Archive for the ‘Central Banks / Monetary Policy’ Category

US Presidents and the Federal Reserve Chairs

December 11, 2019

Nice piece by Peter Earle,

Throughout Fed’s history, it has been attacked by US Presidents. Trump’s attacks are hardly new and just that the medium of attacks has changed. The article discusses some of the episodes of US President and Fed.

In the end:

The entire exercise of introducing evidence that the Fed isn’t politically independent is moot from the start, though. For despite what numerous media outlets have taken the President to task for, the Q&A section of the Richmond Fed website asserts that, in fact, “the Federal Reserve can be more accurately described
as ‘independent within the government’ rather than ‘independent of government.’”

The Fed is independent within the government, in part, because it is self-financed and does not depend on Congressional appropriations or Presidential recommendations for its funding. By the same token, neither the President or Congress can bully the Fed by cutting its budget. That’s not the case with most other federal regulatory agencies, or even the IRS.

Consider what incontestable political independence would actually require: at the very least, every one of the Fed’s political ties—appointments, testimony, the
ability to expand or reduce their mandate, etc.—would have to be severed. To inoculate them from indirect political pressure, the identity of Fed officials would have to be essentially secret.

As currently structured, and considering both the raft of directives that it labors under and the unique attributes of monetary policy, it is cogent to expect elected officials to attempt to sway Fed actions. It was going on for decades before the current President took office and, barring changes, will continue to do so. That any institution exercising as tremendous a mandate as managing the money supply of the world’s largest economy (and the world’s reserve currency, to boot) would go unheeded in the corridors of political power is unrealistic at best.

In that sense, the Federal Reserve is something of an embodiment of the Hayekian adage: a reminder that, at times, economics is a constant lesson in letting people know what they cannot design.

Useful quote from Hayek..

The world‘s first blockchain-based digital collector coin created by the Bank of Lithuania..

December 10, 2019

Fascinating press release from the central bank:

The world‘s first blockchain-based digital collector coin created by the Bank of Lithuania is dedicated to the 16 February 1918 Act of Independence of Lithuania and its 20 signatories. The coin is expected to be issued in spring 2020. “This innovative coin will feature the signatories due to their significant role in the country’s history and contribution to the restoration of our independence. Quite a few of them could be called innovators of their time, as they created and brought progress to Lithuania,” said Marius Jurgilas, Member of the Board of the Bank of Lithuania.

According to him, realisation of this unique idea has provided (and will continue to provide) the Bank of Lithuania with invaluable experience and knowledge in the creation of virtual currencies. “It is especially relevant now since central banks tend to discuss these topics more openly and an outline of such currencies is slowly starting to emerge,” said Mr Jurgilas.

The digital coin is also expected to turn a qualitatively new page in the history of Lithuania’s numismatics and to engage the youth in coin collecting. Therefore, some elements of play will be included in its purchasing process as well. The Bank of Lithuania is planning to release 24,000 collector tokens created using the blockchain technology. Each token will feature one of the 20 signatories and collectors will have a chance to collect the entire set. The tokens will be divided into 6 categories by the signatories’ areas of activity, with 4,000 tokens allotted to each of them.

When purchasing the digital coin, buyers will get 6 randomly selected digital tokens and only upon collecting a token from each of the 6 categories they will be able to redeem a physical silver coin.

The tokens will be available for purchase and storage on the Bank of Lithuania e-shop. In honour of this prominent date, the physical silver coin will bear an unconventional denomination – €19.18 – while its size and form will resemble a credit card, depicting the Act of Independence and its signatories. “I attempted to do a modern take on the historic photograph of the Council of Lithuania that many remember from history books.

The digitised picture consists of more than 36,500 pixels – the approximate number of days that have passed since the Act of 16 February,” said Giedrius Paulauskis, designer of the digital collector coin. The digital collector coin is going to be yet another step in implementing the Bank of Lithuania’s strategic direction in the field of innovation and fintech, aimed at helping Lithuanian and international companies gain knowledge and carry out blockchain‑oriented research, thus adapting and testing blockchain-based services in the financial sector. 

There is a video as well at the end..

