Mark my words: the transmission of central bank communication to the general public via the print media

Tim Munday and James Brookes in this Bank of England paper analyse how central bank communicates to the general public via print media. It also suggests how central banks can improve their news coverage and readability:

We ask how central banks can change their communication in order to receive greater newspaper coverage. We write down a model of news production and consumption in which news generation is endogenous because the central bank must draft its communication in such a way that newspapers choose to report it, while still retaining the message the central bank wishes to convey to the public. We use our model to show that standard econometric techniques that correlate central bank text with measures of news coverage in order to determine what causes central bank communication to be reported on will likely prove to be biased.

We use techniques from computational linguistics combined with an event-study methodology to measure the extent of news coverage a central bank communication receives, and the textual features that might cause a communication to be more (or less) likely to be considered newsworthy.

We consider the case of the Bank of England, and estimate the relationship between news coverage and central bank communication implied by our model. We find that the interaction between the state of the economy and the way in which the Bank of England writes its communication is important for determining news coverage. We provide concrete suggestions for ways in which central bank communication can increase its news coverage by improving readability in line with our results.

Specifically, they find 5 ways in which communications can improve:

we find five main categories of features are significant in explaining the news coverage that central bank communication receives, and derive five policy implications from them. These are that the central bank, if it is designing communication that it wants to reach the general public, should:
1. Keep things simple. Our results show that one should avoid introducing embedded clauses and separable particle verb structures.
2. Be personal. Use we/us/you to engage the reader.
3. Write in short sentences. Long dependence arcs reduce the likelihood of newspaper coverage.
4. Summarise the message in the first sentence of the document.
5. Use facts and figures.   

What may happen when central banks wake up to more persistent inflation?

We are seeing inflation rise across most economies in the world. However, most central banks have treated the inflation as transitory.

Charles Goodhart and Manoj Pradhan look at this question of What may happen when central banks wake up to more persistent inflation:

The current mini-surge in inflation is forecast to return to central bank targets towards the end of 2022, or shortly thereafter. However, there is also a risk of inflation remaining persistently high for longer. This column discusses the implications of such a contingency for central banks and monetary policy.

The authors warn that sudden policy reversals could lead to severe downturns in financial markets and significantly damage public sector balance sheets.

Policy Suggestions:

So, central banks need to consider what their balance sheet policies should become in a world of rising nominal interest rates, and whether the current structure of quantitative easing and the massive availability of additional liquidity is still going to be optimal in such a different situation.

First, central banks will have to bear capital losses on their holdings and could need recapitalisation from governments. That process will have to be structured in a way that does not raise questions about central bank independence (see Allen et al. 2021).

Second, many of the quasi-fiscal uses of quantitative easing (such as propping up mortgage-backed securities (MBS) markets when they had assumed macroeconomic importance) will have to be unwound.

Finally, over a structural horizon, as age-related government debt rises, central bank balance sheets are more likely to expand than shrink. The balancing act will be about avoiding the creation of moral hazard by monetising too much of the debt, versus doing so little that markets push interest rates higher because of concerns surrounding the financing of this debt.

And, through all of that, central banks need to pull these policies together in a way that convinces financial markets that an orderly evolution is not just possible, but likely. In other words, fighting the right war is difficult enough. Fighting the last war would be a catastrophe. 

Challenges to monetary policy: lessons from Medieval Europe

Prof Nathan Sussman of Graduate Institute of Geneva in this post on Bank underground blog discusses monetary policy in Medieval France:

The monetary system is going through significant changes: the rise of cryptocurrencies, negative interest rates, and the decline in the role of traditional banks as intermediaries. History offers policymakers and academics useful case studies that can serve as distant mirrors beyond the study of crises and policy responses to them. Medieval Europe was a period of monetary experimentation and development. The rulers of this period faced similar challenges to those of modern central banks: competition with private monies, no recourse to interest rates as policy tools, and limited use of inside money created by deposit banks. This post draws on my research on monetary policy in late Medieval France to demonstrate the principles that guided policymakers in addressing these challenges.

Lessons:

The historical record shows that state currencies dominate private currencies in general public use for two main reasons. First, states enjoy a comparative advantage in establishing reputation and commitment and therefore are best suited to provide a medium of exchange – a public good – at the lowest cost. The debate about the environmentally unfriendly blockchain verification technology used by cryptocurrencies exemplifies this. Second, the state has a monopoly of the legal system that allows it to provide a legal – contracting – advantage to the state’s unit of account. Then, as now, the legal status of private (crypto) currencies is key to their ability to function as a medium of exchange rather than a financial asset (Rogoff (2017)).

