Archive for the ‘Central Banks / Monetary Policy’ Category

ECB continues to warn governments against war on cash…

July 27, 2017

Not all central banks have joined hands with their respective governments (rather bowed to governments’ pressure) on war on cash. ECB is one such central bank and its unique structure could be a reason for this. It is not answerable to any one country/government and can express itself much freely compared to others on the matter.

I had earlier pointed how it has asked two governments to go slow on war on cash. These were Portugal and Belgium.

Now it asks Bulgaria to go slow as well.  The Bulgarian Govt wants to lower transactions in cash:

The draft law seeks to gradually decrease the maximum limit for cash payments in Bulgaria from the current limit of BGN 10 000 to BGN 1 000 by 2019. The same maximum limit would apply to the payment of instalments in performance of a contractual obligation where the total amount is above
the maximum limit.
1.2 As in the currently applicable law, the maximum limit would apply both to payments in BGN, as well as payments in foreign currencies which are of equivalent amounts.

ECB says:

In particular, the decreasing limits on cash payments proposed by the draft law need to take into
account the advantages of having limits on cash payments in place and the potential
inconvenience thereof for citizens’ regular transactions in certain market segments. Setting the
limitation at these levels may make it difficult to implement the limit in practice. In this regard, it
should be noted that Directive (EU) 2015/849 of the European Parliament and of the Council14,
whilst confirming the vulnerability of large cash payments to money laundering and terrorist
financing, nevertheless applied customer due diligence measures to cash payments of EUR 10 000
or more. This implies that the draft law should establish a proportionate threshold for limits to cash
payments, taking into account the objectives of such limits.

2.11 Against this background, the ECB considers the lowering of the limit on cash payments to BGN
1000 (approximately EUR 500) by the 1st of January 2019 as disproportionate, in the light of the
potentially adverse impact on the cash payment system. In case the legislator wishes to pursue the
proposed cash payment limitations a higher threshold should be chosen and a degree of flexibility
should be introduced in the draft laws by, for example, allowing the delivery and receipt of cash
payments for compelling reasons or for reasons that are outside the individual’s control15, such as
where no payment service provider is available at the place or time of the payment. It might also be
advisable to allow cash transactions above the defined thresholds 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.

More importantly, it is putting all these discussions on its website for all to access. So unlike India, where we are moving from one rumor to another.


RBI stops printing Rs 2000 notes and focus printing on Rs 200 note?

July 26, 2017

The secret wars on banknotes continue in India. It was never clear from the RBI Board meeting when Rs 2000 was issued. Likewise, as news started doing the rounds of launch of Rs 200 note, there was no clarity again on whether and which Board meeting cleared the issue of Rs 200 note.

Both cases of issuance of Rs 2000 and Rs 200 notes, these were new denominations. Section 24 of RBI Act says:


Looking at the Stars while making economic policy…

July 26, 2017

John K Galbraith famously said: “The only function of economic forecasting is to make astrology look respectable.” 

Least did he know economists would take this seriously!

RBNZ Deputy Governor titles his speech: Looking at stars! Just that these stars are the unobserved variables which economists try along which economists shape the economy:


RBI MPC members to be paid much more per meeting than RBI Board members..

July 25, 2017

There was this recent news on compensation terms for RBI MPC members:


Linking usage of English language with monetary policy: Role of verbs in Central bank communications..

July 25, 2017

This is quite an interesting paper by Banca D’Italia economists – Maddalena Galardo and Cinzia Guerrieri.

They look at ECB policy statements and look at verb usage in them – will, expect etc. They use this to figure whether the verbs impact the money markets.

This paper has addressed a relevant question concerning central bank governance, i.e. whether and the extent which the verbal guidance has been effective in shaping the financial markets’ expectations on future short-term interest rates. The answer to this question crucially depends on the way central bank communication is measured. Despite the burgeoning literature on this topic, our paper has proposed a novel approach based on the frequency of future markers in monetary policy statements.

We have considered the European Central Bank communication strategy as a testing case. The main findings are as follows: (i) our verbal guidance index is able to capture the evolution towards explicit forward-looking statements, especially in the aftermath of the Global Financial Crisis and well before the forward guidance on key policy interest rates announced firstly on July 2013;

(ii) the results from the econometric analysis have showed that using a future tense that is perceived by the public as a commitment in pursuing a particular monetary policy stance is indeed effective in shaping future short-term interest rates expectations. In particular, the stronger is the surprise in speaking about future, the stronger is the effect on interest rates, especially for longer horizons.

To conclude, we have performed our analysis during a period characterized mostly by a dovish attitude, and thereof the results are valid in a context of
accommodative monetary policy stance. Although it is not possible to state if these implications hold in a hawkish context too, our results shed light on
the importance of the verbal tenses used to signal future actions.

In the middle of the paper, there is this really interesting discussion on English language and grammar rules which just make the paper quite interesting. It isn’t a typical mechanical paper on central bank communications but stresses on reading the policy statements carefully.

What is next? Role of adjectives?

What is Dictionary Money? When Governments can change value of unit of account almost at will..

July 24, 2017

Most books on monetary economics tell you there are three functions of money:

  • Store of value
  • Unit of account
  • Medium of exchange

All these are taught really mechanically and one is always struggling to figure the differences and meanings of the three terms. What we and our textbooks forget is that all these ideas have evolved historically and the story is hardly as linear.

The superb JP Koning in his new blogpost takes us through the history of unit of account idea. Earlier, we hardly had a fixed unit of account as today. Kings were free to announce and change value of the coins as and when. This was in a way like dictionary money where the meaning of money changed everyday:


Fintech: Is This Time Different?   A Framework for Assessing Risks  and Opportunities for Central  Banks 

July 24, 2017

Nice policy research paper by Bank of Canada economists:

Fintech is likely to increase competition and improve financial inclusiveness, which could reduce the cost of financial intermediation. If financial intermediation changes fundamentally, the traditional tool kit of central banks might be at risk. In this paper, we provide a framework to analyze the economics of various fintech solutions by focusing on the component technologies and underlying frictions that they solve. Moreover, we study the business models that some fintech firms are employing to understand which characteristics will likely lead to broad adoption of their technology. Our framework is meant to be general enough to use as fintech advances. Going forward, central banks and regulators will have to monitor whether these new technologies and business models are fundamentally changing money demand and the industrial organization of financial intermediation.

In this paper we focus mostly on banks and DLT. With respect to banks, we conclude that fintech firms will have incentives to either find new economies of scope or exploit the traditional economies of scope of banks by becoming regulated entities. Banks, on the other hand, will acquire or adopt the fintech innovations but might be hindered by their current business models. Lastly, we conclude that fintech might bring more change by creating new financial
intermediation applications than by changing the ones that exist today.

RBI skipped releasing its weekly balance sheet for 30 June 2017!

July 20, 2017

Apologies for waking up really late to this development (HT: Amit Varma)

As per RBI Act Section 53: (more…)

British Imperialism and the Making of Colonial Currency Systems

July 20, 2017

A fascinating question to think about is British were on Gold Standard for a long time but its colonies were kept on silver. Why were the imperial powers doing this considering a similar currency would have been more imperialistic? Likewise there are several questions on colonial currency systems imposed by other imperial powers. However, most monetary history accounts barely discuss the colonial currency systems.

In this aspect, this book by Wadan Narsey is a breath of fresh air as it discusses British currency policy in its various colonies. The author questions many a standard ideas around currency policy calling them a myth.

Here is a review by Kurt Schuler:

There must be few cases of a publication by an active scholar so long delayed as this book. Wadan Narsey wrote the bulk of it as his dissertation at Sussex University (England), completing it in 1988. That was at the beginning of his career as a university professor in his native Fiji. His retirement, hastened by the military dictatorship of which he was an outspoken critic, gave him the leisure to revisit and revise the dissertation for publication. The result is a work that has at least as much interest as when it was first written. There were many critics of the world monetary system then; there are at least as many now. It is all the more important, then, to know whether previous incarnations of the world monetary system worked better than the present one, or whether they had hitherto neglected disadvantages that should weigh against them.

The central argument of the book is that the British government arranged colonial monetary systems much more for its benefit than for that of the colonies. The British government’s ability to commandeer colonial financial reserves in London was crucial to enabling the Bank of England and the London financial market to avoid a number of crises. Among Britain’s colonies, those with a white majority or a large white minority received more advantageous treatment than majority nonwhite colonies, contributing to their faster economic development.

A must read as it discusses case of India as well. This blog had also reviewed the British currency note policy in this post. As students of Indian economics, these aspects are rarely taught and discussed..



Encouraging Make in India clause to printing banknotes– a case of central bank using industrial policy…

July 19, 2017

This is an interesting development. RBI cancelled two older tenders for Supply of Security Features for Indian Banknotes. It has issued a new tender  which makes it mandatory for the bidders to agree/satisfy the Make in India clause.

The clause states:


The part-time critics of central banks…

July 19, 2017

Nice article by Mark Spitznagel, Founder and Chief Investment Officer of Universa Investments.

He says most experts defend and criticise central banks based on whether central bank actions have hurt or benefited them:

There seems to be no shortage today of investors and pundits criticizing the market interventions of the world’s central banks. Monetary stimulus in the form of artificially low interest rates and bloated central bank balance sheets ($18.5 trillion, to be exact), the argument goes, have created another dangerous financial bubble (evidenced by ubiquitously bubbly stock market valuation ratios) that ultimately threatens the financial system yet again. The author shares wholeheartedly in this criticism.

The ethical problem is, where were these voices when this all started, with Greenspan in the 1990s and, more specifically, with Bernanke in 2008? The central bank critics today who were not critics of — and in most cases were even sympathetic to — the great bailouts and stimulus that started almost a decade ago have reserved their criticisms only for those interventions that appear to hurt their interests, as opposed to those that have helped them. After all, no one would disagree that bailouts and monetary stimulus got us out of the last financial crisis, but they also certainly got us to where we are today, vulnerable to another even bigger one.

You cannot be a part-timer in these matters:

One cannot be a part-time classical liberal, criticizing central planning only when it runs contrary to one’s interests. Indeed, this is the very problem of Socialism: there are winners and losers; the winners are in the here and now — the seen; the losers are in the future — the unseen. The winners don’t complain, and the losers can‘t until it is too late.

But as the future becomes the here and now, the unseen becomes the seen, those who now think they are anticipating a problem and its cause, yet supported that same cause when they stood to benefit, must be seen for what they are: fellow travelers in the central planning ideology that grips today’s financial markets. They are too late.


Improving money through competition….

July 19, 2017

Interesting piece by Norbert Michel, Director, Center for Data Analysis.

He says most forms of money have been discovered by the private sector only to be monopolised by State later. The State’s record in monetary matters has been mostly poor barring a few period. Even in those periods there must have been unintended consequences which are rarely mentioned. Best way to restore monetary stability is to improve money through competition. This is also what supporters of free banking also argue:

Money is the means of payment for virtually all goods and services. Most innovations in the means for payment have originated in private markets, but they were later monopolized by the government, thus mitigating their benefits. Policymakers rarely think about improving money with the same competitive market forces that improve other goods and services. That competitive process is the best way to expose weaknesses and inefficiencies in existing products, thus improving people’s lives.

Congress should avoid policies that single out alternative forms of money and impede people from using their preferred medium of exchange. Although it cannot provide absolute protection, allowing competitive private markets to provide currency would present as powerful a check on the government’s ability to diminish the quality of money as possible.

He says Post World War-II there are two types of money in US:

The U.S. monetary system consists of two types of money:

  1. Base money, often referred to as outside money, is the ultimate means of payment in the economy, and it comes from outside the private sector (i.e., the government).
  2. Inside money, often called credit money, consists of claims to the underlying base money, and it comes from inside the private sector.

Private financial firms compete to provide various types of credit money, such as checkable deposits with bankcards, money market accounts, and travelers’ checks. These financial firms are heavily regulated, often to the detriment of their ability to operate, but few policymakers question whether they should actually provide money.