RIP Paul Volcker: Till there is macroeconomics, you will be remembered

December 10, 2019

My obituary to Paul Volcker. Rest in Peace Sir.

Volcker not just entered macroeconomics hall of fame but made a permanent place for himself. Former Fed chair Ben Bernanke paid tributes to Friedman on his 90th birthday saying: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

On Volcker’s death, taking a cue from Bernanke’s words, all the central bankers in the world — past and present — can give a joint statement: “We would like to say to Paul, regarding cause of inflation, you’re right, we did it. We’re very sorry. But thanks to you, we will try our best not to do it again.”

How ECB is one of the lone central bank against war on cash: Greece and Sweden cases

December 9, 2019

ECB despite wanting to move into e-Euro is also one of those few central banks which understands importance of cash.

In two statements, it welcomes Swedish government’s decision to continue to provide cash services and in another one, it asks Greece Government to remove limits on cash transactions.


The ECB understands that electronic payment instruments are increasingly used as the preferred
method of payment in Sweden, while the use of cash is declining. Nevertheless, cash is a well
established means of payment providing for immediate settlement of debts and direct control over
the payer’s spending. Furthermore, the ability to pay in cash remains particularly important for
certain groups in society that, for various legitimate reasons, prefer to use cash rather than other
means of payment, or who are unable to use digital technology. Additionally, cash payments
facilitate the inclusion of the entire population in the economy by allowing it to settle any kind of
financial transaction in this way12. Further, the number of SEK banknotes in circulation in Sweden
has increased since 2017 and while the rate of identity theft and card fraud continues to rise, it is
still among the lowest in Europe13. The ECB notes that cash could play an important role in the
event of a disturbance in the payment systems, even though cash machines and other service
points may also be affected as these are dependent on interaction with the account holding


the ECB considers that the existing limit on cash payments of EUR 500
for consumer-to-business transactions, and the new tax incentives discouraging companies from
spending cash in excess of EUR 300, are disproportionate in light of the potentially adverse impact
on the cash payment system. In case the legislator wishes to preserve cash payment limitations,
higher thresholds should be chosen and a degree of flexibility should be introduced in the draft
amendments. Cash transactions above the defined thresholds should be permitted as long as the
parties are able to ensure that the payment is traceable by identifying the amount, the reason for
the transaction and the parties involved. In addition, competent authorities are invited to assess
whether the remaining restrictions on cash payments are proportionate and compatible with the
legal tender status of euro banknotes35, in order to ensure that the effects of these measures do
not go beyond what is necessary for achieving the objective of combating tax evasion.


The Problem With “Green” Monetary Policy

December 6, 2019

Otmar Issing in this Proj Synd piece says there is no thing as Green monetary policy:

Although there is increasing support for the idea that central banks should actively contribute to the fight against climate change, monetary policymakers have no mandate to do so, and for good reason. Tackling climate change is – and must remain – the responsibility of elected governments and parliaments.


the growing public demand that central banks contribute more actively to the fight against climate change leads to a different dimension. In theory, central banks could introduce preferential interest rates for “green” activities – thus driving up the prices of “green bonds” – while adopting a more negative attitude toward noxious assets, such as those tied to fossil fuels. And yet, assessing whether and to what extent an asset is environmentally harmful or helpful would be extremely difficult.

Putting aside these more technical issues, the broader question remains: Should central banks assume responsibility for implementing policies to combat climate change? A number of prominent central bankers have already argued that they should. And current proposals for extending central banks’ mandate have come on top of growing concerns about income distribution and other issues tangentially related to monetary policy.

One is reminded of an ironic comment by the great Chicago School economist Jacob Viner. “If you were to ask me what are the professed goals of most central bankers,” Viner wrote in 1964, “I would say on the basis of what I have heard them say that if they were appearing before a commission … they would either include a wide range of goals, including virtue and motherhood and also everything they could think of which is nice and good, or insist on the lack of power of central banks to serve effectively any specific important goal.”