The comparative advantage of the state in circulating a national medium of exchange creates a moral hazard. Historically, private currencies and competition from foreign currencies were a constraint on the state’s opportunistic behavior. However, this did not prevent occasional recourse to inflation tax. Only the independence of monetary policy from fiscal considerations, as Oresme advocated, can prevent this from happening.

Finally, the Medieval experience, which was not unique to France (Cipolla (1982)), shows that monetary policy can be conducted without going through the banking sector. This should be comforting news to central bankers in a world where the role of banks as financial intermediaries will decline (Benes and Kumhof (2012)). It also predates solutions to monetary policy at the effective lower bound based on the distinction between reserve money and the medium of exchange (Agarwal and Kimball (2015)). In the modern version, the government could vary the amount of reserves private institutions are required to hold against the issue of (digital) cash.

Fascinating to read and figure this monetary and banking history.

 

Māori leaders from the banking sector have established the first Māori Bankers Rōpū (group)

Reserve Bank of NZ has been taking several initiatives to include the local Maori community in monetary and banking policies. So much so, the central bank communicates increasingly in the local language.

In one such development, the central bank informs that Maori leaders have taken another initiative to promote banking in the community:

Māori leaders from the banking sector have established the first Māori Bankers Rōpū (group), known as Tāwhia, to share ideas and deepen the understanding of key issues for Māori within the banking sector.

The Rōpū includes senior representatives from ASB, Westpac, ANZ, BNZ, Kiwibank, Heartland and the Reserve Bank of New Zealand – Te Pūtea Matua – as an observer and kaitiaki to the financial system.

 “We’re proud to stand alongside other leaders from the banking industry, as they come together to help deliver and promote outcomes centred on Māori financial inclusion and wellbeing,” says Te Pūtea Matua Governor Adrian Orr.

“At Te Pūtea Matua, we recognise that Te Ao Māori is integral to Aotearoa New Zealand and we’re proud to support this Rōpū and its kaupapa (vision and opportunities).”

Many banking industry participants have adopted their own Te Ao Māori initiatives, and the sector is working towards a more collective response. The Rōpū is grounded in the traditional tikanga of building a whare (traditional houses) by the collective, for the benefit of all.

Rōpū members have highlighted three key focus areas – bolstering access to capital, improving financial literacy for Māori and Māori employment in the banking sector.

“Our leadership team and staff at Te Pūtea Matua look forward to working with the Rōpū and providing our support and expertise, which will in turn benefit the banking sector, Māori customers and Aotearoa.”

Interesting to note how a modern central bank such as RBNZ is trying to balance modernity with protecting heritage.

Inflation, Interest, and the Secular Rise in Wealth Inequality in the U.S.: Is the Fed Responsible?

Prof Edward Wolff in this new NBER paper shows that Fed’s monetary effects have reduced wealth inequality:

Two hallmarks of U.S. monetary policy since the 1981-1982 recession have been declining interest rates and moderation in inflation. Coincident with these trends has been a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This paper analyzes the connection between these two developments on the basis of the Survey of Consumer Finances.

Contrary to expectations, the paper finds that these two monetary effects have reduced wealth inequality rather than increasing it. The effect is sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation accounted for 72.6 percent of the advance of mean wealth over 1983-2019. They also would have led to a 204.9 percent gain in median wealth, compared to the actual rise of 23.4 percent.

Moreover, they have helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this paper differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet.

Debunking the idea that interwar hyperinflation in Germany led to the rise of the Nazi party

Prof Gregori Galofré-Vilà of Universidad Pública de Navarra in this LSE blogpost explains his recent research:

How much hyperinflation in interwar Germany contributed to the rise of the Nazis to political power is still, nearly a century later, a topic of debate. Gregori Galofré-Vilà explores the political and social consequences of hyperinflation in over 500 cities using prices and election returns for the seven federal elections held between 1924 and 1933 and find no connection between the traumatic experience of hyperinflation and the electoral success of the Nazis nearly a decade later.

Resignation of Bundesbank President Jen Weidmann complicates German political outlook

Central banks and central bankers see themselves as economic entities but in reality they are political-economic entities. One is now increasingly seeing news of appointments/resignations of central bankers having political tones.

