Archive for the ‘Central Banks / Monetary Policy’ Category

Has inflation targeting become less credible?

June 28, 2018

New paper by by  Nathan Sussman and Osnat Zohar of BIS.

BIS has also adopted a new way to summarise its research papers:


Since the 2008 financial crisis, oil prices have become highly correlated with inflation expectations for the medium term. This occurred in several countries, implying a global phenomenon. To trace its origins, we decompose oil prices into two factors: one capturing global aggregate demand and the second capturing oil-specific elements. Our measure of global demand is based on the strong co-movement of commodity prices. The oil-specific elements include OPEC’s strategic behavior and shocks to oil demand caused by the weather. We use this decomposition to explain changes in global inflation expectations.


Central bankers were concerned that the increased correlation between inflation expectations and oil prices might indicate an un-anchoring of expectations. If this were the case, the credibility of inflation targeting might be declining. We test for un-anchoring using a framework based on a global Phillips curve. This framework allows us to trace the origins of the change that occurred after the global crisis.


We find that global aggregate demand has affected inflation expectations more since the crisis than it did in the past. Meanwhile, the effect of oil-specific factors remained low and stable. Since oil prices convey information about aggregate demand, their correlation with expectations has increased. Does this change indicate that expectations became un-anchored? Our model for global expectations suggests otherwise. We find that, after the crisis, inflation itself was perceived to react more strongly to aggregate demand. Rational agents thus adjusted their expectations more strongly when aggregate conditions changed. It appears that inflation targeting has remained credible.

Hmm.. Much simpler to figure research this way..


RBI should build a dialogue around its financial stability report and make it more interactive..

June 27, 2018

It could not have been a better coincidence that my Mint article on need for a financial policy committee was released on the same day when RBI released Financial Stability Review for June -2018.

There were couple of comments/suggestions on the Mint article. One of them was that we need to hold authorities accountable for financial stability. It should not be the case that these reports and publications are released with all highlighting “all is well” to suddenly saying “all is unwell”. With so much at stake and pushing people towards financialisation, the authorities should tell us what went from well to unwell stage. We should not have the situation that the RBI Governor tells us that RBI cannot regulate public sector banks when things go bad for these banks. These risks have to be identified and more importantly communicated to people through these publications.

RBI clearly can make tremendous progress on both accountability and communications front.


As Sweden goes cashless, it also worries about banknote supplier..

June 26, 2018

Interesting bit of news from Sweden:

The Riksbank has today, 19 June, given notice of termination of its contract with Crane AB, the company that prints Swedish banknotes. The reason for the termination is that Crane has announced that it will be closing its banknote printing operations in Tumba at the end of this year and moving them to its plant on Malta. As the agreement with Crane states that they will print Swedish banknotes at the printing works in Tumba, the Riksbank is now giving notice of termination of the contract. The Riksbank is now working on finding a new supplier to manufacture Swedish banknotes.

The Riksbank had its own production of both coins and banknotes until the early 2000s. In 2001, the Swedish Mint was sold to Mint of Finland and in 2002 Tumba Bruk was sold to the American company Crane. Since then, the Riksbank has procured the manufacture of both banknotes and coins on the international market. Banknotes have continued to be printed in Tumba, while coins have been manufactured abroad since 2008. The Riksbank is now working on finding a new supplier to manufacture Swedish banknotes. The Riksbank has very stringent requirements of both quality and security in its public procurements. As the Riksbank observes the Public Procurement Act, Swedish banknotes could also be manufactured abroad.

Recently Denmark outsourced both coinage and printing notes to countries abroad.

Does India need a financial policy committee?

June 26, 2018

New Mint piece by Yours Truly.

The idea comes from this interesting speech from Prof Anil Kashyap of University of Chicago. He is also a member of Bank of England’s Financial Markets Committee and shares his views on how FPC came into being and its utility in the broader scheme of macroeconomic policy.