After having played a decisive role in preventing the world from falling into another 1930s-style depression, central banks after the 2008 financial crisis have been held up as saviors of the world. The title of “maestro,” once accorded just to former US Federal Reserve Chair Alan Greenspan, has now been extended to the entire field. With central bankers at the height of their reputation, it is not surprising that many would now want them to make a substantive contribution to the fight against climate change.

But central bankers should never forget what they are appointed for: namely, to preserve price stability and, in some cases, to support high levels of employment. Central bankers are not omnipotent, and they should not be made to feel as if they were. Confronting climate change is above all the responsibility of governments and legislatures that are exposed to the risk of losing elections. Climate policies that will affect social and economic arrangements across all of society belong in the hands of those who are directly answerable to voters.

Time for e-Euro?

December 6, 2019

I have just recently written for Moneycontrol on how European central bankers particularly French are really keen on introducing a central bank digital currency.

Christine Lagarde (who is French!), recently appointed at helm of ECB in her first hearing at the European Parliament interestingly spoke on CBDC:

The other topic you have asked me to discuss today is the future of money. Indeed, as central banks navigate a complex and changing landscape, we should not only aim to anticipate future trends, but also seek to shape them. In doing so, we should be particularly attentive to risks and perform a thorough analysis of their costs and benefits.


A central bank digital currency would allow citizens to use central bank money directly in their daily transactions. However, depending on its design, a central bank digital currency could pose risks. For instance, they could alter the way in which monetary policy is conducted and transmitted to the real economy. They could also carry implications for the functioning of the global financial system and its stability. The question of central bank digital currencies and their optimal design therefore warrants further analysis.

Our ultimate goal is to foster safer, innovative and integrated payments in euro. This will in turn benefit everyone in the euro area and strengthen the euro internationally.

François Veilleroy De Galhau of Banque De France in a recent speech (4 Dec 2019), gave a more detailed speech on CBDC:

I shall turn now to a topic that is a major challenge for the future of the international monetary and financial system: the possible creation of a central bank digital currency (CBDC). The creation of a new form of currency by central banks goes beyond the challenges I have just mentioned: it is neither a precondition for nor a guarantee of more efficient payments. However, we as central banks must and want to take up this call for innovation at a time when private initiatives – especially payments between financial players – and technologies are accelerating, and public and political demand is increasing. Other countries have paved the way; it is now up to us to play our part, both ambitiously and methodically.

To this end, the Banque de France is to be reorganised. The current Direction de la surveillance des paiements et des infrastructures de marché (DSPM – Payments and Market Infrastructures Oversight Directorate) will become the Direction des infrastructures, de l’innovation et des paiements (DIIP – Infrastructure, Innovation and Payments Directorate), and its scope will be extended to cover all payment innovations, infrastructures and central bank digital currency. Additional skills will be recruited to strengthen its expertise, and, with the help of our Lab, the DIIP will work with industry innovators from the private sector: we want to start running experiments rapidly and will launch a call for projects before the end of the first quarter of 2020. We are particularly keen to take part in experiments to integrate a “wholesale” CBDC into innovative procedures for exchanging and settling tokenised financial assets. Nathalie Aufauvre, Director General of Financial Stability and Operations, will coordinate the Banque de France’s acceleration process. Our actions will naturally contribute to the work of the Eurosystem, which should make looking into the possibility of an “e-euro” one of its next focuses: Christine Lagarde referred to it on Monday in front of the European Parliament. Beyond this, we intend to take part in the work of the “innovation hub” recently created by the BIS.

On a substantive level, I would like to share with you some first thoughts – which are still open to discussion, of course – on three aspects: the objectives, externalities and possible modalities of a central bank digital currency.

1/ At this stage, I can see three different – but not mutually exclusive – objectives for digitalising central bank currency. The first relates to the desire, in countries such as Sweden where cash use is declining rapidly, to guarantee all citizens access to central bank money. A CBDC would help to preserve the trust in the financial system that stems in part from being able to exchange assets for legal tender. The second argument relates to the efficiency gains, reduced intermediation costs and resilience that would potentially result from the “tokenisation” of a central bank currency, especially in settlement and post-trade activities (which is also one of the objectives of JP Morgan’s JPM Coin project). The third and final reason – and the most important one for political authorities, including in France and Europe – is that creating a CBDC would give us a powerful lever with which to assert our sovereignty in the face of private-sector initiatives such as Libra. This is also one of the concerns highlighted by the People’s Bank of China with its Digital Currency Electronic Payment (DCEP) project.

In this context, what form should our CBDC take? Public expectations on this differ significantly from those of financial institutions. As a result, in the long term, two different uses of the CBDC could exist side by side: one for payments between financial sector players (a so-called “wholesale” currency) that uses blockchain technology and all its possibilities, notably smart contracts; and another for the general public (a so-called “retail” currency) that is simpler and better suited to retail transactions. In this respect, financial institutions are much more digitally mature than private individuals as they already access central bank currency digitally via the bank accounts they hold with the central bank. In addition, following on from the questions raised by the Governor of the Bank of England, Mark Carney, on the idea of creating an international digital currency in response to the dominance of the US dollar, I think there would be some advantage in moving rapidly to issue at least a wholesale CBDC, as we would be the first such issuer in the world and would thus reap the benefits of having a benchmark CBDC.

2/ The issuance of a CBDC can generate significant positive externalities by increasing the productivity of the financial sector and by extension the economy, and by shoring up confidence in the currency and in the financial system. But, in parallel, it is vital that we examine the potentially negative externalities that a CBDC could generate for liquidity, profitability and bank intermediation. In particular, we need to look very closely at the risks linked to large-scale and/or sudden conversions of bank deposits into central bank money.

3/ The third aspect is the modalities that could be used to circulate the CBDC, especially the “retail” version, about which we need to be particularly vigilant. I’m thinking about the issue of its legal tender status – which is not indispensable but probable; the conditions under which it can be held – in the form of accounts rather than tokens; and last, whether non-residents will have access to it, which would certainly help to raise its international status. Moreover, thanks to their proven expertise in payment instruments, know-your customer requirements and transaction monitoring, financial intermediaries will be able to play a front-line surveillance role in the distribution of the CBDC. In parallel, we will also need to launch a reflection to define the conditions under which the CBDC could circulate anonymously “from person to person”. Limits could be set for the size of anonymous transactions, such as those already applicable in France for e-money and cash payments.


Inflation trends in Asia: implications for central banks

December 6, 2019

Juan Angel Garcia and Aubrey Poon in this paper:

Trend inflation estimates for 12 of the largest Asian economies over 1995-2018 o§er important insights on inflation dynamics and inflation expectations. The disinflationary shocks that hit the region since 2014 were partly transitory, but their effects have been different depending on the behaviour of trend inflation in each country. Countries with relatively high inflation (India, Philippines, Indonesia) benefited, and some were impacted very mildly (China, Taiwan, Hong Kong SAR, Malaysia). Among countries with inflation below target, in those with trend inflation low but constant (Australia, New Zealand) low inflation maybe lasting, but temporary, while those in which trend ináation has declined (South Korea, Thailand) risk low inflation to become entrenched and a de-anchoring of expectations. This diverse international evidence could offer important lessons for monetary policy worldwide.


Contemplations of an interest-rate dove and inflation hawk

December 6, 2019

Interesting title of an interesting speech by Per Jansson, DG of Riksbank.

He says he is a combination of inflation hawk and interest rate dove!


Which country will be the king of digital currency: A currency war of a different kind..

December 4, 2019

My new piece in moneycontrol.

From a hands-off approach to a gradual embrace, central banks are fighting a pitched battle to assert their digital monetary supremacy

Risks and benefits of modern financial technology: Lessons from a 17th century stablecoin

December 3, 2019

Nice speech by Klaas Knot of Netherlands central bank.

He points how Bank of Amsterdam was doing similar things as today’s proposals for stablecoin:


Economics as a profession: from science to practice

December 3, 2019

Benoît Cœuré of ECB in this speech:

It is a true pleasure to be back here at the Paris School of Economics (PSE).

You are now on the home stretch. I well remember how I felt during my own final year: excited, anxious and curious all at once.

Over the next few months, you will need to take serious, life-changing decisions. The data suggest there is about a two-in-three chance that you will pursue further studies.

