Archive for the ‘Central Banks / Monetary Policy’ Category

The case for central bank electronic money and the non-case for central bank cryptocurrencies

March 8, 2018

Aleksander Berentsen and Fabian Schar of University of Basel have a piece on the hot topic of cryptocurrencies.

They point to this interesting diagram on types of money (Just like the money flower):

They say yes to central bank e-money but not for central bank cryptocurrencies. They say e-money is a straight forward case and is easily doable.

We believe that there is a strong case for central bank money in electronic form, and it would be easy to implement. Central banks would only need to allow households and firms to open accounts with them, which would allow them to make payments with central bank electronic money instead of commercial bank deposits. As explained earlier, the main benefit is that central bank electronic money satisfies the population’s need for virtual money without facing counterparty risk.9 But there are additional benefits.

We believe this because we conjecture that “central bank electronic money for all” would have a disciplining effect on commercial banks.11 To attract deposits, they would need to alter their business model or to increase interest rate payments on deposits to compensate users for the additional risk they assume. The disciplining effect on commercial banks will be reinforced by the fact that, in the event of a loss of confidence, customers’ money can be quickly transferred to central bank electronic money accounts. In order to avoid this, the banks must make their business models more secure by, for example, taking fewer risks or by holding more reserves and capital, or they must offer higher interest rates. This simplicity of moving funds to central bank accounts has the potential to create additional volatility. For example, there could be rapid shifts of large quantities of money from commercial bank deposits to central bank accounts that have no real causes (bank panics that are unrelated to fundamentals). In this case, the central bank is called upon to provide commercial banks with the necessary temporary liquidity by offering standing facilities where commercial banks can obtain central bank money against collateral in a fast and uncomplicated way.

In a way, the authors agree with the ongoing Swiss initiative of Sovereign money .

Recently Denmark had rejected electronic money for the opposite reason that it will lead to instability in banking. This is also like monetary policy coming full circle. How central banks emerged to monopolise the currency function from private banks and now they are being seen as competition to these banks over deposits!

Though, they reject that central banks issue their own cryptocurrency:

The distinguishing characteristic of cryptocurrencies is the decentralized nature of transaction handling, which enables users to remain anonymous and allows for permissionless access. These key characteristics are a red flag for central banks, and we predict that no reputable central bank would issue a decentralized virtual currency where users can remain anonymous. The reputational risk would simply be too high. Rather, central banks could issue central bank electronic money. This money would be tightly controlled by them, and users would be subject to standard KYC (“know your customer”) and AML (“anti-money laundering”) procedures.

Some central banks supposedly are evaluating the issuance of a central bank cryptocurrency. However, a closer look at these projects reveals that these are not cryptocurrencies according to our definition in Figure 1. The projects usually are highly centralized.

In general, we don’t think that a central bank should be in the business to satisfy the demand for anonymous payments. We believe that such a demand can and will be perfectly satisfied by the private sector, in particular through cryptocurrencies. History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.

Whatever be the outcome of all this e-money and c-money, it is fascinating to go through the same debates when physical currency was issued…


What insights do taxi rides offer into leakages of Federal Reserve decisions/policies?

March 7, 2018

This looks like a crazy bit of paper and could generate controversy.

It tries to link unusual taxi traffic around NY Fed area around FOMC days to some sort of information sharing between Fed and Commercial Banks.

The author David Andrew Finer tries to explain the complex linkages and teasing it from data:

The taxi data can shed light on one small sliver of Federal Reserve interactions: face-to-face meetings with individuals associated with the Federal Reserve Bank of New York (New York Fed, FRBNY). Insiders of the New York Fed and commercial banks can take black cars, the subway, and other modes of transportation, so I will obtain a lower bound. While monetary policy is primarily the purview of the Board of Governors in Washington, DC, the New York Fed plays an important role. It houses the Fed’s trading desk and supports decision-making by, for example, providing economic briefings. In addition to its actions as a regulator, the New York Fed regularly communicates with commercial financial institutions to obtain market commentary pertinent to monetary policy.

If one accepts the proposition that the Federal Reserve’s monetary-policy meetings in Washington, DC, impact interactions between insiders of the New York Fed and major commercial banks much more than interactions involving the businesses and residences around the New York Fed and those banks, one may identify significant changes in rides with significant changes in meetings relevant to this study. I cannot conclusively demonstrate a link between rides and face-to-face meetings, but evidence that individuals are in very close proximity to each other more often around FOMC meetings would complement more indirect evidence of regular informal communication presented in the academic literature. Given my limited observations, the magnitudes of the changes in meeting counts that I find should be viewed as lower bounds.

Need to read the fine print…

On Persian rugs as alternative monetary assets…

March 7, 2018

Interesting bit from @arbedout (need a twitter account to see) (HT: JP Koning).

“A fine modern Qum rug in silk […] is preferable as a low-risk store of value […]; the demand for the former is widespread and is a fairly stable function of well-known macroeconomic variables” – on Persian rugs as alternative monetary assets



Seven fallacies concerning Milton Friedman’s ”The Role of Monetary Policy”

March 6, 2018

Edward Nelson says there are 7 common fallacies around Friedman’s paper – The Role of Monetary Policy – which celebrated 50 years recently.

This paper analyzes Milton Friedman’s (1968) article “The Role of Monetary Policy,” via a discussion of seven fallacies concerning the article. These fallacies are:

(1) “The Role of Monetary Policy” was Friedman’s first public statement of the natural rate hypothesis.
(2) The Friedman-Phelps Phillips curve was already presented in Samuelson and Solow’s (1960) analysis.
(3) Friedman’s specification of the Phillips curve was based on perfect competition and no nominal rigidities.
(4) Friedman’s (1968) account of monetary policy in the Great Depression contradicted the Monetary History’s version.
(5) Friedman (1968) stated that a monetary expansion will keep the unemployment rate and the real interest rate below their natural rates for two decades.
(6) The zero lower bound on nominal interest rates invalidates the natural rate hypothesis.
(7) Friedman’s (1968) treatment of an interest-rate peg was refuted by the rational expectations revolution.

The discussion lays out the reasons why each of these seven items is a fallacy and infers key aspects of the framework underlying Friedman’s (1968) analysis.



Debating Switzerland’s referendum on sovereign money initiative…

March 6, 2018

I had blogged earlier about the new Swiss referendum on sovereign money. Under this, all money can only be created by SNB and not by banks.

SNB has released a series of documents arguing against the initiative.

Why has the SNB become involved in this political discussion in the first place?
– It is true that the SNB does not usually make pronouncements on political issues. However, it has decided to take a position on this matter as acceptance of the Swiss sovereign money initiative (Vollgeldinitiative) would fundamentally change the Switzerland’s monetary system, create new tasks for the SNB and have a direct impact on its monetary policy.

– Generally speaking, the SNB bears a responsibility when it comes to political discussions that directly concern the monetary system and the fulfilment of the SNB’s statutory mandate. In such cases, it acts on its duty to provide information to ensure that voters can make an informed decision.

SNB can shrug all  this but such demands are coming from the instability it imposed on the system..


Amidst talks of higher inflation target, Norway reduces its target…

March 6, 2018

This is interesting from Norway. In a new remit to the central bank, the Finance Ministry reduced the inflation target from 2.5% t0 2%.

The numerical target is 2
When inflation targeting was introduced, Norway was experiencing a period where substantial oil revenues were to be phased into the economy. This would entail a real appreciation of the krone, and the reasoning was that this could occur in the form of somewhat higher inflation than in other countries. This was a key reason for setting the inflation target at 2.5 percent. The period of phasing in oil revenues is now largely behind us. A key argument for maintaining a higher inflation target than other countries is therefore no longer relevant. Against this background, the inflation target for Norway is now set at 2 percent, in line with that prevailing in comparable countries.

Econs are debating about the need to have a higher inflation target. Infact, Krugman in his recent paper says inflation targeting has opened a can of worms for advanced economies.

Further, the govt, has also added financial stability to the objective, in line with global sentiments:



It’s Baaack, Twenty Years Later

March 5, 2018

In 1998, Paul Krugman wrote a paper on Japan’s woes.

He recently revisited the paper on its 20th anniversary:

This paper is an exercise in self-indulgence and self-aggrandizement…

In early 1998 I set out to reassure myself by writing down a little model to show that if Japan was having troubles, it was simply because the Bank of Japan wasn’t trying hard enough. But as sometimes happens when you try to model your intuitions explicitly (and is one of the main reasons for doing formal analysis), the model ended up telling me something quite different –namely, that when short-term interest rates are near zero it is not, in fact, easy for the central bank to reflate the economy. In fact, even very large increases in the monetary base will have essentially no effect unless the private sector is convinced that there has been a permanent shift in the central bank’s objectives, a new willingness to accept and even promote inflation. As
I put it, the central bank needed to “credibly promise to be irresponsible.”



More central bank transparency only worsens financial and macroeconomic forecasts

March 5, 2018

Thomas Lustenberger and Enzo Rossi of Swiss National Bank go full circle on central bank transparency:


When two Central Bankers walk into a Restaurant, and should central bank be a pawnbroker for all seasons?

March 1, 2018

Superb post by Conversable Economist.

He links to a recent speech by Merv King. It has this interesting anecdote on how Paul Volcker paid for the lunch with King by cheque. But Volcker forgot to put a date on the cheque and it bounced!

Then King says central banks should be more like pawnbrokers for all seasons. Willing to lend to banks based on their forward looking estimate of collateral.

It is interesting to see the word pawnbroker being used by a former central banker as former has always been looked down upon by the elite central bankers. Now the idea is to emulate them..



Failing banks, bail-ins, and central bank independence: Lessons from Cyprus

March 1, 2018

Panicos Demetriades, Former Governor of the Central Bank of Cyprus shares insights on the Cyprus banking crisis.

Banking woes have only become worse since the crisis.


The government of Canada seeking authority to remove legal tender status from old Canadian bank notes…

February 28, 2018

It is interesting how certain constitutions/rulebook restrict powers of the central government.

For instance in case of Canada, the Government does not have the authority to withdraw legal tender status of notes. Thus even some old notes issued since 1935 (when Bank of Canada started) which are barely in circulation remain legal tender. This is different from other countries where the Government can just withdraw legal tender of all possible banknotes.

Bank of Canada updates on this bit:



Money and monetary stability in Europe, 1300-1914

February 27, 2018

K. Kıvanç Karaman, Sevket Pamuk and Seçil Yıldırım-Karaman write on the monetary stability  in Europe over 6 centuries since 1300:




Bitcoin is more trustworthy than some academic critics

February 26, 2018

Prof Larry White takes on the academic critics on bitcoin:



Politics of inflation measurement in UK: Why RPI is preferred over CPI?

February 22, 2018

Mark Carney in a recent speech asked for cautionary withdrawal of Retail Price Index as a measure of inflation in UK.

Prof. Robert O’Neill of  University of Huddersfield in this piece tells us why:



Learning about Korean coin history via Korean pop music…

February 21, 2018

Nice post by Emily Pearce Seigerman, a museum specialist with the National Numismatic Collection.

She says best way to remember history of coinage in Korea is by linking it with their pop music:



The new supplier of Danish Banknotes has been chosen…

February 21, 2018

I had blogged earlier how Denmark is outsourcing both printing of banknotes and minting of coins. Minting was awarded to Mint of Finland.

Now the central bank has announced that printing is being outsourced to a French firm- Oberthur Fiduciaire SAS:



Where and why Central Banks choose to keep their gold reserves? Sweden edition..

February 20, 2018

Came across this press release from Riksbank (Sweden’s central bank).



European Central Bank members have a fixed, non-renewable contract..

February 20, 2018

European Council nominated Luis de Guindos (of Spain) as the vice-chairman of ECB.

The press release said:

The Eurogroup today gave its support to the candidacy of Luis de Guindos for the position of Vice President of the European Central Bank (ECB).

The recommendation to the European Council, composed of the heads of state and government, should be formally adopted by the Council on 20 February. On this basis, the European Council will request opinions from both the European Parliament and the Governing Council of the ECB. It is then expected to adopt its final decision at its meeting of 22-23 March.

The new Vice President will replace Vítor Constâncio as of 1 June 2018. He will serve a non-renewable 8-year term.

Interesting to note that there is a fixed non-renewable term. Not sure how many central banks have this arrangement. This ensures there are no political favors are sought to get reappointed. But still the problems of them joining the private sector, post their retirement remains.

ECB Act says all members to get similar term:

The Executive Board comprises the President, the Vice-President and four other members. They are appointed by the European Council by qualified majority on a recommendation from the Council after it has consulted the European Parliament and the Governing Council. The members’ term of office is eight years and is not renewable (Article 283(2) TFEU and Articles 11.1 and 11.2 of the ECB Statute). 

RBI’s Act on the other hand allows renewal of contract across positions:

8. Composition of the Central Board, and term of office of Directors.
(4) The Governor and a Deputy Governor shall hold office for such term not exceeding five years as the 5[Central Government] may fix when appointing them, and shall be eligible for re-appointment.

[A Director nominated under clause (c) of sub-section (1) shall  hold office for a period of four years and [shall be eligible for reappointment:

Provided that any such Director shall not be appointed for more than two terms, that is, for a maximum period of eight years either continuously or intermittently.]

7) A retiring Director shall be eligible for re-nomination.]

[9. Local Boards, their constitution and functions.
[(3) Every member of a Local Board shall hold office for a term of four years and thereafter until his successor shall have been appointed and shall be eligible for re-appointment.]

Provided that any such Director shall not be appointed for more than two terms, that is, for a maximum period of eight years either continuously or intermittently.

(1) Not less than two auditors shall be appointed, and their remuneration fixed, by the Central Government.
(2) The auditors shall hold office for such term not exceeding one year as the Central Government may fix while appointing them, and shall be eligible for re-ppointment.

Only in case of MPC members the contract is non-renewable:

45ZD. Terms and conditions of appointment of Members of Monetary Policy Committee.
(1) The Members of the Monetary Policy Committee appointed under clause (d) of subsection
(2) of section 45ZB shall hold office for a period of four years and shall not be eligible for re-appointment.

Need to figure the terms of appointments for other central banks too…


Retired politicians in demand in New Zealand..

February 19, 2018

Michael Reddell posts about the topic. 

He says  we need to restrict appointment of politicians/central bankers to take up other jobs post retirement:

Until just over a year ago, Bill English had been Minister of Finance for eight years.  In that role he had responsibility for the framework of legislation (primary and secondary) governing the prudential regulation of banks,  non-banks, and insurers.  He was minister responsible for the Reserve Bank of New Zealand, the prudential supervisory agency (including for banks).  He appointed the people who appointed the new Governor (and – single decisionmaking – supervisor). His department –  The Treasury –  was a key participant in the trans-Tasman banking council.  Even in his year as Prime Minister, there was no sign that he had lost interest in matters economic and financial.

It would be a dreadful look if a retiring former Minister of Finance went (more or less) straight from politics onto the board of a Bank.   It would be almost as bad as if a retiring Governor of the Reserve Bank made a similar move.   The issue –  especially for the Minister of Finance case –  isn’t about inside information; ministers aren’t usually privy to much individual institution data, and the broad intended sweep of policy (a) usually isn’t that secret, and (b) is somewhat specific to particular governments.    It is about incentives, appearances, and our ability to be reasonably confident that our governors are governing in the public interest and not in their own interests.

Probably few people go into politics initially for the post-politics opportunities.  Nonetheless, people need to feed their families, and fill their days, and even if you eventually get to the very top, even being Prime Minister doesn’t last forever.   Bill English is only 56, and the current Prime Minister –  even if consistently successful –  is likely to be out of Parliament by the time she is 50.   And –  even in New Zealand –  private sector directorships can pay pretty well (it was suggested that John Key might be getting $200,000 per annum for chairing the ANZ –  a big bank to be sure, but an unlisted 100 per cent subsidiary of an Australian parent, pretty substantially controlled by that parent).

Whatever the sector, a Cabinet minister who legislates/regulates in ways which are welcomed by the regulated industry are much more likely to find the post-politics doors open than one who regulates in a way the industry finds costly or inconvenient.  It isn’t just an issue in banking – it could be telecoms, or electricity, or transport, export education or whatever.   I’m no great fan of most business regulation, but it exists –  and the community as a whole has made a decision that such regulation is necessary or desirable.  If so, it is easy to envisage cases of a conflict between the public interest and the private interests of the regulated entities.

I’m not suggesting that Bill English (or John Key) made any decisions during their terms in office for reasons other than some mix of their view of the best thing for the country, and their view of how best to get re-elected.     But the incentives, and risks around them. are things that need managing.  It would set a dreadful example if Bill English shortly turns up on the board of a bank (in John Key’s case, the concern might be more about his membership of the Air New Zealand board –  a majority state-owned company, with ownership sold down by Key’s government, and where Key himself had until quite recently been Minister of Tourism).



The role of euro banknotes as legal tender..

February 15, 2018

Another speech from Yves Mersch of ECB who defends role of cash.

This speech is different as he looks at legal aspects of cash usage in Euroarea, what makes cash legal tender etc.:



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