Germany’s political outlook has become uncertain with recent election results. To complicate matters further, Germany Central Bank’s chief – Jens Weidmann – has resigned:

Bundesbank President Jens Weidmann today asked Federal President Frank-Walter Steinmeier to dismiss him from office on 31 December 2021. He is leaving the Bundesbank, which he has headed since May 2011, for personal reasons. “I have come to the conclusion that more than 10 years is a good measure of time to turn over a new leaf – for the Bundesbank, but also for me personally,” Weidmann wrote in a letter to the Bank’s staff.

In his words of thanks to the staff, Weidmann refers to the joint achievements: “The environment in which we operate has changed massively and the Bundesbank’s tasks have grown. The financial crisis, the sovereign debt crisis and most recently the pandemic have led to decisions in politics and monetary policy that will have long-lasting effects. It has always been important to me that the Bundesbank’s clear, stability-oriented voice remains clearly audible. With a great deal of expertise, the departments have contributed to the discussions on the right lessons to be learned from the crisis and on the framework of the monetary union. Important regulatory changes have been adopted. The reorganisation of banking supervision in Europe has not only led to completely new supervisory structures at the ECB, but also to a strengthened role for the Bundesbank. The Bundesbank’s new responsibilities in the area of financial stability also underline our central role when it comes to a functioning financial system.”

David Marsh and Pierre Ortlieb in this OMFIF article say that Weidmann’s resignation creates more problems:

Germany’s difficult coalition-building process has gained fresh complexity following the announcement of Jens Weidmann’s resignation shortly before the European Central bank takes far-reaching decisions on its expansive monetary policy. The departure of the Bundesbank president, unofficial leader of the ‘hawks’ on the ECB council for more than 10 years, is scheduled to take place on 31 December. The decision enshrines expansionary policies as the ECB’s preferred mode for the foreseeable future.

The timing, coinciding with the departure from office of his former boss, Chancellor Angela Merkel, will open decisions on the Bundesbank succession to possible squabbling among coalition partners of likely Chancellor Olaf Scholz. The current finance minister, from the Social Democratic Party (SPD), is trying to form a new government before Christmas. This would be the first SPD-led administration since 2005, marking a decisive break from 16 years of rule by Merkel’s conservative Christian Democrats, the last eight years in coalition with the SPD.

Although his bowing-out will be politically controversial in Germany, a veteran ECB official said it was an ‘elegant’ way of marking a new chapter in ECB-Bundesbank relations.

Weidmann’s most probable successor is Claudia Buch, a low-key economics professor who has been his deputy since 2014. Her promotion would match Scholz’s campaign to bring more women into front-line economic jobs. However other SPD leaders may favour a higher-profile, more political choice, such as Marcel Fratzscher, a well-respected former ECB official who heads Germany’s left-of-centre DIW economic research institute. Jörg Kukies, state secretary in Scholz’s finance ministry, a former Goldman Sachs banker, would be another prominent candidate.

Additionally, the Free Democratic Party and Greens, likely partners in Scholz’s putative ‘traffic light’ coalition, will wish to influence the choice both of Weidmann’s successor and of a possible new member of the Bundesbank board if the post is filled from within that body.

Weidmann’s exit focuses attention in Germany and beyond to growing antipathy between ECB policies of near-permanent monetary easing and the tighter stance habitually favoured by the Bundesbank and conservative German mainstream economic opinion.

According to one long-time Bundesbanker who knows Weidmann well, ‘The timing of the decision is a surprise, but the decision itself is not. He has made no secret of his opposition to the expansive policy the ECB is following. Over the longer term it was impossible to keep up this position. He’s going at the same time as Merkel. This is a political decision. It is taking place at a time when Germany has 5% inflation driven by a massive monetary overhang.’

‘He knows how little influence the Bundesbank president and Germany itself has on decisions taken by a majority of the ECB council. The decision-making is driven very strongly by Italy and France.’

This is 5th straight resignation of Bundesbank chief before completion of term:

Weidmann’s decision to step down after only two and a half years of his second eight-year term makes him the fifth consecutive German ECB governing council member to resign before the full completion of their term. Weidmann was previously Merkel’s chief economic adviser in the German chancellery. His decision bears some resemblance to Bundesbank president Axel Weber and ECB chief economist Jürgen Stark’s resignation seven months apart in 2011 in protest at the ECB’s easing policies aimed particularly at shoring up weaker members of monetary union. Both Weber (now chairman of Swiss bank UBS) and Stark have recently strongly criticised the ECB’s continued accommodative stance.

The Bundesbank says the 20 October announcement reflects 53-year-old Weidmann’s long-time consideration of his future career path. This follows his failure to become Mario Draghi’s successor as ECB president in November 2019. The official announcement paid tribute to ‘the open and constructive atmosphere’ at the ECB under Christine Lagarde, the new president, ‘in the sometimes difficult discussions of the past years’.

