Archive for the ‘Central Banks / Monetary Policy’ Category

Machine learning in UK financial services

October 18, 2019

I recently wrote a piece on Machine learning and its impact on economics and finance.

New BoE publication reviews what is happening in fin services industry in England. It finds ML is being used increasingly by the fin firms:



A history of money and how our use of it has changed down the centuries

October 17, 2019

It is always useful to read about history of money.

This piece by Peter Ranscombe in Scotsman reviews history of money. One is familiar with most part of the piece, but still good to revise..


Three qualities for good policy and decision making: knowledge, courage and humility

October 17, 2019

Mario Draghi in this speech talks about three qualities for good policy and decision making:


What holds back female economists from making a career in central banking: the gender promotion gap

October 14, 2019

Luc Laeven and Ana Lamo of ECB in this article:

The underrepresentation of women in economics is perhaps nowhere as visible as in central banks. This Research Bulletin article uses anonymised personnel data to analyse the career progression of men and women at the European Central Bank (ECB). Women were less likely to be promoted up until 2010, when the ECB issued a statement supporting diversity and took measures to support gender balance. Following this change, the promotion gap disappeared. This masked a lower probability of women applying for promotion, which is partially explained by an aversion to competing, combined with a higher probability of being selected after having applied. Following promotion, women performed better in terms of salary progression, suggesting that the higher probability of being selected is based on merit, not positive discrimination. Thus, organisations such as the ECB should provide training and services that target the competition-related reasons that discourage women from applying for promotion.


State’s role in the payment market is a matter of urgency: Case of Sweden

October 11, 2019

The usage of cash has declined significantly in Sweden. So much so, the polity has to pass laws to ensure people do not refuse cash as a payment.

Gabriel Söderberg of RIksbank in this note argues that the government needs to play an active role in development of e-krona.

The e-krona brings up many different issues. What is the role of the central bank and ultimately the state in society? What is money and how should we organise the payment  system so that it functions as well as possible? And what do we mean by “as well as possible”? In other words: what attributes do we as a society wish our money and our payment system to have? The economic analysis performed by the Riksbank at the start of the project has therefore been joined by a wider societal analysis and the insight that the ultimate decision on the future of the e-krona is affected by areas beyond economic analysis,
including values as to how society should be organised, and should therefore be the subject of a political decision.

Goes back to some of the fundamental questions about money. Some of these questions would have been asked when the State was beginning to get into money…



Review of RBI Internal Working Group on Liquidity Management

October 10, 2019

RBI has been on fire of late releasing one report after the other. I reviewed following reports: agriculture credithousing securitization, secondary market for corporate loans and of course the Jalan Committee.

On 26 Sep 2019, RBI released another report of an Internal Working Group (IWG) to Review the Liquidity Management Framework. This post reviews the committee report.


What a decade of monetary policy innovation has taught us?

October 10, 2019

Not sure there has been any innovation, but nevertheless.

Philip Lowe, Chair of the CGFS (and Governor of the Reserve Bank of Australia) and Jacqueline Loh, Chair of the Markets Committee (and Deputy Managing Director of the Monetary Authority of Singapore) in this FT piece argue:

The global financial crisis presented central banks with unprecedented challenges, and their response was to take extraordinary actions. A decade on, we can say that these measures succeeded in saving the global economy from deflation, but also introduced some distortions in a few areas of the capital markets.

Many central banks introduced unconventional monetary policy tools following the crisis. They embarked on large-scale asset purchases and expanded lending programmes, increasing their balance sheets to historic levels. Interest rates were cut below zero in several countries. Two committees at the Bank for International Settlements released complementary reports today assessing the effectiveness of unconventional monetary policy instruments and analysing the impact of large central bank balance sheets on market functioning.

Unconventional policy tools emerged out of necessity. In the countries hardest hit by the economic crisis, the financial sector stalled and stopped doing its job, hamstrung by losses and drained of liquidity. The subsequent recession sent unemployment soaring. With inflation and interest rates at low levels, the limited room for conventional policy manoeuvre was quickly exhausted.