Indian Monetary Policy in the Time of Inflation Targeting and Demonetisation

June 22, 2018

Rakesh Mohan (Former Deputy Governor RBI) and Partha Ray (Prof at IIM Calcutta) review India’s Inflation targeting framework:

This paper provides a narrative of Indian monetary policy since the North Atlantic Financial Crisis (NAFC) in the mid-2008 till the current period. The period 2009- 13 was dominated by the joint monetary and fiscal stimuli of the Indian authorities prompted by the NAFC. These, along with some structural shocks and a hands-off attitude in forex market intervention, could have had their role in rising inflation and external account instability (leading up to the taper tantrum episode). In this backdrop, after considerable discussion during 2013-2014, a Monetary Policy Framework Agreement (MPFA) was signed between the Government of India and the Reserve Bank of India (RBI) on February 20, 2015, which formally adopted flexible inflation targeting (IT) in India. Under the new statutory IT framework, a six-member Monetary Policy Committee (MPC) met for the first time on October 3 and 4, 2016.

While the IT regime so far has coincided with significant reduction in inflation in India, the atmosphere has been benign. Now that fuel prices have started moving in the north-east direction, a revised framework for the Minimum Support Price (MSP) in the Union Budget for 2018-19 has been proposed by the government and fiscal slippages have started happening, it remains to be seen whether IT can withstand more rough weather in the days to come. Finally, in recent years, Indian monetary policy has been dominated by two significant events: the emergence of significant deterioration of Indian public sector balance sheets, and the demonetisation episode in November 2016. Monetary policy in both of these periods wrestled with fashioning an appropriate strategy for managing the impossible trinity.


Petition to the US President and Congress to end the Federal Reserve..

June 22, 2018

Just came across this petition filed with White House to end the Federal Reserve:

WE THE PEOPLE insist that:

1) Any authority previously given to the Federal Reserve be immediately terminated;

2) The President and Congress fully reestablish Congress’ singular power to mint, regulate, print, or otherwise control the form, amount, and backing of all U. S. legal tender;

3) Our U.S. Government undertake all necessary means to assure the ongoing operation and stability of U.S. currency;

4) Presidential Executive Order #13818 be applied to any Federal Reserve-affiliated person or entity involved in corruption, trafficking, etc., and that all assets thereof be frozen; and

5) All assets held by the Federal Reserve, and any and all of its holders of value, be nationalized and applied to reducing the federal deficit.

For more, Please Visit:

The petition was filed on 13 May 2018 and required 100,000 signatures. It could just manage 12628 signs. Thus it just closed without any action.  The website ( makes hefty allegations against Fed.

I am surprised to see not much articles on this petition. There was some focus o Swiss referendum but barely any discussion on this petition. Part of this reason is there have been few more such petitions in the past (one , two). So, people have stopped noticing.

But even then filing petitions to end Federal Reserve, the mightiest of financial institutions in the world is quite something.



Bhutan warns its citizens of holding Indian Rupees..

June 21, 2018

A strong notice from Royal Monetary Authority of Bhutan (HT: TCA Sharad Raghavan’s piece):


The coins of LGBTQ rulers through history

June 21, 2018

Fascinating post by Kelsey Wiggins, a museum specialist for the National Numismatic Collection.

With Pride Month celebrations recognizing LGBTQ history and culture throughout the country this June, what better way to highlight the occasion than by studying historical LGBTQ rulers with coins?

Throughout history, there are many examples of world leaders who for their gender expressions and sexual orientations would today be seen as members of the LGBTQ community. In some regions or eras, a range of expressions of gender and sexuality were accepted and even encouraged. In regions where certain forms of self-identification and expression were unwelcome, some individuals were still true to their own identity in their own ways. Chief among those who had the privilege of living and loving as they saw fit were historic rulers we would today describe as LGBTQ. It should be emphasized that although we would describe these rulers as gay, lesbian, bisexual, transgender, or queer today, that identification may not have been the way they would want to be described. These terms are modern constructs and are used as aides in telling these human stories.

These historic LGBTQ rulers, like so few other LGBTQ people, have been immortalized through coins from their eras. The National Numismatic Collection has several examples of such coins that represent a wide range of LGBTQ rulers throughout history.

It features rulers from Spain, Sweden Japan etc and pictures of coins during their reign…

Macroprudential tools, capital controls, and the trilemma: Insights from the Bretton Woods era

June 21, 2018

Jean Monnet of Paris School of Economics in this piece points how history keeps coming back in different ways:


Now is the time for banking culture reform

June 20, 2018

The new President of New York Fed – John Williams (earlier President of SF Fed) – in his first speech talks about banking culture:

This brings me back to the issue of culture as a long-term investment that can’t be “fixed” overnight. Several years ago, Rich Lyons, Dean at Berkeley’s Haas School of Business, spoke at the San Francisco Fed and talked about culture in a way that has stuck with me ever since. Transforming a culture is a five- to ten-year project; keeping it that way is an ongoing mission that requires strong leadership and consistent action.

As a leader of a large organization, I’ve taken that message to heart. I’ve found that a culture based on the principle of open and authentic dialogue, that embraces our diverse backgrounds and perspectives delivers better results. I’ve found that well-defined collective values and direction lead to greater collaboration and innovation. Finally, I’ve found that this work is never a finished project, but an ongoing one that constantly evolves.

I started by saying that I feel a sense of urgency in addressing banking culture. So where do I see the priorities for supervision?

As supervisors, we need to ensure that bank management and boards are exerting strong and effective leadership with robust governance. That means holding management and boards of directors to high standards in terms of culture and conduct, even when the numbers look rosy. It means ensuring corporate values are clearly articulated and incentives are squarely align with a bank’s strategic goals. It means identifying, communicating, and mitigating risks in a timely and effective manner. It means that employees feel empowered to raise their hands if they see wrongdoing, and that comprehensive fixes are implemented when something goes wrong. 

Banking culture has become such an important issue in recent years…

One of the planks of Communist Manifesto was to have central banks in most countries…

June 19, 2018

A food for thought article by Prof Dipankar Gupta. He titles it as: We are all marxists: Liberal democrats have understood The Communist Manifesto better than communists”.

The article is in written for 200th birthday of Karl Marx. Prof Gupta says Marx would be pleased that around 60% of his suggestions have already been implemented in most countries which prize themselves as liberal democracies:


How Argentina keeps changing its central bank Governors (but nothing else changes…)

June 18, 2018

I wrote a post in 2010 on how frequently Argentina changes its central bank Governor. By 2010, they had appointed 56 Governors in 80 years of central bank history. In 2010, the government had just fired Martin Redrado who served for 6 years, making his tenure the second oldest after Ernesto Bosch who served  for 10 years from 1935-1945. This makes the average duration of Governors at a measly 1.4 years!

After Redrado, we saw 4 more Governors : Mercedes Marcó del Pont (2010-2013), Juan Carlos Fábrega (2013-2014) and Alejandro Vanoli (2014-2015) and Federico Sturzenegger (2015-18). Clearly the average has not improved.

And once again we see a change. This time the former finance minister Luis Capato has replaced Federico Sturzenegger has been appointed to ease the crisis.

How Argentina keeps finding a crisis is anyone’s guess. For all you know, it has this distinction of being the only country which was developed in 1900s only to descent to a develping one in 2000s. 


Counterfeiting Canadian banknotes using inkjet printers!

June 18, 2018

Another gem from JP Koning.

How cheap inkjet printers were used to counterfeit notes in Canada in early 2000s:

The most common method of producing counterfeit currency involves computer generated images and inkjet printers. Today, the profile of a counterfeit operation could very well be “computer, scanner, printer.” The average home computer is becoming a quality reproduction device, and graphic design and image-manipulation software is readily available at affordable prices. High-resolution inkjet printers are inexpensive, and information on how to counterfeit currency is widely available on the internet. The advances in computing technology have increased the choices available to counterfeiters across the world, as increased quality, decreased cost, portability and ease-of-use become the benchmarks for success in the electronics market. Computers and scanners are
user-friendly, but sophisticated enough to produce high-quality counterfeits.

Counterfeiters in Canada, amateurs or otherwise, tend to focus on the “Birds of Canada” series or the original “Canadian Journey” series of banknotes, as they have fewer security features and arerelatively easy to reproduce. The new “Canadian Journey (stripe)” series of notes tend to be done by the well-organized, well-financed groups who have access to high-powered equipment and spend the time learning how to replicate the newer state-of-the-art security features.
The security features of the “CJ (stripe)” series have thus eliminated the hobbyists, but professionals have found a way to counterfeit these notes. The new security features require more effort to replicate.

To counteract the counterfeiting surge Canada experienced over the last decade, the Bank of Canada, through its participation in the Central Bank Counterfeit Deterrence Group, engaged in the design and implementation of several standardized anticounterfeiting technologies.

The entire document on counterfeiting is interesting..

Reviewing inflation targeting frameworks in New Zealand, Australia and Canada…

June 18, 2018

Reserve Bank of Australia conducted a conference in April 2018 titled : Central Bank Frameworks: Evolution or Revolution?

the central bank has uploaded the papers discussed in the conference and they look fairly interesting reading. There are seperate papers on Inflation targeting in Australia (which completed 25 years of IT), New Zealand (the pioneer) and Canada. Plus there are papers on mon pol committees and macropru policies.


Hong Kong filmmakers found guilty of possession of fake banknotes..

June 14, 2018

This is interesting bit of news. Apparently two filmmakers in an award winning film used fake currency notes. But they looked so real that they have been booked:

Cheung Wai-chuen and Law Yun-lam were found guilty on May 31 of possession of counterfeit cash that was used in the film, which took home five awards – including best picture – at the 36th Hong Kong Film Awards.

In a twist worthy of a Hollywood plot, the authenticity that had garnered the film so much acclaim was now the pair’s undoing.

The Eastern Court heard that in 2016, the year the film came out, Law borrowed 9,996 fake HK$1,000 banknotes from Cheung for a prank. Police found the money in Law’s car and later discovered some 200,000 more banknotes at Cheung’s props company.

Since the notes were so close to the real McCoy, Eastern Court Magistrate Cheung Kit-yee said she believed they could be easily mistaken for authentic cash – despite the words “movie prop” in fine print across the bills. While the magistrate said she did not think the pair had planned to use the fake cash illegally, they had still committed a crime because others could have taken the paper props and tried to pass them off as real money.

The pair were sentenced to four months in prison, although this was suspended for two years sparing them jail time.

Still, the case sent shock waves through the film industry and cast the spotlight on local legislation surrounding movie props.

Will be interesting to watch the proceedings..

No research backing RBI’s move to ban cryptocurrencies

June 14, 2018

There is little doubt that the move to ban virtual/crypto currencies was randomly done. But one did not realise that RBI did not do any research before the decision. Nor it consulted any stakeholders.

This is revealed via the RTI inquiry by Varun Sethi. 

Other central banks are vigorously engaged in the debate for a while now. RBI actually floated a committee to look at the issue on the same day it banned these very currencies. It could have banned after studying the committee report or encouraged other independent research within the bank. To see there was no research and this is revealed by RTI is embarrassing to say the least.

Update: Copy of RTI is here

High time we televise/record Parliamentary hearings of RBI officials…

June 13, 2018

Just learnt about this from media that RBI Governor appeared before the Parliamentary Standing Committee of Finance. On checking the website of the Committee, just saw this notification.  The RBI Governor has again raised concerns over not having enough powers to regulate public sector banks. I mean it is amazing we are hearing this issue after all these years of RBI regulation.

Anyways, what is also irksome is that we hardly get to hear and read what the RBI Governor (and other RBI officials) says in these meetings. Much of its closed doors. It is fairly a standard practice in other central banks where first public is notified of any such meeting in advance and then the testimony/speech is put on the website. In some cases it is televised as well for people to see.

It is high time that Government/RBI also put up minutes of such meetings and the key statements on the website. Given RBI’s role in the political economy of the country, this is the least expected.



21st century cash: Central banking, technological innovation and digital currencies

June 12, 2018

Of all the stuff one has read on digital currencies, this speech by Fabio Panetta is one of the best. As the Deputy Governor of the Bank of Italy, he provides a lot of clarity on the several issues regarding digital currencies.

First he discusses what digital currency mean in terms of the two functions of money: means of payment and store of value. He says the unit of account does not mean much here as a dollar in Physical notes or a dollar in digital form mean the same thing.

  • Means of Payment: He says central bank digital currency will be beneficial for people without a bank account. In terms of payments CBDC will at best just provide competition to already existing private payment systems. It will also reduce cost of cash but then costs of computing will rise.
  • Store of Value: Currently there are costs to storing physical money which will disappear with CBDC. However, there could be issues as CBDC could compete with  bank deposits leading to so called runs on banks as mentioned by other central banks. Thugh, he does not see this as a problem as banks provide much wider services and people will not easily transfer their deposits.

One needs to balance the risk and benefits:

The risks and benefits of CBDCs are two sides of the same (digital) coin, related to the role of money as a means of payment and a store of value. Recourse to a CBDC as a means of payment may well have benefits, but their precise nature is uncertain and they may still be too small to justify the introduction of a
digital currency. Moreover, the issuance of a CBDC may become less positive on balance if we take into account the potential effects on the demand for commercial bank deposits. The risks and benefits would be  affected by the characteristics of the CBDC, but in any event the risks would not disappear altogether.

The business case for introducing CBDCs remains at best unclear. However, like all issues related to technological innovation, the costs, benefits and risks of digital currencies are likely to change rapidly in the future. This suggests that central banks should continue to examine the potential effects of digital
currencies. Indeed, many of them are currently engaged in research and technical experimentation with a CBDC. The Riksbank, Bank of England, and Bank of Canada, to name a few, are actively analyzing the issue. Some have gone even further, such as the Central Bank of Uruguay, which has launched a pilot
project.14 At Banca d’Italia, we are also studying how a CBDC would impact our financial system and monetary policy, and we are working within the Eurosystem on trials using DLT, which might prove useful for a digital currency. Researchers are also actively reflecting on CBDCs. Today’s conference is a notable example.

Then he discusses some open issues like anonymity aspect of currencies:

Probably the most important issue is whether the digital currency should be traceable or whether it should be designed to guarantee, to the extent possible, anonymity. Cash has always been an incredible instrument: it allows for third-party anonymity in transactions and leaves no trace. While this implies that it is an effective means of payment for illicit activities such as money laundering, the financing of terrorism or tax evasion, it also ensures privacy for its users.

The possibility of tracing our digital transactions may have important economic and ethical implications. Imagine for a moment that payments data suggested that spending on alcohol and the probability of defaulting on a loan are positively correlated. Based on such evidence, a bank might decide to reject a loan demand by an applicant with high expenditure on alcohol, even though the correlation does not reflect any ex-ante causal relationship between these two variables but could be simply due, for example, to an ex-post common psychological factor.16 Though it may be over simplified, this example emphasizes that we need to address carefully the privacy issues that may stem from digitization, and in particular from the introduction of a CBDC. Today these risks are still
limited, as in most countries retail transactions are concluded mainly with cash, and the record of our electronic payments represents an imprecise screening device. This is changing rapidly, however.

Just who should decide on the degree of anonymity associated with the use of a CBDC? Clearly, this is more than just a technical issue, and as such, the choice does not belong to central banks alone but also to the political sphere. We need to think carefully, right now, about how to make the introduction of a CBDC fully compatible with the rights of individuals and about how to square the increasing availability of information on the private lives of each one of us in relation to our political views, state of health, or sexual orientation, with the protection of our personal freedom and with the rules that govern the functioning of a modern liberal democracy.

Hmm. This is an important public policy question.

Lots more in the speech.

Gift receiving at the central bank: Bringing transparency and tightening the rules…

June 12, 2018

Croaking Cassandra Blog posts on this issue of giving gifts to the central bank. One remembers how during Diwali most of the financial firms competed to give the classiest of gifts to the central bank officials. The idea was to be counted and get to know the regulator and if possible be in the favored books. The practice was stopped some years ago and not sure what the status is of today.

It seems in New Zealand, the central bank has released a list of gifts received since July 2016. The gifts vary from a computer mouse to a jar of pickle to movie tickets and what not.

The blogger says that this should not be acceptable at all even for courtesy sake:


Swiss reject the Sovereign Money initiative..

June 11, 2018

It would have been a big surprise if Swiss voted in favor of the much criticised Sovereign Money initiative (alternate view here). In the referendum held yday, they rejected it.

SNB which criticized the initiative fairly openly has heaved a sigh of relief and issue a press note: 

The Swiss National Bank (SNB) has acknowledged the outcome of the popular vote on the sovereign money initiative. The SNB has a constitutional and statutory mandate to pursue a monetary policy serving the interests of the country as a whole. It is charged with ensuring price stability while taking due account of economic developments. The adoption of the sovereign money initiative would have made it considerably more difficult for the SNB to fulfil this mandate. With conditions now remaining unchanged, the SNB will be able to maintain its monetary policy focus on ensuring price stability, which makes an important contribution to our country’s prosperity.


%d bloggers like this: