Archive for the ‘Central Banks / Monetary Policy’ Category

How Russia’s central bank adopted inflation targeting and let its currency float?

March 22, 2019

Nice interview of Elvira Nabiullina, the governor of the Central Bank of Russia. She is also the first woman to head the central bank.

She discusses how Russia adopted IT in 2014 in wake of crisis and let its currency float as well:



Canada’s new $10 bill delivers a history lesson: How Viola Desmond led the fight against racism..

March 22, 2019

Nice bit in IMF’s recent edition of F&D:

A successful black businesswoman is jailed, convicted, and fined for refusing to leave a whites-only area of a movie theater in 1946. Local Baptist church leaders step in to lend assistance. An appeal proceeds through the court system, but ultimately proves unsuccessful. Sixty years on, a government apology and posthumous pardon attempt to right the wrong.

A page torn from a history book recording events from the southern United States? Not quite.

While reminiscent of incidents that occurred much farther south in the early part of the 20th century, the episode transpired in Nova Scotia, one of the maritime provinces on the east coast of Canada.

Viola Desmond and her court case became an inspiration for the pursuit of racial equality across Canada. A testament to an oft neglected but marked moment in Canadian history, her likeness now appears on Canada’s $10 banknote.


When Desmond purchased her ticket at the movie theater that day in 1946, she received admission to the balcony—the seating generally reserved for nonwhite customers. But being nearsighted, and unaware of the policy, she went to sit in the floor section to be closer to the screen. A ticket taker noted her ticket was for upstairs seating, so she returned to the ticket counter to purchase a floor seat. Denied the purchase and realizing that her request was refused because of her race, she decided to sit on the main floor anyway. The police were called, and she was forcibly removed from the theater, injuring her hip, before she spent 12 hours in jail and paid the $20 fine.

While no laws existed in Nova Scotia to enforce segregation at the time, no court in the province had ruled on the legality of discriminatory policies in hotels, theaters, or restaurants. The tax on the balcony price of 20 cents was 2 cents; the tax on the floor price of 40 cents was 3 cents. In the end, Desmond was convicted of depriving the government of a penny in tax.

“In 1946, Viola Desmond took a courageous stand against injustice that helped inspire a movement for equality and social justice in Canada,” said Jennifer O’Connell, parliamentary secretary to the minister of finance, who spoke at the $10 banknote event. “More than 70 years later, we honor her as the first Canadian woman to appear on a [regularly circulating] banknote and hope her story inspires the next generation of Canadians to follow in her footsteps.”

Superb. The new vertical note also looks quite trendy:


Eastern Carribean central bank to launch blockchain-based digital currency..

March 20, 2019

ECCB conducts monetary policy for eight island economies:

 Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, Saint Lucia, and St Vincent and the Grenadines.

Apart from Sweden, ECCB is now looking to issue its own digital currency:

The Eastern Caribbean Central Bank (ECCB) and the Barbados-based fintech company, Bitt Inc. (Bitt) have signed a contract to conduct a blockchain-issued Central Bank Digital Currency (CBDC) pilot within the Eastern Caribbean Currency Union (ECCU).

The watershed contract was signed on 21 February at the ECCB’s Headquarters in Basseterre, St Kitts and Nevis.

This ECCB CBDC pilot is the first of its kind and will involve a securely minted and issued digital version of the EC dollar (DXCD). The digital EC dollar will be distributed and used by Licensed Financial Institutions and Non-Bank Financial Institutions in the ECCU. The DXCD will be used for financial transactions between consumers and merchants, including peer-to-peer transactions, all using smart devices. For example, an individual in St Kitts and Nevis will be able to send DXCD securely from his/her smartphone to a friend in Grenada in seconds – and at no cost to either party.

The Governor of the ECCB, Timothy N. J. Antoine, emphasised that in contrast to previous CBDC research and experimentsthe ECCB is going a step further.

“This is not an academic exercise. Not only will the digital EC Dollar be the world’s first digital legal tender currency to be issued by a central bank on blockchain but this pilot is also a live CBDC deployment with a view to an eventual phased public rollout. The pilot is part of the ECCB’s Strategic Plan 2017-2021 which aims to help reduce cash usage within the ECCU by 50 per cent, promote greater financial sector stability, and expedite the growth and development of our member countries. It would be a game-changer for the way we do business”.

CEO of Bitt Inc., Rawdon Adams, said, “I thank the ECCB for choosing Bitt. Our mission is the practical application of cutting edge technology to solve persistent financial problems. It is about a successful currency union building on its impressive record of financial stability, development and integration to deliver a quantum improvement to the lives of all its 630,000 citizens. Enhancing economic growth and the quality of life of ordinary people is the aim.”

The ECCB is now poised to embark on the DXCD pilot from March 2019. The pilot will be executed in two phases: development and testing, for about twelve months, followed by rollout and implementation in pilot countries for about six months. As part of pilot implementation, the ECCB will ramp up its sensitisation and education initiatives to facilitate active public engagement throughout all member countries.

The ECCB is being technically supported on this Project by Pinaka Consulting Ltd. 

The Governor in a later speech explained the motivation:


Brazil central bank seeks formal autonomy to do its job…

March 20, 2019

Brazil’s new right-wing President Jair Bolsonaro had promised central bank autonomy in 100 days, if elected. Now after being elected, the talks are on to give the central bank formal autonomy. They have also appointed a new Governor – Campos Neto.

Appointed by Economy Minister Paulo Guedes in November, Campos Neto did not take office until late in February because he had to be questioned by the Senate in order to have his appointment approved. In the ceremony of transfer of position, he said he is proud to work with Guedes. “The meetings in Leblon [during the electoral campaign] will not be forgotten. We are really in a well-tuned orchestra being led by conductor Paulo Guedes,” he said.

Campos Neto pointed out he will work to have the Central Bank fulfill its two main missions: to preserve the purchasing power of the country’s currency through low inflation and solidity in the financial system. Next week, the president of the Central Bank will chair the first meeting of the Monetary Policy Committee (Copom), the agency that sets the Selic, Brazil’s benchmark interest rate, currently fixed at 6.5 percent a year.

In the first address, Campos Neto also said that the government will seek to expand the funds raised by major projects in the private enterprise, increase the access to the financial system, improve the population’s financial education, stimulate everybody’s participation in the market, and boost savings.

The autonomy of the Brazilian Central Bank is currently being considered by Congress. The idea is to prevent the president from interfering in the monetary policy, with the institution free to make decisions on interest and take the measures as it sees fit.


Hold those hagiographies of Mario Draghi as ECB chief

March 19, 2019

V Anantha Nageshwaran in his new piece cautions against praising Mario Draghi, who would soon retire as ECB head:


Kazakhstan will get rid of the Russian language on their money

March 19, 2019

Nice bit on currency and language which has a long history:

The Kazakh authorities have changed the design of coins and banknotes of the national currency — tenge. Now they will not be inscriptions in Russian language. The corresponding decree of the President Nursultan Nazarbayev published on the website of the legal information system “Adilet”.

“The text used in the design of banknotes and coins, issued in the state language. In the design of investment and collection coins allowed the use of inscriptions in foreign languages”, — the document says.

While Russian language can be used in the design of investment and collection coins, issued by the National Bank of Kazakhstan.

The old rules allowed the use of Russian along with Kazakh in the design of banknotes and coins.

Russian has the status official, but not a state language in Kazakhstan, and in accordance with the Constitution, can be used in public organizations. The authorities have carried out a policy of “trilingualism”, encouraging the population to study, in addition to Kazakh, Russian and English.

In 2016, President Nursultan Nazarbaev demanded significant to dismiss officials who refuse to talk to people in Russian. However, in February last year, he said that the authorities — the Parliament and the government should go in its work in the Kazakh language.


The rage called Modern Monetary Theory (MMT)

March 19, 2019

My piece in moneycontrol on MMT.

The Fed should buy recession insurance…

March 18, 2019

Brad DeLong in this article says Fed should buy recession insurance:

…if the next downturn is looming, North Atlantic central banks do not have the policy room to fight it effectively. Should a recession arrive, the US Federal Reserve would ideally be able to cut interest rates by five percentage points, as is customary in such situations. But with short-term safe interest rates currently at 2.4%, it cannot. And with euro and yen interest rates still around zero, the European Central Bank and the Bank of Japan would be unable to help much, either. 

Looking ahead, therefore, the big risk is not that inflation will start spiraling upward, with the Fed unable to raise interest rates fast enough to stabilize the economy. Rather, it is the downside risk that a year from now, the North Atlantic will be in recession, governments will not provide enough fiscal stimulus, and the Fed won’t be able to reduce interest rates enough – leaving it nearly helpless to even try to stabilize the economy.

The logical response to such an asymmetric risk is – or ought to be – to buy insurance to cover it. Worryingly, however, the Fed is not taking out any policy insurance at all against a possible recession, despite having at least three possible options from which to choose.

Three options are: raise policy rates today, cut interest rates today to try to compensate for its inability to reduce rates enough in a future downturn and leave interest rates unchanged for now. It is doing the third option but is not explaining what happens if a recession occurs.


Changing gears: about cycling and the future of banking

March 18, 2019

Frank Elderson, Executive Director of Supervision at Dutch Central Bank in this speech connects cycling and banking regulation:

When I took up this job as chief supervisor for the Dutch banking sector, summer last year, I realized again how much better shape the Dutch banks are in, than the last time I was actively involved in prudential banking supervision.

You see, I was leading the DNB team responsible for supervising ABN Amro back in 2006. I remember going to the Zuidas by bike, parking it right in front of that huge entrance of the ABN Amro building – which wasn’t allowed by the way. That solitary black bicycle, against the sheer backdrop of one of the tallest sky-scrapers of Amsterdam at that time, in a way that bicycle formed an early example of transparent supervision: since everybody knew it was my bike, every time they saw it they knew the supervisor was in the building.

Of course, it’s a story with a tragic undertone. The years 2006 and 2007 have a fateful ring to them. We were witnessing the tearing apart of the largest bank in the Netherlands. Less than a year after the consortium took over ABN Amro, on a sunny day people were leaving the Lehman head offices
carrying cardboard boxes. The rest is history.

How totally different to the picture we observe today! Today I see a banking sector that has weathered the storm, and has emerged stronger. Smaller perhaps, but more resilient, more focused and better capitalized.

Hmm.. It is quite transparent really, Usually, the banks do not want any sign whatsoever of a regulator parking their vehicles at their offices . It could lead to a signal that bank is under trouble and build expecations for a run..

Then he points to three challenges ahead for banks and their supervisors:

  • Anti-Money Laundering and Countering Financing of Terrorism
  • restoring trust in banking sector
  • forward looking risk management

He concludes by looking at ECB’s Single Supervisory mechanism:

Of course, and this is perhaps one of the greatest changes of all over the past twelve years, we are not going about this alone. Today, if you are entering your head offices, you may see not one bicycle, but two. Or a whole lot, if an on-site inspection is taking place. (Actually, this is a figure of speech. We have not yet completely succeeded in transferring our love for cycling to all our good colleagues within the SSM.)

Because I am talking about the SSM of course. I think the SSM has been a great improvement in the way we exercise supervision. If I only think back at the situation we were in, back in 2012, when the European Council’s decision about the banking union was taken. And in November 2013 the SSM was
formally established.It is hard to believe how much progress we’ve made in just a few years.

Many highly qualified staff had to be recruited. A complete supervisory framework had to be designed and be made operational, incorporating the best elements of each nation’s approach to supervision. And a close collaborative relationship with national supervisory authorities developed. It was an
astounding achievement, and the ECB deserves much credit for this.

We are now in a transitional phase. A phase in which the banking union is steadily taking shape, and the SSM is consolidating into a truly harmonized European supervisor. Based on past experience, I look forward to this new phase with confidence and I am eager to take part in it. That’s how we are continuing, safeguarding a sound banking sector in the interest of depositors and a prosperous economy.

Only one last thing: I would love to see more supervisors taking the bicycle when moving around in Frankfurt…

Typical Dutch ending..

Independent monetary policy versus a common currency: case of Czech Republic

March 15, 2019

Interesting research by Jan Br˚uha and Jaromír Tonner of Czech National Bank.