For many, a master’s degree is a natural step towards a PhD. And a PhD is essentially a promise of employment. In the United States, for example, the unemployment rate for PhD economists is about 0.8%, the lowest among all sciences.[1] Not a bad place to start from.

But a PhD is not about financial optimisation. Estimates for the United Kingdom suggest that British men with a master’s degree earn 23% more than those who could have gone to university but chose not to.[2] The earnings premium for a PhD, which often takes three to five times as long, is just 26%. For some subjects, the premium for a PhD even vanishes entirely.

So first piece of advice: your PhD should be fuelled by your passion and your love for research rather than by hopes of earning more money.

Money was clearly not the reason for me to join the labour market in 1992 when I graduated from PSE with a Master in Analysis and Policy in Economics.

My first appointment took me to the National Institute of Statistics and Economic Studies, or INSEE, before I moved on to the French Treasury and then, in 2012, to the European Central Bank (ECB).

The path that I chose to explore is just one of many that are open to you. The good news is that the solid training you receive here at PSE makes it your choice.

The world of economics is incredibly broad. I will leave it to the participants of the two roundtables this evening to make a convincing case for their respective institutions, although I would not be surprised if many of you take the lead from the English author G.K. Chesterton who said, “I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite”.

But I wouldn’t be here tonight if I hadn’t planned to use this opportunity to make at least some publicity for the public sector.


Germany’s most famous financial export: Pfandbrief’s (covered bond) 250th anniversary..

December 2, 2019

I did blog about the 250th anniversary of Pfandbrief earlier. Pfandbrief means bonds in German and is basically a covered bond.

On the website of German Pfandbrief Banks, these bonds are called as German’s top financial export:

In the course of its 250-year history, the Pfandbrief has evolved into one of Germany’s top financial exports and is rightly regarded as playing a leading role in shaping the European covered bond market. The Pfandbrief has also had a significant impact on Germany’s long-term culture in the financing of real estate and local authorities, and has since established itself as an indispensable element of the strategic refinancing mix within the banking industry. A brief and concise overview of the various milestones in the history of the Pfandbrief can be found here.

In a recent speech, Jens Weidmann of Bundesbank gives a speech to commemorate the occasion. Title of his speech: Consistency as a mandate as Pfandbriefs have consistently helped finance multiple projects nit just in Germany but across the world too:

Boredom is less desirable for a festive occasion such as this, but all the more so for Friedrich Nietzsche, to whom boredom was a precondition for original thought and productive action.[2]

Central bankers do not find boring to be all that bad, either. As former Bank of England governor Mervyn King used to put it, “boring is best”. With a view to predictable monetary policy, he explained that “a successful central bank should be boring”.[3]

As regards the Pfandbrief, a reputation for being boring is at once a compliment and a seal of confidence. Once money is put on the table, many lose their lust for adventure.

What makes these bonds tick?

Let me begin with this question: what is the recipe for the success that the Pfandbrief has enjoyed over such a long life?

Its unique selling point is undoubtedly its high level of security: Pfandbrief holders enjoy two layers of protection against default. That is like circus acrobats who are protected by a net and a safety line – or someone who wears both a belt and suspenders.

Not only is the issuer liable, but the Pfandbrief is also covered by a pool of assets subject to statutory quality standards and conservative measures of value. If the issuer becomes insolvent, the Pfandbrief holders have the right to the cover pool, access to which is denied the other creditors.

This double layer of protection comes with a further advantage: as the cover assets remain on the issuer’s balance sheet, it is in the issuer’s own best interest to avoid a creditor default and to handle risk-relevant information carefully. Experts refer to this as having “skin in the game”.[4] The expression illustrates that, in the event of a default, the issuer will not get away with his skin intact.

This mitigates the moral hazard of issuing loans without performing due diligence on clients and sufficiently monitoring them. This incentive problem is often seen as one of the factors leading to the onset of the sub-prime crisis in the United States.[5] Pfandbriefe can therefore make an important contribution to financial stability. On the other hand, it is also possible that, in extremis, the issuance of covered bonds can get out of hand.