Even fewer policymakers question whether anyone other than the federal government should provide base money, despite its fundamental economic importance. Because the Federal Reserve is the monopoly provider of base money, the U.S. government ultimately determines the total amount—and type—of money that private firms can create.  This monopoly necessarily limits the extent to which competitive processes can strengthen money, and exposes the means of payment for all goods and services to the mistakes of a single government entity.

Precisely because people are so vulnerable to the abuse of money (including modern monetary policy errors), Congress should not interfere with citizens’ ability to opt out of official currency.The competitive process is, ultimately, the only way to discover what people view as the best means of payment.

There are interesting references here which are not part of monetary economics syllabus in most universities. In all other things we are taught competition matters but not in money where powers are to reside with central bank. There is wide history of free banking which was quite successful as well but we hardly look at the evidence.

There is a reason Friedman said: Most economists do not question central banks as it provides them glamorous job opportunities. It is not just quetioning central banks in op-eds but even in teaching…


Who Would Be Affected by More Banking Deserts (branchless banking)?

July 18, 2017

Learnt about this new term from St Louis Fed blog: banking deserts:

Although technology has made it easy to bank from almost anywhere, personal and public benefits are still derived from bank branches. In areas without branches—commonly referred to as “banking deserts”—the costs and inconveniences of cashing checks, establishing deposit accounts, obtaining loans and maintaining banking relationships are exacerbated.

As expected, the deserts ill impact the poor:


What Remains of Milton Friedman’s Monetarism?

July 18, 2017

Robert Hetzel of Richmond Fed has a paper:

From the early 1960s until the early 1970s with the emergence of rational expectations, under the rubric of monetarism, Milton Friedman defined macroeconomic debate. Although the Keynesian consensus that he challenged has disappeared, the current academic literature makes little reference to monetarist ideas. What happened to them? The argument here is that those ideas remain relevant but require translation into terms expressible in modern macroeconomic models and in the monetary policies of central banks, neither of which contain any obvious references to money. Moreover, the Friedman and Schwartz methodology for identifying shocks retains relevance.

Lots of monetary history in the paper..

Tibet’s really colorful currency notes (which were demonetised in 1959)…

July 14, 2017

JP Koning points to this interesting article on history of Tibet currency notes in 1912-59. The article has pictures of many notes during the period but they are not clear. Seperately, Koning puts the picture of one of the notes:


South Africa needs a sensible debate about its Central Bank. Here’s a start..

July 12, 2017

Prof Vishnu Padayachee of University of the Witwatersrand and Bradley Bordiss PhD candidate at the same University argue for a more sensible debate on their central bank – SARB. Just recently, the Public Proctor asked the central bank to have a broader role leading to a lot of noise.

They say there are 2 mon pol camps:


Could You Live 90 Days on Bitcoin?

July 11, 2017

A couple just did and here is their story:

Like most newlyweds, Austin and Beccy Craig were excited about returning home to Utah after their honeymoon and beginning their new life together. But unlike most couples who find their lives calming down after the chaos of wedding planning is over, the Craigs were about to embark on an adventure no one had ever attempted before: Beccy and Austin were going to spend the next three months living solely on Bitcoin.

The Life on Bitcoin Kickstarter launched in 2013, four years after the elusive Satoshi Nakamoto had published his treatise on Bitcoin and then walked away from the entire project and dissolved into anonymity. The timing of the film is also important, as it came right after Bitcoin had rallied and crashed and critics proclaimed that the currency was dead. But as Austin points out in an exclusive interview with FEE, “A lot of people were saying Bitcoin is dead, but it was ten times more valuable than before the rally started.” He continues, “I learned enough to know that this was a revolutionary technology… it was essentially a pandora’s box. There was no way to close it up and pretend it didn’t exist. Bitcoin wasn’t going away.”

And how did Beccy feel about Austin’s desire to be involved in a documentary about cryptocurrency? As Austin says, “To my great amazement, when I asked Beccy about it she was onboard.”

The rules of the Life on Bitcoin documentary were relatively simple: Bitcoin would be the only medium of exchange permitted for all financial transactions made by the couple for 90 days. All cash, credit, and debit cards were to be confiscated and phones, internet, and any other accounts not currently set up to accept payment with Bitcoin would be shut off as well.

The Craigs have become modern pioneers in the world of cryptocurrency.

