Archive for the ‘Central Banks / Monetary Policy’ Category

Ironically, Alan Turing to be the face of GBP 50 banknote (Ramanujan was in shortlist too!)

July 16, 2019

Bank of England announced that Alan Turing would be the new face of their GBP 50 banknotes.

Alan Turing was chosen following the Bank’s character selection process including advice from scientific experts. In 2018, the Banknote Character Advisory Committee chose to celebrate the field of science on the £50 note and this was followed by a six week public nomination period. The Bank received a total of 227,299 nominations, covering 989 eligible characters. The Committee considered all the nominations before deciding on a shortlist of 12 options, which were put to the Governor for him to make the final decision. 

Mark Carney, Governor of the Bank of England, commented: “Alan Turing was an outstanding mathematician whose work has had an enormous impact on how we live today. As the father of computer science and artificial intelligence, as well as war hero, Alan Turing’s contributions were far ranging and path breaking. Turing is a giant on whose shoulders so many now stand.” 

Alan Turing provided the theoretical underpinnings for the modern computer. While best known for his work devising code-breaking machines during WWII, Turing played a pivotal role in the development of early computers first at the National Physical Laboratory and later at the University of Manchester. He set the foundations for work on artificial intelligence by considering the question of whether machines could think. Turing was homosexual and was posthumously pardoned by the Queen having been convicted of gross indecency for his relationship with a man. His legacy continues to have an impact on both science and society today. 

This is quite ironic. Turing’s work laid the foundations for not just computers science but also today’s digital world. The digital world has spread its tentacles to the world of money with cryptocurrencies and digital payments challenging physical banknotes. And we have Turing as  the face of the GBP 50 banknote!

Turing was chosen from a list which included Ramanujan too:



How to Keep Central Banks Independent

July 16, 2019

Group of economists in the piece say central banks should go back to their original mandate of financial stability:

Some observers say central banks can best mitigate risks to their independence by returning to the narrow price-stability mandate that served them so well prior to the global financial crisis. But this advice is misguided: central banks must revive their original role as guardians of financial stability.


Protecting central-bank independence requires adaptation. In the post-crisis world, governments and citizens will continue to delegate increasingly broad policymaking powers to an unelected independent institution. Central banks must therefore become increasingly accountable in order to maintain their legitimacy. We need a public debate to forge agreement on a framework for central banks’ objectives, tools, and communication mechanisms. Failure to have such a discussion would pose a risk not only to central-bank independence, but also to financial stability and overall social welfare.
I doubt this will help. Take the case of European central bankers which are part of the Eurosystem. As monetary policy is given to ECB. most of these central banks look at financial stability. Yet are under pressure from Governments.
Unless, we have better rules to prevent firing of the central bankers autonomy would always be in the hands of the government.

Corporate Governance in Banks in India: Designing a new benchmark index

July 16, 2019

Rekha Mishra and Anwesha Das of RBI in this new EPW paper:

While several committees have examined and suggested ways to improve corporate governance in banks in India, this study makes an attempt to prepare a benchmark index for the board composition aspect of corporate governance. A comparison between the indices for public sector banks with private sector banks reveals that differences in governance structures cannot be explained fully in terms of ownership only. This is a welcome feature, as with some efforts on the part of the majority shareholder, corporate governance in all the banks can be brought on par with the best-performing bank, by ensuring greater compliance with corporate governance benchmarks.

When central bankers speak about cloud services instead of the usual monetary policy stuff..

July 15, 2019

Central bankers/policymakers use the metaphor of looking up to clouds/skies for saying how economic growth is likely to be in future. Some say dark, some say blue and so on. In India (and South Asia), policymakers actually look at skies to figure state of monsoons.

With technology, using the word cloud means something much more. Mr Burkhard Balz of Bundesbank in this speech looks at how digitisation means central banks also have to change and look at their cloud services:


Should the Bank of Japan issue a Digital Currency?

July 12, 2019

Masayoshi Amamiya, Deputy Governor of the Bank of Japan, in this speech says BoJ has no such plans. However, it is studying these ideas for two reasons:

Today, I have had the pleasure of sharing with you my understanding on retail payments in the digital age, focusing on the relationship between central bank money and private money.

Now, I would like to give you my own answer to the question I posed at the beginning: “Why are many central banks, including the Bank of Japan, committed to researching and studying into CBDCs even though they have no plan to issue them in the near future?” I have two reasons. First, since technological innovation evolves rapidly, the retail payments market structure could suddenly change dramatically, pushing us toward a cashless society.

In some cases, the need for CBDC issuance may suddenly increase. To be able to adapt to such a situation, central banks need to deepen their understanding on the latest developments in information technologies and their applicability to CBDC. Second, as I have discussed in the latter half of my speech, through research into CBDC — or through the CBDC lens — central banks examine more fundamental questions such as: “What are the required functions of money?”; “What ways do we have of improving the complementary relationship between central bank money and private money?”; or “What ways do we have of enhancing the functionality of private digital currency?” This process can offer clues for ways in which payment and settlement systems as a whole can be improved.

The Bank will continue to examine CBDC with these two aspects in mind. In this respect, allow me to introduce two of our recent initiatives. On the technological front, the Bank is continuing research into distributed ledger technology — DLT. Project Stella, a joint research project with the European Central Bank is part of these initiatives.5 This project has resulted in three reports so far, exploring, for example, the applicability of DLT to payments using central bank deposits — that is, wholesale CBDC.

On the legal front, the Bank’s Institute for Monetary and Economic Studies set up a study group on legal issues regarding CBDC in November 2018. It identifies potential legal issues that would arise if the Bank were to issue CBDC in response to rapid developments in technology and their possible interpretations. The report will be released in due course.

The Bank will continue to work to improve the efficiency and safety of payment and settlement systems. It will examine, from various perspectives, the desirable nature of these systems, including the issue of CBDC. And this brings me to the end of my speech.


England and NZ: trying to be best in ODI cricket and central banking

July 12, 2019

Reflecting on my recent piece in Business Standard where I argued how England is trying to revive fortunes in One Day International Cricket and Central banking.

I wrote the piece when England was struggling to make it to semi-finals having lost to Pakistan, Australia and Sri Lanka. Somehow, England figured a way out and won the next matches against India and NZ to qualify for Semifinals.They also beat their arch rivals Australia in semis, in a manner Australia will always remember. It was as if firtunes had reversed as Aussies gave that kind of treatment to Englisy be it Test matches or ODIs. England were tested and proved critics wrong and showed their reign to top was not a fluke but years of preparation.

It is interesting that they will be playing the final against NZ which somehow puffed into semis and beat favorites India to enter the final. It has to be seen whether NZ which were favorites to win in 1992 and 2015 but lost both, win the cup without being favorites at all. They will take lot of inspiration from India’s own win against WI in 1983 final against all odds.

In the BS piece, I also argued how Bank of England is trying to regain its top position as well. For long, it was seen as a role model for central banks but stopped being one. Now it is trying to pick the tempo by ushering in several policy changes and innovations.

What is interesting is that Bank of England is also competing with its counterpart in NZ for becoming this “role model for other central banks” title. RBNZ was the first to start inflation targeting in 1989 and has pioneered quite a few things since 1989. I wrote about RBNZ here.

RBNZ no intends to become the best central bank. Its Governor Adrian Orr in a speech highlighted this statement of intent:

Over the recent period we have committed to our vision to be ‘a great team and the best central bank’, and we have embedded our new Monetary Policy Committee and policy mandate. In addition, we have reorganised our operating structure, and have been investing in our people, our stakeholder relationships home and abroad, our supervision capability and activities, our digital capability, and our payment systems and the future of cash.

Change is now business as usual for the Reserve Bank and I sincerely thank my colleagues for managing through this period of renewal. There is of course more change to come.

Just over two weeks ago, the Prime Minister and the Minister of Finance made some important announcements about progress with the government’s review of our statutory framework for financial system regulation. They announced some in-principle decisions – including introducing a deposit insurance scheme – and set out further questions for a consultation, which is going on now.

So this is a good time discuss the future of the Reserve Bank, and how the changes under consideration might promote the prosperity and wellbeing of New Zealanders and contribute to a sustainable and productive economy. Those phrases, by the way, are not my own. They come from the Reserve Bank Act and express the overarching purpose of the Reserve Bank’s many functions.


Interesting how the competition between the two is in both the fields, cricket and central banking!

What drives demand for banknotes? Swiss edition

July 11, 2019

Interesting paper by Katrin Assenmacher, Franz Seitz and Jorn Tenhofen:

Knowing the part of currency in circulation that is used for transactions is important information for a central bank. For several countries, the share of banknotes that is hoarded or circulates abroad is sizeable, which may be particularly relevant for largedenomination banknotes. We analyse the demand for Swiss banknotes over a period starting in 1950 to 2017 and use different methods to derive the evolution of the amount that is hoarded.

Our findings indicate a sizeable amount of hoarding, in particular for large denominations. The hoarding shares increased around the break-up of the Bretton Woods system, were comparatively low in the mid-1990s and have increased significantly since the turn of the millennium and the recent financial and economic crises.

Well, the results are just opposite of what central bankers and government will tell you. They say people hoard money for all kinds of illegal transactions, black money and so on. They never tell you that most of the time common people hoard money for all the policy problems created by the government and central banks.

Cost-benefit Analysis of Leaning against the Wind

July 11, 2019

Should central banks increase policy rates to mitigate financial instability?

Trent Saunders and Peter Tulip of RBA look at the evidence from Australia:

Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial instability is called ‘leaning against the wind’. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia.

The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.


Bank of England completes 325 years: An anniversary exhibition showing 325 objects

July 10, 2019

Bank of England formed on 27 July 1694, will soon be celebrating its 325 years!

Jennifer Adam, Curator of the Bank of England Museum in this article points how the museum plans to celebrate the event:

The Bank of England officially came into being on the 27 July 1694, with the signing of its Royal Charter. Over 300 years later the Bank of England is the United Kingdom’s central bank, at the centre of a complex financial system, with well‑established roles in maintaining financial and monetary stability and regulating other parts of the banking system. It is also an employer, a body of staff, a workplace, and a building that has evolved through periods of industrial, technological and social revolution.

In July 2019, the Bank of England Museum will mark this anniversary with a new temporary exhibition, 325 years, 325 objects. Each section of the exhibition will provide a glimpse into an era of the Bank’s work and its social history, featuring many objects that haven’t been displayed before. At the centre of the exhibition is a new and unique artwork commission, which will become a permanent part of the Bank of England’s collections.

This article looks at some of the exhibition’s key themes, including changes in the way payments are made and aspects of life at the Bank. It is not a comprehensive catalogue of what is on display but a selection of highlights from the social history of the Bank since its foundation.

One of the key aims for this exhibition was to show a more diverse cast of characters from the Bank’s history. In particular, we wanted to include stories that reflected the presence of women at the Bank as both investors and, later, as staff. Developing this exhibition has revealed some lesser known stories within our collections and has highlighted gaps that we hope to address in future.

Those in London, should make visiting BoE museum part of the itinerary…

ECB’s new chief economist Philip Lane answers questions on Twitter

July 10, 2019

This is really cool stuff from ECB. Earlier chief economist Peter Praet also engaged in similar Twitter conversation, but I think the new chief economist Philip Lane does better at it.

May be RBI could try this as well…


Lagarde as ECB head: Germans are divided on the appointment..

July 10, 2019

Nice piece by David Marsch in OMFIF:

In the drawn-out annals of Franco-German wrangles over economic and monetary union, last week’s deal over top European posts, including the presidency of the European Central Bank, stands out as a landmark French triumph. President Emmanuel Macron has exploited Chancellor Angela Merkel’s political weakness by pushing through a solution that gives France strong levers of control over European money – and provides Germany with only scant rewards in return.

There are some constructive aspects. The nomination of Christine Lagarde, International Monetary Fund managing director, to succeed Mario Draghi on 1 November has been greeted by some in Germany as providing a much-needed boost to the ECB’s status.

A high-profile policy-maker with a brisk collegiate organisational style brings to Frankfurt a track record in handling crises. In contrast to Draghi, who has kept a low profile on the wider Frankfurt scene, Lagarde will install glamour and a touch of show business in the German financial capital. She will add to the city’s appeal to international financial firms after Britain’s departure from the European Union.

Other interpretations, for the Germans, are less positive. Officials point to the unbalanced nature of last week’s agreement. Lagarde’s appointment, scotching German hopes that the job would go to Bundesbank President Jens Weidmann, looks certain to go through the political approval process. The other important part of the deal, nomination as European Commission president of Ursula von der Leyen, the trouble-plagued German defence minister, is not secure, since she could fall victim to an increasingly strong-willed European Parliament.

Lagarde’s policy stance at the IMF, supporting both quantitative easing through ECB asset purchases and growth-boosting German fiscal activism, will now be enshrined and enhanced at the centre of European decision-making. The view from Frankfurt is that Lagarde will put on hold indefinitely much-heralded monetary ‘normalisation’. So there will be no end to ultra-easy policy and no interest rate rises to alleviate what German economists say are dangerous ECB-induced distortions in the financial system.

From optimal currency areas to digital currency areas..

July 10, 2019

Markus K Brunnermeier, Harold James and Jean-Pierre Landau envisage that we will have digital currency areas in future:

20th anniversary of Euro: Twenty papers to better understand the single currency

July 9, 2019

Nauro Campos and Fabrizio Coricelli do us a huge favor by listing the 20 papers one should be reading to understand Euro.

Sea change in global economic outlook

July 8, 2019

Mark Carney in this speech points how global economic outlook has gone through a sea change from optimistic to pessimistic.  He quotes from who other but Shakespeare:

A sea change is a profound transformation. The term was originally coined by Shakespeare in The Tempest,
of which there are five productions across Dorset this summer.These productions will mix tragedy and comedy in a play whose themes range from magic and creation to betrayal and revenge.

My focus is more limited and prosaic – but also more immediately relevant to your work. In recent months, there has been a sea change in financial markets driven by growing concerns over the global economic outlook. I will assess these global developments before turning to what they may mean for the UK’s economic prospects.

A good account of economic conditions…

Decline of economist as a central banker

July 8, 2019

My new piece in Business Standard.

I reflect on the recent nomination of Christine Lagarde as head of European Central Bank. It is interesting how French dominate Germans, on the Bundesbank styled European Central Bank.

In recent months we have seen how governments worldwide are preferring non-economists to head the central banks. Lagarde is an addition to the list.

Though, it is a choice which would be seen as not really a good one. Lagarde is former French Minister of Finance and you do not want to see former Ministers heading central banks, atleast not in European Central Bank, which prides on independence and autonomy.

Much more in the piece.


Meanwhile Turkey’s President fires the Central Bank Governor

July 6, 2019

Today (6th July 2019), Erdogan fired the Governor of Turkey Central Bank: Mr. Murat Cetinkaya:

Turkish President Recep Tayyip Erdogan has fired the governor of the central bank and replaced him with his deputy.

No official reason was given for the sacking of Murat Cetinkaya, who had held the position since April 2016.

However, it comes amid reports of disagreements over interest rates, which the government wants to lower in a bid to boost economic growth.

The announcement has prompted renewed concern over the central bank’s independence.

Mr Erdogan has called for interest rates to be lowered, describing them as the “mother and father of all evil”. He has claimed that high interest rates cause inflation and believes that lowering them will improve growth.

Erdogan appointed the Deputy Governor with the same first name: Mr. Murat Uysal. . Uysal has issued a statement on becoming appointed saying “Bank will continue to independently implement monetary policy instruments!”:

With a decree published in Official Gazette No.30823 dated 06 July 2019, Mr. Murat Uysal has been appointed as Governor of the Central Bank of the Republic of Turkey.

Murat Uysal had been acting as Deputy Governor since 9 June 2016.

In his first statement as Governor, Mr. Uysal emphasized that the Bank will continue to independently implement monetary policy instruments focused on achieving and maintaining its primary objective of price stability in line with the duties and responsibilities granted to him by law.