What is good for the Pfandbrief holder can put the other creditors of a bank at a disadvantage: the more covered bonds an institution issues, the more collateral is set aside to cover them – and the smaller the quantity of unencumbered assets available to cover the rest of the bank’s creditors.[6]

Such asset encumbrance must always be kept in mind. This is why transparency is decisive, and institutions are required to disclose their holdings of encumbered assets. However, the Bundesbank does not believe that regulatory intervention, such as by setting a cap on asset encumbrance, is necessary.

What the topic shows us is this: the security of the Pfandbrief is not necessarily identical to the security of the issuer. And, during the financial crisis, individual issuers did, in fact, encounter severe distress. This was due, not least, to attempts to use short-term funds to finance long-term business. However, not a single Pfandbrief defaulted. This is why Jean-Claude Juncker has found that “[c]overed bonds have proved themselves to be a reliable and stable form of financing, particularly during the financial crisis”.[7]


He also talks about Grüner (Green) Pfandbriefs:

Risks, interactions and keeping sight of the big picture are critical factors when it comes to another topic, too: climate change. When Alexander von Humboldt witnessed the environmental damage caused by plantations on his travels in Venezuela, he was able to join the dots and warned of the human impact on the environment and its consequences for future generations. In particular, he noted the important role played by the forest in cooling the air, storing water and protecting against soil erosion.[13]

Climate change is a challenge that we all face. Christine Lagarde, President of the ECB, has said that all public and private institutions should act, within their mandates, to address it.[14]

The first “Grüner Pfandbrief” was issued back in 2015, even before the Paris Agreement was signed. Without wanting to flatter, it is now safe to say that this product innovation, which was designed to finance energy-efficient buildings, was a little ahead of its time.

The green bond market as a whole can make a substantial contribution to financing environmentally friendly projects. In Germany, sustainable investment has risen by over 70% in the past four years. What is more, strong market growth can be observed globally as well.[15] And yet the role played by green finance remains fairly small. Green bonds account for only just 2% of the international market as a whole. In other words, green finance probably still has considerable potential.

A key requirement here is a clear, generally accepted definition of what “green” and “sustainable” actually mean. This could also strengthen confidence in green finance, as it would counteract the effect of “greenwashing”. What this means is that a financial product is, for example, marketed as being green without actually being environmentally friendly.

A variety of standards and principles aimed at preventing such deceptive labelling and providing investors with clarity already exist. Expanding on this, the European Commission is currently working on its own classification system. This taxonomy will make it possible to classify sustainable financial products in a way that is uniform, clear and reliable. It is the centrepiece of the EU’s Sustainable Finance Action Plan and is intended to serve as a reference framework for investors so that Europe can reach the climate goals set as part of the Paris Agreement.

More here on the Banks website

Nice speech giving a glimpse of history of financial instruments..

Common Chiffchaff: The bird that makes the sound of money!

December 2, 2019

Given this blog focuses so much on things related to money and banking, this piece by Abhishek Gulshan in the Hindu is quite amazing:

Low temperatures in the city gives us bird watchers a cause for great celebration. Bird sightings go up as many winter migrants make their way into Delhi-NCR, keeping all of us on the lookout every day.

One bird to visit the city is the Common Chiffchaff or Phylloscopus collybita, as it’s known scientifically. Phylloscopus’ literally translates to leaf-seeker and ‘collybita’ has been derived from the latin word ‘collybista’, meaning the money-changer, from the sound it makes.

In its breeding time, the song of the bird resembles a two-note high-pitched sharp and rhythmic ‘chiff-chaff-chiff-chaff-chiff-chaff’. In areas where they migrate to, they generally utter a warbling ‘hweet’. The bird has onomatopoeic names in many other languages apart from English, reiterating the significance of its sound. ZilpzapinGerman, Tjiftjaf in Dutch, and siff- saff in Welsh.

Perhaps one of the hawk/dove/owl used to justify positions of central bankers should make space for Chiffchaff. How should a chiffchaff central banker be defined?

How executive greed led to ruin of De La Rue, world’s top banknote printer…

November 29, 2019

De La Rue which prints/provides technology for banknotes is in financial trouble. One would think this would be due to rise in digital transactions. But this is not the case. It is due to executive compensation!