On balance, central bankers say that the results of unconventional policies have been positive. Interventions helped smooth investor and consumer expectations and jump-start markets. Research by bankers and academics points to a positive response of economic activity to the extra stimulus provided by unconventional tools. The risk of a deflationary spiral was largely avoided, though inflation still undershot central bank objectives.

Balance sheet-expanding policies aimed at improving market functioning delivered on this front. Balance sheet policies aiming primarily to provide monetary stimulus had some side-effects on market functioning.

The path has been neither smooth nor straight, and some policies have been more successful than others. The reports conclude that corrections to the initial plans were necessary in view of the experience gathered in the course of implementation. Balance sheet policies aiming primarily to provide monetary stimulus had some side-effects on market functioning – especially in terms of reducing the availability of bonds in the market – which were addressed by central bank countermeasures.

In addition, the style of central bank communication about policy intentions and use of these tools had to be adjusted to changing circumstances and fine-tuned to the interpretations that market participants gave to policy messages. Monetary policy is a powerful but not very precise tool and prolonged easing can have side-effects. In part, it works by stimulating aggregate expenditure in a slump by encouraging investors and consumers, who have become overly cautious, to take more risk. Unconventional tools work the same way and, as the reports discuss, protracted use may also encourage imprudent behaviour by market participants.

In a world with open financial borders, it also has spillovers. Investors obtaining cheap funding at home can seek returns abroad, and recipient economies need to manage capital flows in a way that is consistent with their own priorities and needs.

The central banks that used unconventional policies report that these tools have earned a place in their policymakers’ toolbox. They can provide additional policy space and flexibility, allowing a central bank to achieve its mandate when conventional tools have reached their limits. In a world of low inflation and structurally low real rates, they may become increasingly important.

Another lesson is that the tools need to be complemented with measures that reduce side-effects. Such measures could include securities lending facilities that mitigate the scarcity effects from central bank asset purchases, and policies that reduce the impact of negative rates on banks funded by retail deposits.

Money markets must maintain sufficient capacity to function after the extraordinary liquidity is withdrawn, and central banks must preserve operational flexibility to address unexpected changes. Central banks also need to strike the right balance between providing guidance that reduces uncertainty and unduly narrowing down central bankers’ options to respond to changing circumstances in the future.

The reports suggest that unconventional tools’ effectiveness can be strengthened if central banks communicate that they are willing and able to use them. This is best done in a way consistent with each bank’s legal mandate and institutional framework.

Central bank credibility is a major determinant of the effectiveness of monetary policy and this applies as well in the use of unconventional tools. At the same time, their use is best seen as one component of an overall public policy framework that encompasses fiscal and prudential policy responses. Policymakers should avoid placing a disproportionate burden on monetary policy.

This is more like patting one’s own back!

Are Bankers like magicians who pull rabbits from hats?

October 9, 2019

Another interesting speech by Lars Rhode, head of Denmark Central Bank. See earlier ones: one, two).

This speech is given on occasion of 100 years of banking supervision in Denmark.  He starts comparing bankers to magicians!:

What are the characteristics of banking?

In the words of the historian Søren Mørch – loosely quoted – banking belongs in the department where rabbits are pulled out of top hats and ladies are sawn in half. This only works if the audience – the banks’ customers – behave as expected and do what they usually do.

If the customers do not trust the bank, there will be a run on the bank. The trick will fall flat, and the money will vanish.

We can try to regulate our way out of the risk that the trick will fall flat. But whatever we do, we can never guarantee that the banks will not experience problems. So does that mean that we should avoid regulation? The answer is “no”. Regulation is a must.

🙂 Interesting way to explain need for banking regulation.

He then reviews the history of banking supervision in Denmark which is a decent read for banking historians.

In the end:

I started by talking about pulling rabbits out of top hats and sawing ladies in half. But don’t get me wrong. Banking is no joking matter. Regulation of the banks is necessary as they play a special role in society.

Financial regulation and the financial supervisory function, which has now existed in Denmark for 100 years, are primarily there for the citizens and
firms – not for the banks.

Banking and rules undergo continuous change. Take for example payment services, where costs to society are almost halfed since 2009. Increased competition and innovation is something we should welcome.