Each transaction made would also be limited to include only the buyer(s) and the seller, without a middleman exchanging US dollars for Bitcoin. For this experiment to really work and prove Bitcoin’s value as a form of real world currency, it would need to be as practical as possible.

Using a third party to exchange Bitcoin for USD, and then giving the USD to the seller would be a mere currency exchange rather than an actual transaction of money in exchange for goods or services. So an intermediary was only permitted for transactions after all other avenues had been attempted.

Since Utah is a tightknit community where its members care for each other often without being asked, there were also rules placed on the ability of family and friends to help out the couple. Unless the family or friends in question had legitimate commercial businesses, they would not be allowed to assist the Craigs. The only two exemptions to these rules were payroll taxes withheld from the couple’s paychecks, and of course medical emergencies.

To keep the experiment both interesting and applicable to the real world of Bitcoin transactions, the experiment was set to grow as the Craigs achieved success. If the couple proved that they were able to master the art of using Bitcoin to pay for food, rent, internet, and all other bills in Utah, then the limits would be pushed to include interstate travel and then international travel.

Amazing stuff..

Evolution of banknotes in New Zealand (1967-2017)

July 10, 2017

In 1967 New Zealand moved to decimal currency system.

Matthew Wright of RBNZ tracks the changes in banknotes ever since:

Banknotes are always designed with imagery relevant to the society in which they will be circulating, symbolising the national identity of the issuing country. Reviewing the historical designs of New Zealand’s banknotes from this perspective reveals a more complex picture of the 1967 switch to decimalisation than the usual perception of a discontinuous change.

Despite the switch from imperial to decimal currency, there were clear social continuities in the imagery used for the pre-decimal Series 2 and first
decimal Series 3 notes. The real conceptual break came with the Series 5, 6 and 7 decimal notes introduced from 1992–93, which introduced new
iconography and themes common to all three series. While the Series 2 pre-decimal and Series 3 and 4 decimal series, by intent, reflected similar mid-20th century social values – underscoring the stable social character of the New Zealand society of their day, the decimal Series 5, 6 and 7 carried a different range of subjects which were selected through public consultation, formal public survey and independent expert analysis, for relevance to the society of the late 20th century and beyond.

Nice bit..

Canada’s beautiful coins…

July 10, 2017

Alex Tabarrok has stunning pictures on Marginal Revolution Blog of Canadian coins. Are they really coins?

Pakistan Rupee devalues by 3.5% in a single day leading to war of words…

July 7, 2017

In its recent State of economy report released on 30 June 2017, State Bank of Pakistan reported that its current account deficit was highest since Q2 2009.

Pakistan’s overall external balance recorded a deficit of US$ 1.6 billion in Jul-Mar FY17, against a surplus of US$ 1.1 billion in the same period last year. This was mainly caused by a large trade deficit on the back of high imports– without a matching performance by exports. The imports of fuel, machinery and food items (mainly palm oil and pulses), all increased sharply due to robust domestic demand and ongoing power and infrastructure development activity. This dynamic pushed the current account deficit (CAD) to US$ 2.6 billion in Q3 – the highest since Q2-FY09. The higher CAD was recorded despite the receipt of US$ 550 million inflow under Coalition Support Fund in the third quarter. For Jul-Mar FY17, the current account gap amounted to US$ 6.1 billion, over twice the level recorded in the same period last year.

Just a few months ago, on 2 May 2017 the government appointed an interim chief of the central bank for 3 months till a new appointment:

It is informed that the Federal Government vide its Notification No. 3(4)-Bkg-I/2013 dated 1st May, 2017 has appointed Mr. Riaz Riazuddin, presently serving as Deputy Governor State Bank of Pakistan, as Acting Governor State Bank of Pakistan with immediate effect, for a period not exceeding three months or till appointment of a regular Governor, State Bank of Pakistan whichever is earlier, in terms of sub-section (3A) of Section 10 of the State Bank of Pakistan Act, 1956.
Thus, a new Governor was to be appointed by Aug 2.
However. on July 5 2017, the currency depreciated by 3.1% in a single day. SBP termed it as adjustment against the high CAD:


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