Guardian reports:

De La Rue’s shareholder meeting in June, 48% of votes were cast against the banknote printer’s remuneration report, presumably in protest at the £197,000 bonus awarded to its then chief executive, Martin Sutherland, in his final undistinguished year at the helm. Perhaps the 52% of compliant voters were half asleep. Five months later, the horrible state of De La Rue should be plain even to dozy fund managers.

Debt has soared, borrowing covenants are tight and there is “material uncertainty” over the 200-year-old company’s future if known risks materialise. De La Rue has fallen into a half-year loss of £12.1m. The dividend is being cut from 25p a share to zero, which clearly should have happened before now. The share price, down by almost a quarter on Tuesday, stands at a 21-year low.

The farewell bonus for Sutherland, who finally departed last month, now looks a wretched joke about a licence to print money.

The new chief executive, Clive Vacher, was too polite to aim a direct kick at his predecessors but it wasn’t hard to detect his diagnosis of drift in the boardroom. “The business has experienced an unprecedented level of change with the chairman, CEO, senior independent director and most of the executive team leaving or resigning in the period,” he wrote in the half-year report. “This has led to inconsistency in both quality and speed of execution.”


No lessons learnt..

25 years of independence of Central banks of Mexico and Spain

November 29, 2019

Central Bank Independence seems to be a great deal in Latin American countries. There is a reason why Central bank of Mexico organised a seminar to reflect on the 25 years of its independence.

Pablo Hernández de Cos, Governor of Central Bank of Spain gives a speech at the seminar:

The Banco de España was granted institutional independence in July 1994. So this year, as is also the case for the Banco de México, marks the 25th anniversary of our Law of Autonomy. The independence of the Banco de España came about as part of the European economic integration process. Following the requirements laid down in the Maastricht Treaty, central banks in the European Union were meant to pursue the primary objective of price stability and be vested with a large degree of independence, both political and operational. Participation in the monetary union also entailed a change in the relationship
between Treasury and central bank so as to incorporate the prohibition of monetary financing of government deficits.

Central bank independence was granted with a large degree of legal protection and, as a matter of fact, no country in the European Union can change it at its own discretion. Of course, the independence of the central bank does not mean arbitrariness, as it is well counterbalanced by high transparency and accountability requirements and practices. 

Granting independence to the Banco de España some years before the introduction of the euro as a common currency reflected Spain’s strong ambition to become a founding member of the European Economic and Monetary Union. It was also the result of a firm political conviction as to the benefits of price stability and the advisability of delegating the pursuit of this goal to an independent central bank. Price stability requires a medium-term orientation and the independence of the monetary authority creates credibility by helping to keep inflation expectations anchored while avoiding time inconsistency problems.1 These reasons were particularly compelling for the Spanish economy in light of the previous experience of relatively high inflation.



Central bankers as explorers/navigators such as Vasco Da Gama, Columbus…

November 29, 2019

Klaas Knot of Dutch Central Bank in this speech:

We are drawing closer to the end of the year in which the ECB has been celebrating its twentieth anniversary. Typically, this type of event leads one to look back and reflect on the lessons learnt over time. And to evaluate how the lessons learnt can be taken on board in future endeavors. Indeed, the year has seen many conferences and papers dedicated to the tale of the ECB’s first two decades. For European central bankers, the second of these two decades has been particularly challenging.

In the last decade, the ECB has been navigating uncharted waters with unconventional monetary policy, just like Magellan, Sir Francis Drake and Columbus. We were not without compass, nor without a clearly set course. But nevertheless, the waters we navigated were new to us. No maps were available. And, again like those famous explorers, we were vigilant, alert and prudent. Now that we seem to have reached a harbor of some sort, and a new captain is aboard, we should consider charting the unchartered. We should draw maps of the coasts we discovered. We should mark where the sea monsters live. We should be the cartographers of unconventional monetary policy.


Not sure many would agree to this comparison!

What drives interest rates? Central bank policy rates or something else?