Future financial services and functions will perhaps be delivered by new actors. They may claim they are not banks and therefore should not be
subject to supervision. However, the guiding principle should always be that it is the function which is regulated.

The new challenges for the supervisory authority are best solved in close and binding cross-border cooperation, which is precisely what the strengthened banking cooperation is about. None of us know what tomorrow brings. But it is our duty to do our best to protect the fundamental financial functions of our society.


Creating a World wide currency

October 7, 2019

Interesting food for thought piece by the trio of econs: Pierpaolo Benigno, Linda Schilling, Harald Uhlig


Modern monetary theory and its critics

October 4, 2019

Lots of recent research on MMT:

The new edition of Real World Economics Review has several papers.

Cato Journal has few papers.

Fiscal Policy getting traction amidst European monetary policymakers…

October 4, 2019

After Mario Draghi, French central bank Governor  François Villeroy De Galhau joins the debate.

He actually reverses the usual policy response to crisis/uncertainty. We are usually told monetary policy is the first response and then fiscal policy. He says given today’s times, fiscal policy comes first:


Law and macroeconomics – the global evolution of macroprudential regulation

October 4, 2019

When we say law and economics, it usually means micro. In this speech, Randal Quarles of Federal Reserve in this speech says law and macro are connected as well:


How “deep” parameters of central banking of 1990s are a distant memory now

October 3, 2019

Interesting speech by Mary Daly, President of San Francisco Fed. She gives the speech on 30 years of inflation targeting in NZ.

She joined the Fed in 1990s and there were three main parameters around mon policy. All those have changed now:

To understand the new environment we face, we first have to look back to the past. And here I will use the United States as an example.

When I started working at the Federal Reserve in 1996, I learned three important facts—the “deep” parameters of central banking. First, the potential growth rate of the U.S. economy averages around 3.5%. Second, the real neutral rate of interest—or r-star—changes over time but is well-bounded away from zero, mostly in the range of 2% to 3% or higher (Congressional Budget Office 2019, Laubach and Williams 2003, FRB New York 2019, Christensen and Rudebusch 2019). Third, unemployment and inflation are strongly linked through the Phillips curve.

Fast forward to 2019. These facts—these deep parameters—feel like a distant memory. As of June, participants of the Federal Open Market Committee put longer-run potential growth in the United States at about 1.9%. Estimates of the long-run neutral rate of interest were penciled in at just 0.5% (Board of Governors 2019b). As for the Phillips curve, most arguments today center around whether it’s dead or just gravely ill. Either way, the relationship between unemployment and inflation has become very difficult to spot.

Although the numbers may be a little different, the changes I’ve described are not unique to the United States. Global demographic shifts and lower productivity gains are tempering growth and reducing long-run interest rates in many countries (Holston, Laubach, and Williams 2017). And a number of central banks are finding that inflation is less responsive to labor market improvements than in the past.

These trends have important implications for monetary policy. Lower r-star and the zero lower bound mean we’ll have less room to maneuver when the next downturn occurs. One of the lessons learned from the financial crisis and its aftermath is that alternative tools like forward guidance and the balance sheet can be effective at stimulating economies. However, they’re still imperfect substitutes for the most effective tool at our disposal: traditional interest rate adjustments. And the fainter signal coming from the Phillips curve means we have less direct, real-time feedback about how monetary policy is playing out in the economy.

In other words, the jobs of central banks have gotten harder.


Early French and German central bank charters: Central Banking before Riskbank and Bank of England

October 3, 2019

Superb ECB paper by Ulrich Bindseil.

We usually say central banking started with Swedes and British. There were earlier attempts too but their charters were not accessible and available in English. Bindseil translates the charters of six French and German banks starting with Nurnberg exchange and lending bank of 1498. They suggest central bamks arrived much earlier:

In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, a number of earlier European continental institutions would also have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English.

This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre-1800 central banks in France and Germany. The six early public banks displayed varying levels of success and duration, and qualify to a different degree as central banks. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics.