The Czech Republic joined the EU in 2004, i.e. after 1993, and it is therefore obliged to adopt the euro sometime in the future. Obviously, euro adoption would have its benefits and costs. This paper aims to contribute to the macroeconomic analysis of the costs and benefits. By “macroeconomic”, we mean those costs and benefits which are related to business cycle fluctuations, to positive trade effects and to the nominal convergence of the Czech economy. We therefore do not investigate other costs and benefits, such as the change of legal tender, the change in the country’s credibility after adopting the euro and the costs of potential fiscal free riding by other member countries. This is not to say that these other aspects are not important, but this paper concentrates on the above-mentioned well-defined aspects of euro adoption.

The main macroeconomic benefit of adopting the euro is the elimination of exchange rate risk, which should be beneficial to trade, as the euro area countries are dominant trading partners for the Czech Republic. The macroeconomic costs include a reduction in the effectiveness of domestic macroeconomic policies and the risk of greater volatility in economic activity and consumption due to the loss of independent interest rate and exchange rate policy. This is because the common  monetary policy of the ECB cannot respond sufficiently to shocks which affect only a small part
of the euro area economy. The relative importance of the costs and benefits of adopting the common currency is ex ante unclear and the literature offers conflicting results. Therefore, it is worth investigating the macroeconomic costs of joining the euro area.

To contribute to this research agenda, we use simulations performed using the CNB’s official “g3” macroeconomic forecasting model, which is a typical small open economy new Keynesian model. As a counterfactual, we build a modified version of the g3 model with a fixed nominal exchange
rate and with the monetary policy rate equal to the ECB rate.

To evaluate the effects of euro adoption on the Czech economy, we employ two approaches. We compare the unconditional volatilities of important macro variables implied by the two macroeconomic models. The volatility of nominal variables increases after joining the common currency, as the common monetary policy does not react to purely domestic shocks.

We also simulate the counterfactual outcomes of macroeconomic variables that would have happened if the euro had been adopted in the past. We find that euro adoption would have meant an increase in the volatility of macroeconomic variables, while the effects on the levels of real output and consumption would have been positive. These positive effects on the real economy are due  mainly to the trade effect, but temporarily lower real interest rates would also have contributed. Nominal exchange rate appreciation during the ERM II phase could partly alleviate the nominal volatility caused by euro adoption.


Why Latin American central banks follow Fed closely?

March 15, 2019

Andres Velasco, currently Dean of School of Public Policy at the London School of Economics in this piece:


11 March 1935: First official Canada banknotes were issued

March 14, 2019

Nice bit on monetary history of Canada.


How Singapore manages its forex reserves?

March 14, 2019

Ravi Menon, head of Monetary Authority of Singapore in this nice speech:

Singapore has official foreign reserves (OFR) of almost US$300 billion. 

  • In absolute terms, this is the eleventh highest stock of OFR in the world. 
  • As a percentage of GDP and on a per capita basis, it is the third highest in the world.
  • Singapore’s OFR sit on the balance sheet of the Monetary Authority of Singapore (MAS), the central bank and integrated financial regulator.

Besides the OFR, there are two other pots of national reserves in Singapore:

  • The Government of Singapore Investment Corporation (GIC), a fund management company, manages on behalf of the Singapore Government a diverse portfolio of foreign assets – well in excess of US$100 billion.
  • Temasek Holdings, an investment company wholly owned by the Singapore Government, holds equity stakes in a variety of domestic and foreign corporates, amounting to more than US$200 billion.

This morning, let me try to answer three questions:

  • What role do the reserves play?
  • How are the reserves accumulated and managed?
  • How are the OFR managed?


RBI’s museum at Calcutta

March 12, 2019

It was really surprising to see this logo on the homepage of RBI’s website:

The RBI Museum

On clicking, one realised it is RBI’s museum at Calcutta. There is one in Mumbai in Fort area too.

The Calcutta museum website says:

Welcome to the The Reserve Bank of India Museum. The Museum will immerse you in a one-of-a-kind experience that explains the money, its role in the economy and your role in it, in a fun and interactive way. 

You can also explore how money has evolved over the centuries, how and why gold still holds an important place in our society and also about the genesis of RBI. The Museum also features a 7 ft. ‘Yap’ Stone, an interactive exhibit on gold mining, a 12 ft. high sculpture and much more. 

You can read more about ‘The RBI Museum’ in this brochure here and get a preview of the exhibits. Engage in a hands-on journey through exhibits that are brought to life through interactive displays, games, sculptures and videos.

Wow! It rarely happens that India’s museums welcome people. It is also nice that RBI has put up the link to the museum on its homepage. One is wondering, whether RBI is listening to the constant cry of this blogger to include history in its analysis? Too much to imagine but this is welcome…


Pass-through of Bank of England’s policy rate to household interest rates

March 12, 2019

Michael Saunders,  External MPC Member at Bank of England in this speech discusses the monetary transmission in UK.

The transmission has been weak due to low policy rates:

Let me summarise the argument so far. Household deposit rates are unlikely to respond fully to policy rate hikes until the spread between deposit and policy rates has normalised further. With the funding gap closed, mortgage lending rates are now more sensitive to deposit rates and less sensitive to wholesale unsecured funding rates. Hence, for as long as deposit rates remain less sensitive to policy rate changes, rates on new mortgages may also respond by less than usual to changes in Bank Rate (and corresponding swap rates). 

The link from changes in the policy rate set by the MPC to changes in households’ deposit and lending rates is not permanently broken, but is likely to be less effective while the policy rate is very low. This has some general implications for monetary policy. Since the crisis, policymakers have had to pay more
attention to the issue that there may be an effective lower bound (ELB) for the policy rate – not necessarily at zero – below which a further reduction generates no extra stimulus and may even be counter-productive.

However, as the policy rate approaches the ELB, there also may be a range in which policy rate changes have progressively less impact on banks’ deposit and lending rates. Close to the ELB, a lower policy rate would be reflected mainly in wider lending spreads (over riskless rates) rather than lower mortgage rates.
Conversely, a slight rise in the policy rate would produce narrower lending spreads. Lending and deposit rates would not move much either way.

This is only part of the monetary transmission mechanism (MTM). But it is a fairly important part.

BoE models suggest that monetary policy in the UK operates through four main channels: the exchange rate; cost of capital and non-housing wealth; the cashflow effect on households and their willingness to bring forward or delay purchases; and a housing channel. The latter two channels rely on the pass-through of policy rate changes to household interest rates. For example, a higher policy rate pushes up mortgage rates and hence weakens housing activity and house prices, reducing the value of households’ collateral (the housing channel). And the combined rise in deposit and mortgage rates squeezes consumer spending because the spending of people with a mortgage is more sensitive to interest rate changes than the spending of net savers (the cashflow channel), even if this effect is less marked than it used to be.20 The Bank’s suite of models suggest that these two channels typically account for between a third and two thirds of the total expected medium-term impact on output from policy rate changes, depending on how persistent the interest rate change is and the extent to which it is anticipated. If these channels are less effective, then the overall MTM also may be less effective than usual.

It is not possible to be precise about where the threshold for such a zone of reduced policy effectiveness might be. It probably starts when sight deposit rates reach or are close to their effective lower bound, and hence when the policy rate itself is clearly above the ELB. As a rough estimate, my guess is it that for the UK this might occur at a policy rate of roughly 2% or so, reflecting a near-zero floor for sight deposit rates plus an equilibrium spread of 150-200bp between household sight deposit rates and the policy rate.

The reduction in policy effectiveness may become more marked as the policy rate approaches the ELB and a higher share of deposit rates (eg time deposits) become constrained. Of course, this is still very uncertain  and we are still learning about the effects of policy rate changes at low levels. But this issue may be a fairly regular occurrence given that the neutral policy rate is much lower than previously.


Spain planning to establish a macroprudential board..

March 11, 2019

Spain has asked ECB’s opinion on its proposal to establish a macroprudential board. ECB says it is a good idea to have one.

The organisation of the new board is interesting. It will be housed under the Ministry with central bank chiefs part of the board:


Ten Years of Research – What Have We Learnt Since the Financial Crisis? (Australia edition)

March 8, 2019

Nice speech by John Simon, Head of Economic Research at RBA:


First Trust bank to stop printing its own banknotes from 30 June 2022 onwards

March 7, 2019

In UK and related territories, banknotes are issued by players other than Bank of England. They are issued in Sterling Pounds and have same value as  BoE notes but the issuer is different.

Thus in Northern Ireland, there are 4 such banks that issue their own banknotes:

  • Bank of Ireland
  • First Trust Bank
  • Danske Bank
  • Ulster Bank

First Trust Bank has announced it will stop issuing its own banknotes from 30 Jun 2022 onwards. Its ATMs will issue BoE notes:


China’s Quiet Revolution in Central Banking…

March 7, 2019

Nice article by Miao Yanliang, member of China Finance 40, a Beijing think tank. He points how People’s Bank of China is undergoing changes under their new chief Yi Gang.

…the People’s Bank of China (PBOC) is undergoing its own quiet revolution. Like the Fed before it, China’s central bank is becoming more communicative. But the real revolution in Beijing concerns exchange-rate policy, with the PBOC increasingly allowing market forces to determine the renminbi’s value. Both developments are welcome.

The PBOC’s communication offensive has much to do with its new governor, Yi Gang, who was appointed in March 2018. Last month, the bank hosted its first-ever briefing to explain the latest economic and monetary data. And Yi himself has taken the initiative to explain policy decisions, notably his “three arrows” to support funding for small and medium-size enterprises. The governor also occasionally weighs in about stock-market volatility, even though such interventions may raise eyebrows among central-banking traditionalists.

Another significant move came in January, when the PBOC unveiled a new version of its English-language website. Previously, only about 2% of the Chinese site’s content was available in English, prompting foreign investors to complain about an uneven playing field. But the bank’s new English site covers almost every major aspect of policy, from open-market operations and decisions to the governor’s speeches and activities. For example, it features Yi’s speech last December at Tsinghua University on China’s monetary policy framework, together with an English version of his original PowerPoint slides, which are not available in Chinese on the PBOC’s site.

Although this open communication is certainly important, the PBOC’s increasingly flexible exchange-rate policy is far more transformative. In 2015-2016, the PBOC spent about $1 trillion of China’s foreign-exchange reserves to prop up the depreciating renminbi. These days, the PBOC no longer intervenes regularly in the currency market, and does not have an exchange-rate target.

I just checked PBOC’s new website in English. A big improvement indeed. Lots of interesting stuff to explore..


Regulations needed after CEO of cryptocurrency exchange in Canada takes passwords to his grave

March 5, 2019

I had blogged about how an economist benefits from cryptocurrency in Venezuela. I was reminded that perhaps Cryptos are useful in cases where State has failed just as in case of Venezuela. This is rare and does not really justify the need for cryptos.

I came across this fascinating article by Prof Lisa Cramer of Univ of Toronto which points issues with both, crypto and digital world. Apparently, a CEO of crypto exchange in Canada died and he was the only one who knew passwords to the deposits:

A high-stakes legal drama featuring cryptocurrencies has been unfolding in a Canadian court recently.

The antics that led to the litigation almost defy credulity, and they highlight the need for new regulations to better suit a financial marketplace that includes virtual currencies.

News broke in early February that Canadian cryptocurrency exchange QuadrigaCX was seeking creditor protection, leaving in financial limbo about 115,000 people who had entrusted the firm to maintain their deposits of cash, Bitcoins and other digital tokens worth an estimated C$250 million.

The company’s need for bankruptcy protection arose when its founder and chief operator, Gerald Cotten, died suddenly in December while vacationing in India. Normally, if a financial institution’s executive officer meets an untimely demise, he or she doesn’t bring to the afterworld the only keys to the vault. And thus clients maintain continued access their deposited funds all the while.

In the case of Quadriga, unfortunately, Cotten was the only living soul who knew the password to an encrypted offline repository, known as cold storage, where the firm had enshrined the vast majority of clients’ cryptocurrency deposits. Without the password, no one can access those holdings.


Passwords are already ruling our worlds in many ways. This is only going to become more complex even without cryptos.

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