November 29, 2019

Òscar Jordà and Alan M. Taylor in this short paper look at evidence from Japan, Germany, the United Kingdom, and the United States.

People generally attribute a great deal of discretion to a central bank’s ability to set interest rates. This might be an overstatement. Our analysis suggests that most of the variation in interest rates can be explained by conditions beyond the central bank’s control: the aging of the population, declining rates of productivity growth, and other slow-moving factors known to affect the neutral rate of interest globally and domestically. From this perspective, fears that policy stances are increasingly diverging across advanced economies and that this divergence may have adverse consequences for the international financial system may be overblown.


Central Bank of Ukraine being attacked by a oligarch and the central bank chooses to respond

November 28, 2019

This blog has pointed to several attacks on Ukraine central bank and even its retired Governor.

The Central Bank Board responds to the continued attacks:


Ensuring exorbitant privilege of US Dollar: The real challenge for USD is not Libra but Chinese CBDC

November 26, 2019

Ken Rogoff in this Proj Synd piece:

Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America’s ability to leverage faith in its currency to pursue its broader national interests. The real challenge for the United States isn’t Facebook’s proposed Libra; it’s government-backed digital currencies like the one planned by China.

He says US govt can still work around Libra/Bitcoin and so on. But cannot do anything against Chinese CBDC:

America’s deep and liquid markets, its strong institutions, and the rule of law will trump Chinese efforts to achieve currency dominance for a long time to come. China’s burdensome capital controls, its limits on foreign holdings of bonds and equities, and the general opaqueness of its financial system leave the renminbi many decades away from supplanting the dollar in the legal global economy.

Control over the underground economy, however, is another matter entirely. The global underground economy, consisting mainly of tax evasion and criminal activities, but also terrorism, is much smaller than the legal economy (perhaps one-fifth the size), but it is still highly consequential. The issue here is not so much whose currency is dominant, but how to minimize adverse effects. And a widely used, state-backed Chinese digital currency could certainly have an impact, especially in areas where China’s interests do not coincide with those of the West.

A US-regulated digital currency could in principle be required to be traceable by US authorities, so that if North Korea were to use it to hire Russian nuclear scientists, or Iran were to use it to finance terrorist activity, they would run a high risk of being caught, and potentially even blocked. If, however, the digital currency were run out of China, the US would have far fewer levers to pull. Western regulators could ultimately ban the use of China’s digital currency, but that wouldn’t stop it from being used in large parts of Africa, Latin America, and Asia, which in turn could engender some underground demand even in the US and Europe.

One might well ask why existing cryptocurrencies such as Bitcoin cannot already perform this function. To an extremely limited extent, they do. But regulators worldwide have huge incentives to rein in cryptocurrencies by sharply proscribing their use in banks and retail establishments. Such restrictions make existing cryptocurrencies highly illiquid and ultimately greatly limit their fundamental underlying value. Not so for a Chinese-backed digital renminbi that could readily be spent in one of the world’s two largest economies. True, when China announces its new digital currency, it will almost surely be “permissioned”: a central clearing house will in principle allow the Chinese government to see anything and everything. But the US will not.

Keynes and Fiscal Federalism in India: History, Ideology and Practice

November 26, 2019

RBI organises 4 memorial lectures:

NK Singh delivered the 17th LK Jha Memorial lecture.

It is interesting and odd how all of these lectures have been given by scholars and policymakers based elsewhere. All these years, there has not been a single lecture from an academic/policymaker based in India.

N.K. Singh happens to be the first speaker in these lectures who is currently serving as the chair of the 15th Finance Commission. Not surprisingly, Mr Singh chooses to speaks on fiscal federalism (Sharing of financial resources between Central Government, State Governments and Local governments). Fiscal federalism has become an important topic of late given the late addition to its terms of reference.

At the end of his lecture, Mr Singh quotes Keynes which sums up the evolution of fiscal federalism in India:

In the context of remark that markets may remain irrational longer than I can remain solvent, John Maynard Keynes is reported to have remarked that when facts and circumstances change, I change my mind – what do you do?

The facts and circumstances on Fiscal Federalism have changed. Time to change our mind.

The lecture points to some of these changes. Read the whole thing…


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