The texts also provide evidence of the role of central banking legislation, and of the distinction between, on the one side, the statutes and charters of the banks, and on the other side the operational aspects which tend to be framed by separate rules and regulations.

Finally, the texts provide evidence of the policy objectives of early central banks, including in particular those of a monetary nature. To put these documents into context, the objectives, balance sheet structure, achievements and closure of each central bank are briefly summarised.


Mario Draghi interview: He reflects on the 8 years as ECB President

October 1, 2019

Mario Draghi steps down as ECB President at end of this month.

In this FT interview, Draghi discusses and reflects his term:


The Puzzling Lure of Financial Globalization

October 1, 2019

Arvind Subramanian and Dani Rodrik in this Proj Syndicate piece argue that financial globalisation continues to excite economists:

Although most of the intellectual consensus behind neoliberalism has collapsed, the idea that emerging markets should throw their borders open to foreign financial flows is still taken for granted in policymaking circles. Until that changes, the developing world will suffer from unnecessary volatility, periodic crises, and lost dynamism.


After holding off for decades, China has finally embraced financial globalization, announcing recently that it would eliminate capital controls to allow unfettered short-term foreign inflows (so-called hot money). By contrast, after decades of boom-bust cycles, Argentina is facing another a macroeconomic crisis, and has finally imposed capital controls to prevent a catastrophic decline in its currency.

Both of these episodes reveal the intellectual hold that financial globalization still has on policymakers, despite its history of failure. Why, after all, would China abandon capital controls now, and what took Argentina so long to adopt such obviously necessary measures?

The Chinese economic miracle has many sources. In addition to the turn to markets, China has benefited from exports and foreign investment, internal migration, and the Maoist legacy of a public education and health system. It is also the civilizational heir to a strong, effective state with an enlightened, albeit ruthless, leadership. Its people collectively crave stability. But an important factor in China’s rise was the decision not to open the economy to capital flows

Consider the following counterfactual history. In the late 1990s, when China’s economic miracle was becoming evident, it could easily have succumbed to the prevailing orthodoxy on financial globalization. Had it done so, the likely outcome would have been a surge in foreign capital chasing high Chinese returns, rapid appreciation of the renminbi, slower export growth, and lost dynamism. China’s export machine would not have become the juggernaut that it is, and its economy may well have suffered through much more volatility as a result of the fickleness of foreign capital. In fact, Argentina – with its periodic macroeconomic volatility and recurring financial crises – offers a perfect illustration of these downsides.

Nearly every major emerging-market financial crisis of the past few decades has been preceded or accompanied by surges in capital inflows. That was true of Latin America in the 1980s, India in 1991, Mexico in 1994, and East Asia and Russia in the late 1990s. It was also true of Brazil, Turkey, and Argentina in the early 2000s; the Baltics, Iceland, Greece, and Spain in the late 2000s and early 2010s; and the “Fragile Five” emerging-market economies (Brazil, India, Indonesia, South Africa, and Turkey) in 2013. And it is true of Argentina today.

To be sure, capital flows have often reflected deeper policy problems or imbalances within a given emerging market. But they are also usually the necessary transmission mechanism for crises, and thus have magnified the eventual costs to those economies. Although most tenets of the neoliberal consensus – privatization, deregulation, trade integration, immigration, fiscal discipline, and the primacy of growth over distribution – are now being challenged or outright rejected, financial globalization remains a glaring exception.

Well, there is too much money and too many careers are at stake and they all try their best to keep the circle going..

Protection of the euro against counterfeiting and on the authentication of euro coins in Luxembourg

September 30, 2019

Interesting bit of commentary on ECB’s website.

Luxembourg is placing a new law to deter counterfeiting of Euros in the country. ECB sends its views on the new law. This is a bit more interesting as ECB is a suprnational central bank not accountable to any one government. But Euro circulates in the respective countries and needs counterfeit laws:

The draft law amends five national laws in order to introduce criminal law sanctions for relevant institutions, as well as their managers and responsible staff, who fail to comply with their obligations as set out in Article 6 of Council Regulation (EC) No 1338/20016. Under that Article, relevant institutions are obliged to: (i) ensure that euro banknotes and coins which they have received and which they intend to put back into circulation are checked for authenticity and that counterfeits are detected; (ii) withdraw from circulation all euro banknotes and coins received by them which they know or have sufficient reason to believe to be counterfeit; and (iii) immediately hand over such euro banknotes and coins to the competent authorities. The relevant institutions are the addressees of Article 6(1) of Regulation (EC) No 1338/2001, which are further specified under the draft law as: (i) merchants engaged in the processing and distribution to the public of money via automated bank machines or automated dispensers; (ii) casinos and similar institutions engaged in the processing and distribution to the public of money via automated teller machines or (cash dispensers); (iii) credit institutions, and, within the limits of their payment activity, other professionals of the financial sector; (iv) companies performing private security and surveillance activities; and (v) payment institutions, within the limits of their payment activity. The foreseen criminal law sanctions consist of fines between EUR 1,250 and EUR 125,000.

1.3 The draft law also complements the BCL’s tasks in respect of euro banknotes and coins, in addition to those laid down in the Law of 23 December 1998 on the monetary status and the Banque centrale du Luxembourg (hereinafter the ‘Law on the BCL’). Firstly, the draft law formally designates the BCL as the competent authority for ensuring compliance with Council Regulation.

ECB supports most of these measures…

Sabine Lautenschläger, Germany’s representative on the European Central Bank’s executive board resigns!

September 27, 2019

Missed this development:

Today, Sabine Lautenschläger, Member of the Executive Board and Governing Council of the European Central Bank (ECB), informed President Mario Draghi that she will resign from her position on 31 October 2019, prior to the end of her term of office. Ms Lautenschläger has been a Member of the Executive Board and Governing Council since 27 January 2014 as well as serving a full term in office as the Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM).

President Mario Draghi thanked her for her instrumental role in helping set up and steer Europe-wide banking supervision, a key pillar of banking union, as well as her unwavering commitment to Europe.

She was unhappy with the ECB decision to restart the bond buying program. This means there is no German on ECB Board, a central bank designed on the lines of Bundesbank.

I had blogged how German presss see Draghi as a devil.

Bundesbank chief Weidmann in this interview says ECB has gone too far:

New bond purchases and even higher penalty interest rates for banks. Is that what’s needed in your opinion, too?
Economic activity has cooled down, mainly in Germany but also elsewhere in the euro area. So inflation is expected to be somewhat lower. The ECB Governing Council has now adopted a very comprehensive package that will provide even more monetary policy accommodation. But I think it has gone too far with this decision. You see, the economic situation is not all that bad, wages are growing strongly, and the spectre of deflation – that is, of persistently contracting prices and wages – is nowhere to be seen.


You’re a longstanding critic of the ECB’s monetary policy – but are your views falling on deaf ears at the ECB? Doesn’t Draghi care what you say or do?
I’ve always singled out government bond purchases for criticism because there is a danger they might blur the boundary between monetary and fiscal policy. That is why we established clear constraints for these purchases on the Governing Council, not least because I pushed for them. So my concerns were taken on board. These new purchases, however, will call these constraints into question in the foreseeable future. And incidentally, I’m not alone with my critical stance. Mario Draghi, remember, indicated that opinion is divided on the Governing Council.

Are zero interest rates destroying our savings culture and eroding confidence in our economic system?
You’re right to say that monetary policy is currently placing a strain on savers. But it’s always a good idea to put some money away for later and to provide for old age, even if interest rates are low. And it’s not as if people have stopped saving altogether. But I do agree with your point that when a public sector institution like the central bank chooses which instruments to use, it needs to make sure that its actions do not deeply unsettle people. That also means that people can count on their money retaining its value, that is to say, that the central bank will pursue its objective of price stability.

A big development!

Loan mela comeback: Missed history lessons

September 27, 2019

My new piece in Business Standard. It reviews history of loan mela.


A fifty-year history of Facebook’s Libra

September 25, 2019

JP Koning in this superb blogpost (as  always) points idea of Libra is hardly new. There have been several attempts in the past both private and public to create a similar currency unit:


%d bloggers like this: