Archive for the ‘Central Banks / Monetary Policy’ Category

Launch of the Central Bank of Ireland’s archives

September 21, 2017

Philip Lane chief of Ireland Central Bank launches the central bank archives in this speech:



Promoting Hong Kong as a hub for Corporate Treasury: Issues and Solutions

September 20, 2017

A nice speech from Normal TL Chan, CEO of the Hong Kong Monetary Authority.

He points how HKMA found out that taxation prevented Corporates to set up Treasuries in HK. Then they urged the govt to rectify the same:


Bundesbank at 60: each country gets the inflation it deserves…

September 19, 2017

I just wrote y’day about how much Bundesbank matters to ECB policy and yet no German central banker is primed for the top job at ECB.

Least did I realise that year 2017 happens to be 60th anniversary of Bundesbank. Jens Weidmann, the chief of the central bank pays tribute and shares some fascinating history:

The Bundesbank first saw the light of the world on 4 July 1957, the day on which Germany’s Bundestag adopted the Bundesbank Act – alongside the Antitrust Act. Writing at the time, the Frankfurter Allgemeine Zeitung newspaper remarked that this day had witnessed “the adoption of two crucially important pieces of basic legislation for our entire economic system”.

When the Bundesbank Act came into force on 1 August 1957, the Bank deutscher Länder, the Land Central Banks and the Berlin Central Bank were merged to form a single institution, the Deutsche Bundesbank.

This new institution took over the headquarters of the Bank deutscher Länder in Frankfurt am Main. I wonder if you are aware that it almost ended up being based in Hamburg. Back then, the British forces were pushing for the Bank deutscher Länder to make Hamburg its home. But as it turned out, the Americans got their way, and the institution was established in their preferred location of Frankfurt, inside the US occupation zone.

That marked a major turning point for Frankfurt. The city evolved into Germany’s financial centre and later also succeeded in attracting the European Central Bank. But I don’t think Hamburg lost out in any way – Hamburg is an appealing, vibrant and economically successful location as it is.

He says though location of Frankfurt has little to do with Bundesbank’s success:

One thing I am quite certain about is that the choice of location did not influence the Bundesbank’s success, which I think can be put down to three key factors:

  • Its narrow mandate to preserve price stability,
  • Its independence, which allows it to pursue this objective even against political influence, if need be, and
  • An appreciation of the need for stability throughout much of the German population, which gave the Bundesbank the popular backing it needed to pursue its monetary policy objectives.

Ladies and gentlemen, the fundamental problem facing monetary policymakers is that they are caught in a conflict of objectives. In the short run, staving off inflation can sap economic momentum and drag on employment. On the other hand, the central bank can temporarily dampen unemployment if it tolerates a higher rate of inflation. This phenomenon is what economists call the Phillips curve relationship. It is a concept which crops up in a famous remark uttered by Helmut Schmidt in the early 1970s, when he once said that “I would rather have 5% inflation than 5% unemployment”.

An inverse relationship exists between inflation and joblessness because an unexpected increase in inflation pushes down real wages, lowers the price of labour, and thus tends to lead to a drop in unemployment.

But that only happens in the short run. Because employees will push for the higher rate of inflation to be offset, thus moving real wages and unemployment back to where they were before. There is a shift in the Phillips curve.

And if the unions, fearing a further increase in the rate of inflation, push through even higher wage increases, unemployment will rise as a result.

Let me use an everyday situation to shed more light on how this principle works. Imagine a person who is habitually late for work. Now, their partner might be able to outsmart them once by moving the hands of the kitchen clock forward by five minutes. But in the long run, that person will get used to the new time, so the clock will have to be put forward even more to prevent that person from leaving the house late in future.

That’s exactly how it is with monetary policy. If you fire up the printing presses to fend off unemployment, you will end up mired in high inflation and high unemployment.

He brings some episodes from German history which affirmed this fight for price stability:

Bearing that in mind, it was undoubtedly crucial that the Bundesbank, just like its predecessor, the Bank deutscher Länder, had independence from political control. Because German post-war history also bears witness to a number of situations in which the Bank was forced to head off political demands to loosen monetary policy.

One such situation that springs to mind is the famous “Gürzenich speech” which Konrad Adenauer delivered shortly before the Bundesbank was established. At that time, the Bank deutscher Länder had switched to a tight monetary policy stance because there was a risk that the brisk external demand might cause Germany’s economy to overheat. Konrad Adenauer, speaking in 1956 at Cologne’s Gürzenich Hall, warned that the tight policy would be “disastrous … for the man on the street”. A year later, the SPIEGEL magazine looked back at these events and wrote: “What is more, the credit constraints later turned out to be absolutely correct; they came just in time to prevent the boom from morphing into an inflationary economic gallop.”

Another situation I can think of occurred in the year 1979, when the government drummed up sentiment against an increase in the discount and Lombard rates. Manfred Lahnstein, State Secretary in the Federal Ministry of Finance, presented his critique before the Central Bank Council and then went public with his misgivings. He expressed concerns that the policy rate hikes might endanger the economic upswing. As it turned out, the German economy expanded at a real rate of 4½% in 1979, even though policy rates were increased. The Bundesbank, then, did well to prevent the global inflationary tendencies from spilling over into Germany more strongly than they did.

Because the Bundesbank held its ground in both these cases and refused to be knocked off course, the Die Welt newspaper once dubbed it in retrospect the “bulwark on the Main”.

That was praise indeed for the Bundesbank, of course. For it had resisted the political pressure not because it was indifferent to the macroeconomic prospects, but it firmly believed, even back then, that monetary stability is the best contribution a central bank can make in the long run towards high levels of employment and sustained economic growth.

He also adds that what is also central to this is people’s appreciation of merits of stable currency.

But I am convinced that the Bundesbank only prevailed in its skirmishes with politicians because it could count on the general public’s appreciation of the merits of a stable currency. This brings me to the third of the key factors in the Bank’s success which I mentioned earlier on. A policy strictly geared to stability only stands a chance of success if the general public is sufficiently aware of the merits of stability. That’s because, in the long run, it is not right for democratic states to have a monetary policy which runs counter to public opinion.

On this topic, Otmar Issing once said that each country gets the inflation it deserves.

This is mainly due to German hyperinflation of 1920s continue to remain etched in people’s memories…

He then goes on to discuss current crisis and ECB’s role so far…

Superb throughout.


Primer on Islamic Banking

September 19, 2017

Superb primer by Arshadur Rahman of Bank of England. It explains the basics of Islamic Banking and does a great job.

Also interesting to know BoE planning to introduce a Shari’ah compliant facility. This will faciliate UK Islamic banks hold central bank assets:

  • ​Islamic banking is a relatively young but growing sector of the broader financial services industry. Numerous banks around the world offer Islamic, or Shari’ah compliant, financial products.
  • Some central banks offer Shari’ah compliant liquidity facilities to Islamic banks, affording them similar flexibility to other firms in managing their liquidity. Such facilities avoid the payment or receipt of interest, which is otherwise the most common basis for operating a liquidity facility.
  • The Bank is establishing a Shari’ah compliant facility, specifically a deposit facility to allow UK Islamic banks to hold central bank assets as part of their liquid assets buffer. This article explores the various ways in which this can be done, along with the model the Bank has chosen to adopt.

How religions have shaped all these banking and financing cultures and institutions..

Italy, France say ‘we don’t want Jens Weidmann to become ECB president’…

September 18, 2017

In many ways ECB is an ironical central bank.

The central bank is based in Germany and was designed as a replica of Bundesbank. Why? Because no other central bank had a reputation as the formidable German entity. So, if the European countries wanted to give up their mon policy to ECB, they said it better be like Bundesbank. Otherwise again we have a non-credible central bank creating all sorts of problems. Apart from the design, even the location was chosen as German as one always worried over political influence elsewhere. So much so both the central banks are located in Frankfurt within a 4 km distance.

Now, here comes the twist. Given strong German resemblance, one would impagine it is best to let German head the central bank. But no German has headed the central bank until today. Yes, one German has always been on the board but that is just about it. Earlier the German was a chief economist (Otmar Issing, Jurgen Stark). But even that is not the case today as Sabine Lautenschläger, who is a law person is on the board. Infact Axel Weber head of Bundesbank came close to being ECB chief but resigned from Bundesbank amidst lots of controversy.

So, the chief of ECB was first a Dutch, then a French and currently an Italian. They have kept Germany out as the fear remains that with a German not even little political maneuvering will be  possible. With the non-German as a head, one can expect some sympathies in case of a slowdown.

This was tested during the current crisis. Both Weber and Stark did not favor any monetary stimulus by ECB and had runs with the ECB leadership leading to resignations. Post Stark, it became easy for Draghi to take control and convince others for monetary stimulus. However, Bundesbank under the new chief Weidmann continued to oppose the policies.

As Draghi’s term is ending in 2019, the speculations have started early. The Italians and French are again opposed to having Weidmann as President:

In its new edition, Germany’s Der Spiegel magazine reported Friday that Italy and France would object to installing Bundesbank chief Jens Weidmann as head of the European Central Bank after the end of Mario Draghi’s term in 2019.