Weidmann’s frustration at his permanent membership of a ‘structural minority’ on the ECB council was a major element behind the decision. During his bouts of opposition to ECB policies, Weidmann fell out with both French President Emmanual Macron and with Draghi, now Italian premier. However frustrating this role may have proven, it was an indispensable one: his willingness to champion hawkish opinions while playing along behind the scenes was important in legitimating the decision-making processes of European monetary policy.

 

Five Ways to Build a New Macroeconomics

JW Mason reflects on the State of macroeconomics:

We need to be brutally honest: What is taught in today’s graduate programs as macroeconomics is entirely useless for the kinds of questions we are interested in. 

I have in front of me the macro comprehensive exam from a well-regarded mainstream economics PhD program. The comp starts with the familiar Euler equation with a representative agent maximizing their utility from consumption over an infinite future. Then we introduce various complications — instead of a single good we have a final and intermediate good, we allow firms to have some market power, we introduce random variation in the production technology or markup. The problem at each stage is to find what is the optimal path chosen by the representative household under the new set of constraints.

This is what macroeconomics education looks like in 2021. I submit that it provides no preparation whatsoever for thinking about the substantive questions we are interested in. It’s not that this or that assumption is unrealistic. It is that there is no point of contact between the world of these models and the real economies that we live in.

I don’t think that anyone in this conversation reasons this way when they are thinking about real economic questions. If you are asked how serious inflation is likely to be over the next year, or how much of a constraint public debt is on public spending, or how income distribution is likely to change based on labor market conditions, you will not base your answer on some kind of vaguely analogous questions about a world of rational households optimizing the tradeoff between labor and consumption over an infinite future. You will answer it based on your concrete institutional and historical knowledge of the world we live in today. 

He lists 5 changes the curriculum needs:

What should we be doing instead? There is no fully-fledged alternative to the mainstream, no heterodox theory that is ready to step in to replace the existing macro curriculum. Still, we don’t have to start from scratch. There are fragments, or building blocks, of a more scientific macroeconomics scattered around. We can find promising approaches in work from earlier generations, work in the margins of the profession, and work being done by people outside of economics, in the policy world, in finance, in other social sciences.  

This work, it seems to me, shares a number of characteristics.

First, it is in close contact with broader public debates. Macroeconomics exists not to study “the economy” in the abstract — there isn’t any such thing — but to help us address concrete problems with the economies that we live in. The questions of what topics are important, what assumptions are reasonable, what considerations are relevant, can only be answered from a perspective outside of theory itself. A useful macroeconomic theory cannot be an axiomatic system developed from first principles. It needs to start with the conversations among policymakers, business people, journalists, and so on, and then generalize and systematize them. 

A corollary of this is that we are looking not for a general model of the economy, but a lot of specialized models for particular questions. 

Second, it has national accounting at its center. Physical scientists spend an enormous amount of time refining and mastering their data collection tools. For macroeconomics, that means the national accounts, along with other sources of macro data. A major part of graduate education in economics should be gaining a deep understanding of existing accounting and data collection practices. If models are going to be relevant for policy or empirical work, they need to be built around the categories of macro data. One of the great vices of today’s macroeconomics is to treat a variable in a model as equivalent to a similarly-named item in the national accounts, even when they are defined quite differently.

Third, this work is fundamentally aggregative. The questions that macroeconomics asks involve aggregate variables like output, inflation, the wage share, the trade balance, etc. No matter how it is derived, the operational content of the theory is a set of causal relationships between these aggregate variables. You can certainly shed light on relationships between aggregates using micro data. But the questions we are asking always need to be posed in terms of observable aggregates. The disdain for “reduced form” models is something we have to rid ourselves of. 

Fourth, it is historical. There are few if any general laws for how “an economy” operates; what there are, are patterns that are more or less consistent over a certain span of time and space. Macroeconomics is also historical in a second sense: It deals with developments that unfold in historical time. (This, among other reasons, is why the intertemporal approach is fundamentally unsuitable.) We need fewer models of “the” business cycle, and more narrative descriptions of individual cycles. This requires a sort of figure-ground reversal in our thinking — instead of seeing concrete developments as case studies or tests of models, we need to see models as embedded in concrete stories. 

Fifth, it is monetary. The economies we live in are organized around money commitments and money flows, and most of the variables we are interested in are defined and measured in terms of money. These facts are not incidental. A model of a hypothetical non-monetary economy is not going to generate reliable intuitions about real economies. Of course it is sometimes useful to adjust money values for inflation, but it’s a bad habit to refer to the result quantities as “real” — it suggests that there is some objective quantity lying behind the monetary one, which is in no way the case.

In my ideal world, a macroeconomics education would proceed like this. First, here are the problems the external world is posing to us — the economic questions being asked by historians, policy makers, the business press. Second, here is the observable data relevant to those questions, here’s how the variables are defined and measured. Third, here are how those observables have evolved in some important historical cases. Fourth, here are some general patterns that seem to hold over a certain range  — and just as important, here is the range where they don’t. Finally, here are some stories that might explain those patterns, that are plausible given what we know about how economic activity is organized.

Read the comments too. Macro is another word for fights!

The low yield environment and Forex Reserves management

Ashish Saurabh and Nitin Madan of RBI in this Bulletin article write on an important but ignored issue.

Central banks of developing economies maintain and manage foreign exchange reserves. The reserves are usually invested in govt securities in developed economies primarily US. However, with interest rates remaining low, these reserves generate negligible returns. What options do central banks have in a low interest rate scenario? Ashish and Nitin discuss this topic in their paper.

Interest rates which have been on a declining trajectory over the last four decades in advanced economies, touched their historic lows in 2020. The prominent drivers of the declining trend in nominal yields are the sustained downward shift in real interest rates and low levels of
inflation, given well anchored inflation expectations. The structural low yield environment may persist in the  post COVID environment due to uncertainty about the growth outlook. This low yield environment has made it an arduous task for the Reserve Managers to generate
reasonable returns on their foreign assets. This article highlights the scope for looking beyond traditional ways to manage foreign exchange reserves in order to augment portfolio returns without undermining the predominant goals of safety and liquidity.     

Peer effects and debt accumulation: Evidence from lottery winnings

Magnus A. H. Gulbrandsen of Norges Bank in this interesting paper track the impact of lottery wins on neighborhoods:

I estimate the effect of lottery winnings on peers’ debt  accumulation using administrative data from Norway. I identify neighbors of lottery winners, and estimate an average debt response of 2.1 percent of the lottery prize among households that live up to ten houses from the winner. Analyzing heterogeneity, I find that neighborhood characteristics and shared characteristics with the winner matter for the debt response: there is a tendency for greater effects for those (1) residing closest to the winner, (2) residing in single-household dwellings, (3) with a longer tenure, and (4) with a household structure similar to that of the winner. Finally, estimates of the (imputed) expenditure response
among neighbors indicate that they accumulate debt to finance increased spending, consistent with a “keeping-up-with-the Joneses” type explanation, where neighbors react to each others expenditure. 

 

Denmark Central Bank’s Gold – A historical overview

Nice historical analysis of role of Gold in Denmark’s monetary system from a historical perspective. The short paper is written by Kim Abidgren.

There is still public interest in Danmarks Nationalbank’s gold stock, although it has been many years since gold played an important role in the cash system and more generally in monetary and foreign exchange policies. The analysis provides an overview of the historical background of the gold stock based on source material from Danmarks Nationalbank’s archives at the Danish National Archives.

 

Should Keynes’s General Theory book have been titled instead as ‘Special Theory of Employment, Interest and Money’?

I had pointed that Monetary Authority of Singapore has completed its 50 years in 1971 and the central bank has released a commemorative volume on its 50 years.

In the volume there is a speech (page 8-13) by Dr Goh Keng Swee who was chair of MAS from 1980 to 1985.

He reflects on his college days when he studied economics and Keynes released the General Theory:

When I was studying economics at Raffles College in pre-War days, the Keynesian revolution broke out with the publication of John Keynes’
The General Theory of Employment, Interest and Money. Today, critics, including Sir John Hicks, are agreed that it was a badly written work and made for difficult reading. I can attest to the latter. As an undergraduate, I read the book from cover to cover no fewer than three times, some chapters even more. What puzzled me most was that Keynes measured variables and aggregates, such as National Income and Money Supply, in terms of what he called “Wage Units”. I asked my professor what this meant and why Keynes did this, but could not get a satisfactory reply. Nor did the literature of the day prove more helpful.

Years later, the truth dawned on me. The Keynesian remedy for curing unemployment — the burning issue of the day left behind by the Great
Depression years — involved a serious risk of inflation. Of course, Keynes knew this. The remedy he recommended took the form of expansion of bank credit through central bank policies to finance government expenditure. This extra spending will create additional demand for goods
and services, thereby reducing unemployment. But if economic variables are measured in wage units, inflation would be factored out as wages will rise in keeping with price increases. If variables such as the consumer price index or interest rates and aggregates like money supply, were measured in wage units, their increases would be reduced to the extent to which wages rise.

There is a further difficulty to contend with. The Keynesian system is a closed one, that is, it takes no account of foreign trade. This is admissible in theory, but in practice, since all modern states engage in foreign trade, a Keynesian stimulus will lead eventually to balance of payments deficits if governments do not exercise restraint in time. A part of the increased incomes people receive will be spent on imports and when exports do not increase in proportion, a trade deficit will occur. In the immediate postWar years, Keynesian economics won widespread acceptance in both academic and government circles in Britain and the United States. Confidence increased in the ability of governments to maintain full employment and stable economic growth through Central Bank credit policies and government fiscal (budgetary) policies.

However Keynesian policies backfired in 1960s:

However, by the mid1960s, certain stubborn difficulties appeared and refused to go away. In Britain, this took the form of balance of payments troubles which led to the devaluation of the pound in November 1967.

America experienced troubles in a different form. Because all major world currencies fixed their par values in terms of the US dollar and the 
US dollar was pegged to gold at US$35 per ounce, America could not devalue the dollar except by raising the price of gold. This the government was unwilling to do for political reasons. Eventually, what happened was an increase in inflationary pressure in the US and a decline in confidence over the convertibility of the US dollar into gold at US$35 per ounce because of increasing US dollar balances accumulated overseas as a result of trade deficits. In the end, gold convertibility of the US dollar was suspended in August 1971 and, shortly thereafter, the regime of floating currencies came into being. World currencies continue to float till this day.

He points how Singapore was watching these developments and learnt from them.

Finally he says he is not against Keynes but the General Theory should have been named as

In conclusion, I want to correct any impression this article may have given that I think poorly of Keynes as an economist. I do not. He is the greatest economist the world has produced this century. He introduced a new way of looking at an economic system, in a different way from the classical greats such as Adam Smith, David Ricardo and Alfred Marshall. The classicals saw the system as one consisting of producers and
consumers, each making his own decision as a producer or a consumer. They studied how a free market harmonises their interests. Keynes looked at how the system functions as a whole. Keynes gave birth to a discipline we now call macroeconomics.   

….

If one has to fault Keynes on any point, it would be the title of his book. This should have been The Special Theory of Employment, Interest and Money. His prescriptions were intended to address the special circumstances created by the Great Depression. By calling it a General Theory, he led lesser minds than his into believing that his prescriptions could be applied under all circumstances, with unhappy consequences, as we have noted.

Schumpeter had made similar comments on General Theory as well..

The Fed’s Evolving Involvement in the Repo Markets

Huberto M. Ennis and Jeff Huther in this Richmond Fed paper look at ongoing changes in Fed’s monetary policy framework:

The Fed recently introduced a new monetary policy tool — the Standing Repo Facility — which complements the Overnight Reverse Repo program put in place in 2013. We provide an overview of the workings of these two initiatives and their effects on the repo market, with thoughts about the way they affect the dynamics of this critical segment of the financial system.

Reserve Bank of NZ adds two more assistant governors for addressing new challenges

Central banks like all other organisations respond to challenges by creating new roles and divisions.

Reserve Bank of NZ has done the same. So far, the central bank had 1 Governor, 1 deputy governor and 5 assistant governors looking at various roles.

It has created two new assistant governor positions: 1) Risk, Compliance & Legal Services and 2) Information and Data Analytics. 

Governor Adrian Orr says the Reserve Bank is well advanced in its transformation to meet its new mandate. “We are aware of our future governance expectations under new legislation. We’re strengthening our foundations and how we operate.”

The changes will result in the Senior Leadership Team expanding from six to eight roles. The additional roles are the General Managers of ‘Risk, Compliance and Legal Services’ and ‘Information and Data Analytics’.

Mr Orr said “These new roles have been created to bolster the overall capability and capacity of the Leadership Team, and to ensure these important tasks are given appropriate prominence. Other senior leadership roles have been refreshed to both accommodate the new roles and to ensure the Bank’s broader mandate is being appropriately managed.”

RBNZ has interesting role allocations across the DG/AG

• Governor / Chief Executive
  • Deputy Governor – General Manager Financial Stability Group
  • Assistant Governor – General Manager Strategy, Governance and Sustainability
  • Assistant Governor – General Manager Transformation, Innovation, People & Culture
  • Assistant Governor – General Manager Money Group
  • Assistant Governor – General Manager Digital Solutions and Security (CSO; Chief Security Officer)
  • Assistant Governor – General Manager Finance and Commercial Operations (Chief Financial Officer)
  • Assistant Governor- General Manager Information, Data and Analytics (New)
  • Assistant Governor – General Manager Risk, Compliance and Legal Services (CRO) (Chief Risk Officer New)

This aspect of how different central banks organise themselves across various departments is quite interesting…

50 years of Monetary Authority of Singapore: 50 Landmark Statements by MAS Leaders

This blog had pointed to the 50th anniversary of Monetary Authority of Singapore.

MAS has announced series of events to commemorate the event.  The central bank has also released this exciting volume of 50 Landmark Statements by MAS Leaders. Chairperson’s statement (hightime the organisations replace the word chairman with chairperson):

The Monetary Authority of Singapore (MAS) is not often in the public eye. It has however played a critical role in Singapore’s economic development, keeping inflation low to support sustained economic growth, preserving financial stability and trust, advancing the development of a global financial centre, and judiciously managing a significant component of Singapore’s reserves. 

This 50th anniversary compilation provides convenient access to the thinking behind MAS’ policies and strategies as they have evolved, through 50 landmark statements by its leaders.

The span of MAS’ roles has grown over the years, and has made it quite distinct among its international peers. It began with narrow functions: indeed its name as a monetary authority rather than a central bank had its origins in the days of the currency board system, when currency issuance was managed outside of MAS. It has long since become a full-fledged central bank, conducting monetary policy, managing Singapore’s official foreign reserves, and ensuring overall financial stability and a reliable payment system.

However, MAS is also one of few central banks that are an integrated financial regulator. It oversees the full span of banking, insurance and capital market activities, fostering the soundness of individual financial institutions and safeguarding the interests of investors and consumers of  financial products. Additionally, MAS has taken on the mandate of promoting a vibrant financial hub with a skilled workforce, connected to global and regional markets.

An underlying theme in this compilation is a strategic vision that combines prudence with an appetite for innovation. MAS has a unique dual reputation. It is viewed as stricter than most prudential supervisors, with Singapore’s record of financial stability being testimony to this. But it is also, among supervisors, one of the most facilitative of business development and proactive in promoting technological innovation and green finance.

These two bearings at the heart of MAS’ strategies have not been incompatible. They will be inseparable in a future where financial stability will itself depend on a progressive response to the challenges of disruptive business models and the climate crisis.

MAS has been willing to depart from convention in crafting policies to fit Singapore’s own circumstances. In the early 1980s, MAS chose to use the exchange rate as its instrument of monetary policy, and effectively gave up control of domestic interest rates and money supply. In the midst of the Asian financial crisis, MAS embarked on a bold liberalisation of Singapore’s financial sector rather than hunker down.

Unusual too for a central bank, MAS has worked in close coordination with government ministries to implement macroprudential measures, aimed at preserving financial stability, promoting a sustainable property market, and safeguarding financial prudence of households. Be it in the areas of macroprudential stability, jobs and skills, digital technologies, sustainability, or financial literacy, MAS has been able to work collaboratively with other public agencies without loss of autonomy where it counts as a central bank or financial supervisor.

I am privileged to have been closely engaged with MAS over the last four decades, working alongside many dedicated and highly capable officers and my colleagues on its Board. I pay tribute to all those who led and served in MAS over the last 50 years, for their deep professionalism, unstinting drive for excellence, and commitment to public service. 

 

Explained | The saga of the US Debt Ceiling crisis and $1 trillion coin

My new piece explaining the linkages between US debt ceiling crisis and US Dollar 1 trillion coin.

The US government has run into a debt ceiling crisis once again. A few economists have suggested that the US government could mint a platinum coin worth $1 trillion to resolve the crisis.

What exactly is the debt ceiling crisis and how would the coin help resolve the crisis? Here is a primer to explain these two issues.

Central bank communication with non-experts: Role of Twitter

Michael Ehrmann and Alena Wabitsch in this ECB paper see the role Twitter has played in central bank communications with non-experts:

Central banks have intensified their communication with non-experts – an endeavour which some have argued is bound to fail. This paper studies English and German Twitter traffic about the ECB to understand whether its communication is received by non-experts and how it affects their views. It shows that Twitter traffic is responsive to ECB communication, also for non-experts. For several ECB communication events, Twitter constitutes primarily a channel to relay information: tweets become more factual and the views expressed more moderate and homogeneous.

Other communication events, such as former President Draghi’s “Whatever it takes” statement, trigger persistent traffic and a divergence in views. Also, ECB-related tweets are more likely to get retweeted or liked if they express stronger or more subjective views. Thus, Twitter also serves as a platform for controversial discussions.

The findings suggest that central banks manage to reach non-experts, i.e. their communication is not a road to nowhere.

 

Decrypting new age International Capital Flows via bitcoins

Clemens Graf von Luckner, Carmen M. Reinhart & Kenneth S. Rogoff in this NBER paper analyse capital inflows via a bitcoin exchange. They find that bitcoins are being used significantly in foreign capital inflows:

This paper employs high frequency transactions data on the world’s oldest and most extensive centralized peer-to-peer Bitcoin market, which enables trade in the currencies of more than 135 countries. We develop an algorithm that allows, with high probability, the detection of “crypto vehicle transactions” in which crypto currency is used to move capital across borders or facilitate domestic transactions.

In contrast to previous work which has used “on-chain” data, our approach enables one to investigate parts of the vastly larger pool of “off-chain” transactions.

We find that, as a conservative lower bound, over 7 percent of the 45 million trades on the exchange we explore represent crypto vehicle transactions in which Bitcoin is used to make payment in fiat currency. Roughly 20 percent of these represent international capital flight/flows/remittances.

Although our work cannot be used to put a price on cryptocurrencies, it provides the first systematic quantitative evidence that the transactional use of cryptocurrencies constitutes a fundamental component of their value, at least under the current regulatory regime.

Hmm..

How Emerging European Economies Found a New Monetary Policy Tool: Asset purchase programs

Group of IMF researchers have written this paper on how some of the Emerging European economies used asset purchases during the 2020 pandemic induced crisis. They found the asset purchases fairly effective in mitigating the crisis:

Several emerging market central banks in Europe deployed asset purchase programs (APPs) amid the 2020 pandemic. The common main goals were to address market dysfunction and impaired monetary transmission, distinct from the quantitative easing conducted by major advanced economy central banks. Likely reflecting the global nature of the crisis, these APPs defied the traditional emerging market concern of destabilizing the exchange rate or inflation expectations and instead alleviated markets successfully.

We uncover some evidence that APPs in European emerging markets stabilized government bond markets and boosted equity prices, with no indication of exchange rate pressure. Examining global and domestic factors that could limit the usability of APPs, in the event of renewed market dysfunction we see a potential scope for scaling up APPs in most European emerging markets that used APPs during the pandemic, provided that they remain consistent with the primary objective of monetary policy and keep a safe distance from the risk of fiscal dominance.

As central banks in the region move towards monetary policy tightening, the tapering, ending, and unwinding of APPs must also be carefully considered. Clear and transparent communication is critical at each step of the process, from the inception to the closure of APPs, particularly when a large shock hits and triggers a major policy shift.

The paper has been explained in this IMF article.

Interesting to see how asset purchases are becoming an important mon pol tool across central banks.

 

The Difference Between “Conducting” and “Implementing” Monetary Policy

Jane Ihrig and Scott A. Wolla in this St Louis Fed research point to the difference between conducting and implementing mon policy:

At the end of his prepared remarks at the June 16, 2021, press conference, Federal Reserve Chair Jerome Powell noted both that the Federal Reserve System (Fed) made a “technical adjustment” to its administered interest rates and that it “has no bearing on the appropriate path for the federal funds rate or stance of monetary policy.” So you might be wondering, what exactly is a technical adjustment and how is it different from the Federal Open Market Committee’s (FOMC’s) actions to adjust the stance of monetary policy? 

This technical adjustment to the Fed’s administered rates is the difference between the FOMC conducting monetary policy and the Fed implementing monetary policy. The FOMC conducts monetary policy by determining a target range for the Fed’s policy rate—the federal funds rate (FFR)—to move the economy toward its congressionally mandated goals of maximum employment and price stability. When the FOMC sets this target range, the idea is that it will influence the FFR and other market interest rates, which, in turn, affects the spending, investing, and saving decisions of businesses and consumers.

But how does the Fed ensure market interest rates follow the target range for the policy rate set by the FOMC? The Fed implements policy by using its tools to keep the FFR within the FOMC’s desired target range. Note that the Fed does not directly set the FFR, as this is determined by institutions borrowing and lending in the federal funds market. Rather, the Fed uses it policy tools and sets two of its administered rates—the interest on reserve balances (IORB) rate and the overnight reverse repurchase agreement (ON RRP) rate—to guide the FFR within the target range. 

Not sure whether I get the difference very clearly.