Mr. Uysal stated that the Bank’s communication channels for the policies aimed at achieving price stability and financial stability will be utilized at the maximum level in the new period, and in this regard he will hold a press conference in the coming days.

The place and date of this meeting will be announced on a later date.

Really Mr Uysal? Independence?

Some more details here..

Does Japan vindicate MMT?

July 5, 2019

Koichi Hamada, advisor to Shinzo Abe in this piece says Japanese economy has followed MMT but one has to be careful drawing lessons:

Some MMT advocates – including Stephanie Kelton, a former economic adviser to Sanders – point to Japanas proof that the approach works. Despite high public debt, its economy is steadily recovering, and standards of living are high.

Moreover, MMT advocates point out, Japan’s expansionary monetary policies – a central feature of Prime Minister Shinzo Abe’s economic-revitalization strategy, Abenomics – have not generated a much-feared surge in inflation. Even within Japan, some argue that there is no need for a consumption-tax hike to fund public spending.

But there is a serious problem with this logic: Japan’s government is not as heavily indebted as is generally believed. Though Japan’s gross debt-to-GDP ratio, at 240%, is the highest in the developed world, what really matters – for the government, just like for private firms – is the net debt-to-GDP ratio, which accounts for real and financial assets. And Japan’s public companies have very large real assets.

In fact, by this measure, Japan is about on par with the US, and doing much better than France and Germany, according to the International Monetary Fund’s October 2018 Fiscal Monitor report, “Managing Public Wealth.” Further challenging Kelton’s assessment, Japan’s primary balance has improved under Abenomics, thanks to its economic recovery.

This does not mean that MMT has no merit, in Japan or elsewhere. In its campaign to increase consumption taxes, Japan’s Ministry of Finance drilled into the public psyche the concept of “Ricardian equivalence”: a government cannot stimulate consumer demand with debt-financed spending, because people assume that whatever is gained now will be offset by higher taxes due in the future. (It was this campaign that drove the MOF constantly to advertise the 240% figure.)

MMT can challenge this strict Ricardian belief, drawing attention to the potential of deficit financing, say, to boost employment through targeted social spending. And, indeed, Olivier Blanchard and Takeshi Tashiro have already proposed using limited deficit financing to help bring Japan’s interest rates up to zero, at a time when the government’s borrowing costs are low and the effectiveness of monetary policy is weak.


MMT works but upto the point inflation comes back:


When policymakers look at sky for clues: India’s “blue skies” vs World’s “no clear skies”..

July 5, 2019

The economic policymakers are increasingly looking up to the sky for guiding economic policy.

The Economic Survey for 2018-19 was all around the colour blue. The Survey points to Blue Sky thinking and even kept the colour of the survey as blue. The Preface explains:


Facebook’s Libra Currency – Will it rewrite the crypto playbook?

July 3, 2019

My new piece on Moneycontrol on FB’s proposed currency Libra.

Italian Government wanting to nationalise the central bank and take ownership of the gold

July 2, 2019

I had blogged on Italian government wanting the gold managed by the central bank.

They have prepared a draft law and asked ECB for its view:

The draft law on Banca d’Italia’s ownership structure provides that the capital shares of Banca d’Italia currently held by private sector entities shall be purchased by the Ministry of Economy and Finance at a nominal value of 1000 lire as set by specified provisions of Italian law dating from the 1930s.

The draft law further provides that, after such transfer, the Ministry of Economy and Finance may transfer its shareholding, or part of it, only to public sector entities. A governmental delegated regulation to be enacted within three months from the entry into force of the draft law will regulate the procedures for transferring the shares.


The explanatory note states that, without prejudice to compliance with international obligations deriving from the Treaties, spelling out explicitly that the ownership of the gold reserves remains with the Italian State seems necessary in light of the hybrid nature acquired by Banca d’Italia over time due to several
legislative interventions. The reference to the hybrid nature of Banca d’Italia seems to refer to the Banca d’Italia’s nature as a public law institution predominantly owned by private sector entities.

Battles continue..

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