It said government representatives from both nations had told German Finance Minister Wolfgang Schäuble that they had nothing against a German at the helm of the ECB, “but it must not be Jens Weidmann.”

The report elaborated that southern eurozone nations feared current pragmatic and flexible crisis management measures such as the ECB’s huge bond-buying program as carried out under Draghi would no longer be possible under Weidmann.

While Schäuble said in May he would not take part in any debate about Draghi’s successor, numerous media reports had highlighted his and German Chancellor Angela Merkel’s likely push for Weidmann to become the fourth guardian of the euro currency, after a representative from the Netherlands, France and Italy.

But there may be a whole bunch of contenders for the job of ECB president, among them Bank of France Governor Francois Villeroy de Galhau.

It cannot be taken for granted, though, that the fight for the post will include Jens Weidmann at all. A spokesman for the Bundesbank on Friday quoted him as saying he enjoyed his current job and would certainly stand ready for another term beginning May 2019, should he be asked to do so.

Weidmann has headed the German central bank since 2011.

Even if it is premature speculation, the European leaders will try hard to keep a German central banker heading the Board.

So much so for the ironies…

75th anniversary of Bank of China branch in Sydney and some interesting history…

September 15, 2017

Philip Lowe, chief of Reserve Bank of Australia shares some history from the Archives at the 75th anniversary.

Back in 1940s it was much easier to open a bank branch in Australia and tougher for people to travel to the country. How global banks and finance is built over the years is a tale of many a struggle:


Equifax hackers are demanding ransom in Bitcoins but not dollars or Euros..Why?

September 12, 2017

The usual logic to the question is that bitcoins are anonymous and thus cannot be tracked, so it is a currency for the criminal class.

Jeffrey A. Tucker gives another perspective:


Britannia, Jane Austen and the surprising tale of why money has long had a female face in England…

September 12, 2017

We usually are made to think/believe that finance is mainly “a men thing” and women are best kept out of the picture. However, this is not entirely true. This blog has written about women stock brokers  in early history of finance in NY. There must be evidence of their presence in other finance industries as well (for an unrelated area see women’s contribution in computer programming).

Following 2008 crisis, it was suggested that if there were more women in bank boards, may be banks would have been more stable. A recent paper does show this to be the case.

Now, Prof. Claudine van Hensbergen (Eighteenth-Century English Literature, Northumbria University, Newcastle) takes us further back in time. She reflects on the recent decision of Bank of England to print Jane Austin notes and says money has always had a female face in England:


When Marco Polo saw the paper currency for the first time…

September 12, 2017

Dave Birch has a piece in Medium. 

History of paper money started in  China and via Marco Polo tales the world came to learn of it.


Importance of understanding legal aspects of central banks: Case of appointment at Reserve Bank of New Zealand…

September 11, 2017

The role of economics and law especially in central banking is becoming an increasingly an important topic. But as economic students, we hardly study law and whatever little is mostly for contracts etc.

Given how central banks are basically a legal entity and what is broadly does is defined under law, there should be much more attention on central bank act, its governance and highly crucial appointment rules.  Things like appointment rules immediately raise the question of how and why central bank statutes differ across countries? The answers lie in political economy and other aspects which we just miss.

Croaking Cassandra blog has been writing on how the appointments of chief of New Zealand are not as per law. The crux of the matter is the currenct Gpvernor term is getting over and NZ is facing elections. The Government has decided to appoint an interim Governor and appoint a full-term one only after elections. But the central bank law does not allow this.

In its recent post, Cassandra again raises the issue:


Estonia may launch its own virtual currency..

September 8, 2017

Interesting to know this:

If you’re already having trouble keeping track of all the virtual “cryptocurrencies” out there, then here’s another one that might end up on your radar: the Estonian “estcoin.”

Estonia isn’t the first country to consider launching its own digital currency as a rival to the better-known likes of Bitcoin and Ethereum—China’s central bank is quietly testing the idea of a new cryptocurrency, and Russia’s central bank is considering the same. However, Estonia may have an advantage in the public-sector digital infrastructure that it’s already built, and it sees the idea as a way of allowing people around the world to directly invest in the country’s digital aspirations.

 Over the last two-and-a-half years, Estonia has offered so-called e-residency to foreign entrepreneurs who want to virtually site their businesses in the country. The program gives people an Estonian government-backed digital ID, the ability to simply register an EU company, access to business banking and payments services, and tools with which to digitally sign documents. So far, more than 22,000 people have signed up from around the world.
In a Tuesday blog post, Kaspar Korjus, the managing director of the e-Residency program, said this experience gave Estonia an edge over other countries that are considering the introduction of national cryptocurrencies. Indeed, the estcoin could become bound up with the rest of the e-Residency ecosystem.

“No other country has come close to developing both the technology and the legal frameworks that would enable them to introduce and securely manage tradable crypto assets globally,” Korjus wrote. “The secure digital identities used by e-residents (as well as citizens and residents of Estonia) are now the ideal mechanism for securely trading crypto assets in a trusted and transparent digital environment. The tokens cannot be counterfeited and the government oversight means they cannot be used for illegal activities.”

Estcoins could be used to pay for public and private services in Estonia, and “eventually function as a viable currency used globally,” he said.

Why don’t we look at lessons from Indian banking history while resolving current NPA crisis..

September 8, 2017

It was interesting to read RBI DG’s speech on Indian banking NPA crisis. He starts pointing to the scale of the problem and then looks at examples of banking crisis in Japan (1990s)  and Europe (recently).

In the end, he asks several qs in words of William Wordsworth:


Uzbekistan devalues currency by 50% overnight…

September 8, 2017

As markets opened on 5 September 2017, Uzbeks were in for a surprise as the currency opened  at 4200 soms compared to 8100 soms a day earlier.It was a long overdue move and welcomed. SO much so one person sayd to declare 5 Sep as a national day:

Even normally level-headed experts like Yuliy Yusupov were exuberant.  
“I don’t think it would be a bad idea to make September 5 a holiday — Convertibility Day. Outsiders wouldn’t understand. … For 21 years we’ve been waiting,” Yusupov wrote on Facebook.

More links  here:

Has Reserve Bank of India got its exchange rate strategy wrong?

September 7, 2017

There are again questions over what India should do with Rupee. Should its allow Rupee to appreciate or depreciate?

Niranjan takes you through many such questions:


Why aren’t questions asked to RBI Board over demonetisation?

September 7, 2017

There is a lot of blame game since the RBI Annual report 2016-17 was released. Much of the criticism is directed towards the Government as basically it was their decision.

However, the story is not entire clear here as basically the Government says RBI Board gave them the advisery to do so. There are a lot of questions and clarifications over RBI Board’s role in demonetisation. Now one may agree or disagree with their specific role but one can’t get away saying that the Board had no role to play. Unlike previous two demonetisations where RBI Governor said no, so the Board was not involved and the decision was made by government under closed doors. So the entire thing rested with the Government.

This time around this is not the story as RBI Board was involved. The former Governor in his recent statements said that RBI was not involved in demonetisation under his term, so something must have happened in the two months to convince RBI to agree to the decision.


Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System

September 7, 2017

This is the title of a Bank of Finland working paper by Gur Huberman, Jacob D. Leshno and Ciamac Moallemi.

Though fairly technical, the paper has some interesting observations:


African protests over CFA Franc colonial currency..

September 7, 2017

Troubling set of developments in West Africa. Even if colonial powers have ceded control they continue to shape the destinies of their colonies via laws, institutions and of course money.

It so happened that French-Beninese national, Kemi Seba burned a 5000 CFA Franc note protesting against the colonial currency. He appealed to the African countries to issue their own name currency.


From monetary money to fiscal money: Should Governments issue their own money?

September 6, 2017

Yanis Varoufakis has a puzzling column.

He says we think most money is created by central banks which is not really right. Most money these days is being created by banks who lend to each other using Govt bonds as collateral.


If Fiscal councils are just advisers to Governments, should central banks/MPC also do the same?

September 5, 2017

Interesting piece by Prof Simon Wren-Lewis on his blog.

He says Fiscal councils are just advisory bodies but monetary policy is a delegated control body. Why can’t we have monetary policy committee/central banks do the same?

With fiscal councils (or Independent Fiscal Institutions) now commonplace in advanced economies, a natural question arises. Why are all these councils advisory, while independent central banks have control over monetary policy? For fiscal policy we seem to have delegated advice [1], while for monetary policy we have delegated control. In this post I want to focus on control over how policy instruments are changed, and not control of the goals of policy. For clarity assume that governments still control the ultimate goals of monetary policy (e.g. an inflation target) and fiscal policy (e.g. a target for the deficit in 5 years time).
As fiscal councils are the less familiar, it is natural to try and answer this question by asking why fiscal councils are not given control over fiscal policy. I am, of course, not talking about controlling the detail of government spending or taxes, but instead setting a target for the projected deficit which governments should aim to achieve in a budget. There are lots of potential answers to that question, which I have written about elsewhere.
However we could ask the question the other way around, and I cannot remember anyone asking it this way. Why are there no independent advisory central banks? In the UK, for example, imagine having the MPC meeting, and then immediately advising (in secret for a short time) the Chancellor of their recommendation for interest rates. The Chancellor would very quickly (within an hour or day?) decide whether to accept that recommendation or do something different. After that, the decision and the MPC’s recommendation would be announced.
He says this could happen in US but much more difficult in other countries:
Two straightforward points. First, a system of that kind could only work in the US if Congress gave the President the power to accept the Fed’s recommendation or impose the President’s own decision: perhaps not something we would want to contemplate right now. In the Eurozone the ECB would have to give recommendations to Ecofin, which might make it both impractical and perhaps undesirable. Second, this form of delegation is obviously weaker than giving complete control to the central bank, and that in itself may be a reason why it is not adopted.
Nevertheless, for a country like the UK, it would be a mistake to underestimate the political pressure the Chancellor would be under to accept the central bank’s public advice. The Chancellor or Treasury minister would be entirely responsible from deviating from the recommendation given to them, and if it went wrong they would incur a considerable political cost. In these circumstances, it would be understandable for governments to reason that there was little to be gained from having the power to overrule central bank advice. They would get it in the neck if they overruled this advice and turned out to be wrong, but equally if the MPC make mistakes they would also have ultimate responsibility for accepting this advice. If in practice nearly all of the time they are going to accept the central bank’s recommendations, why not give them complete control so that at least you are not implicated when things go wrong.
Of course many governments used to be happy to control monetary policy, as long as the advice they were getting was secret. But if that advice is public, as surely we all agree it should be, would even formally advisory central banks start to in effect control monetary policy because governments would never incur the risk of going against their advice? In which case, why so much fuss about independent central banks that do control monetary policy being undemocratic?
I stress again that I’m talking about control of month to month interest rate changes, and not the goals of monetary policy (inflation targets or NGDP targets). I think those should be democratically decided (as in the UK, but not the US or EZ), and that central banks should be accountable in a meaningful way if they do not achieve these goals. But for the day to day business of setting rates, I cannot see that much would be gained by putting those under democratic control. 
I think secrecy is the key. India is an interesting example here as well. History of RBI tells you how government pretty much controlled monetary policy till 1991. Some might say it was till 1997 when the Government stopped automatic financing of deficits via the adhoc Treasury bills.
The Government could pretty much run the monetary policy with RBI just playing an advisory role as there was much secrecy. Once we moved towards sharing more details with financial media and so on, the previous model broke down. RBI was now given a delegated control role…
Lots to think about in the post. Political economy of central banking…

How is it that ECB understands role/importance of cash where cash usage is declining?

September 5, 2017

Yves Mersch member of ECB Executive Board has a piece on role of cash in the system. It is interesting to note that despite the fact that some of the European countries are seeing a decline in cash usage, ECB thinks cash still plays an important role in the system. He made an earlier speech on the issue as well.

In this piece he says:

There is much talk about the demise of cash. But to paraphrase Mark Twain, reports of its death are an exaggeration. Cash remains popular. A crucial point for banks to understand, since respecting clients’ needs and wishes is a precondition to ensuring their loyalty and support. This not only applies to the relationship between private banks and their clients, but also between central banks and the public, where cash provides a tangible daily link. I will discuss each in turn.


In this context, some see major business opportunities arising from abolishing cash, by eliminating the high storage, issuance, and handling costs that the financial industry currently faces. Customers would benefit, too, as they would no longer need to carry wads of cash or search for ATMs.

But this assumed increase in convenience would come at a cost. There are a wide range of legal, governance and operational questions that need to be considered carefully before switching away from cash. Just as cash has a number of technological safeguards to protect from counterfeiting, innovative payment systems require significant safeguards to protect individuals from theft and from loss of personal information. That protection of personal information extends to ensuring the ability of law-abiding citizens to maintain their anonymity and addressing legitimate concerns surrounding the use of Big Data for personal profiling.

Most importantly, empirical evidence suggests that the lobbying to abolish cash fails to respect the will of the people: cash remains popular. Recent research for the ECB finds that 80% of transactions at point of sale are in cash. Even adjusting for the value of transactions, cash still accounts for the majority. Indeed, the demand for cash currently outstrips the growth in nominal GDP.

Banks should see such developments as a positive opportunity to engage with customers, without actively pushing them away from cash where it remains their preference. Enabling customers to manage their finances in the manner that most appeals to them encourages loyalty and supports customer retention.

He then discusses how cash provides the crucial link between central bank and public…

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