their private notes were backed by safer assets. However, in Michigan, Wisconsin and Illinios free banks suffered as they invested in all kinds of assets. Read the piece for details.

What lessons for cryptos?

What are the lessons from this era? Some banknotes in New York and New England did indeed come closest to fulfilling the functions of money under a regulatory regime, enforced by the government or the private sector. Given that the attraction of cryptocurrencies today lies in the fact that their issuance is not determined by government fiat and that they are not publicly regulated, then, this historical record might give pause to those who see them as a potential substitute for money. The free-banking era also illustrates numerous examples of failures, especially in the Midwest, due to idiosyncratic regulation. This history suggests that effective regulation should involve a way to ensure that a new currency enjoys stable liquidity. This was a clear challenge for some states before the Civil War and for cryptocurrencies today.

Policymakers have recently pointed to some of these fea­tures as constraints on cryptocurrencies’ utility in the long run. Fed Vice Chairman for Supervision Randal Quarles noted in a speech last NovemberOffsite that among the dan­gers posed by cryptocurrencies is that during crises, “the demand for liquidity can increase significantly, including the demand for the central asset used in settling payments.”

“Even private-sector banks and certainly nonbanks can have a hard time meeting large-scale demands for extra liquidity,” he added. “Without the backing of a central bank asset and institutional support, it is not clear how a private digital currency at the center of a large-scale pay­ment system would behave … in times of stress.”

In a speech last MarchOffsite, Bank of England Gov. Mark Carney also underscored this point in a broader critique of cryptocurrencies, charging that they are “failing” as money for now. He warned that the inherently “fixed supply rules” of these currencies would run the risk of repeating another, less successful, historical experiment. “[R]ecreating a virtual global gold standard,” he said, “would be a criminal act of monetary amnesia.”


%d bloggers like this: