Archive for the ‘Central Banks / Monetary Policy’ Category

When an Australian economist’s piece on monetary transmission is discussed in Parliament..

June 7, 2017

It does not happen too often when Parliamentarians discuss an economist’s piece, even if the hearing is on economic matters.

So it is interesting when Prof. Abbas Valadkhani of Swinburne University of Technology writes this piece in Oct 2016 on how banks delay rate cuts following rate cut by central bank. He shows via research that these delayed rate cuts help these banks make money:

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Bank of England economists reading children books to simplify writing…

June 6, 2017

Paul Romer was recently sidelined for asking WB economists to wrote clearly. So much so for economists continued hubris.

However, some organisations are taking this criticism seriously. For instance Bank of England econs are reading children author books: (HT: MR Blog):

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Why Italian bonds remain riskier compared to Japanese despite latter having higher government debt?

June 6, 2017

The praise or blame as expected is on central bank doors.

Prof. Athanasios Orphanides who is also former head of Bank of Cyprus blames ECB for Italy’s woes:

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Has the Swiss Phillips curve flattened over the years?

June 5, 2017

Interesting article by Stefan Gerlach, Chief Economist of EFG Bank.

In many economies, inflation may have remained stubbornly low during the recovery because their Phillips curves have become flatter. This column uses an analysis of Swiss data since 1916 that support this argument. The most recent structural break in the Swiss Phillips curve occurred in 1994, when it became much flatter. Previous structural breaks suggest that this has been a change from an above-average to a below-average slope, not a collapse from the long-term normal level.

Despite Friedman rejecting Philips Curve, it remains on of the most important macro idea. Moreover, Friedman wrote about times when we had high inflation and positive rates. It is all so confusing now.

Overall, these findings suggest that the change of the slope of the Phillips curve between the 1970s and 1990s, as emphasised by Blanchard et al. (2015), was an abrupt fall from an above-average to a below-average slope, not a collapse from some historically ‘normal’ slope to almost zero. If so, the current flat Phillips curve may be merely a temporary phenomenon that will soon increase in slope.

The analysis also raises questions for future work. First, how country-specific are the observed changes in the slope of the Swiss Phillips curve, and to what extent are they also present in data from other economies? It would be interesting to know if Phillips curves elsewhere were unusually steep in the 1970s.

Second, to what extent can we separate different hypotheses for changes in the slope of the Phillips curve? Consider the most recent period: the Phillips curve hay have indeed flattened, but we might have confused shifts in the level and the slope of the Phillips curve. This could happen if, for instance, we have underestimated the amount of slack in the economy.

Arizona’s government has adopted new pro-Gold reforms

June 2, 2017

This blog had pointed how some US States are planning to allow gold/silver as currencies.

Now Arizona has acted to removing taxes on Gold and Silver:

Last week in Arizona, Governor Ducey signed into law HB 2014, which removes state-level taxation of gold and silver coins, and moves the state further toward treating gold and silver as simply another form of legal tender. By removing taxation, the legislation facilitates the more widespread purchasing and selling of gold and silver both an a hedge against inflation and as a medium of exchange. 

In March, Ron Paul testified at the Arizona legislature in favor of the bill, and noted he considers the legislation as part of an effort to create more room for “competing currencies” against the dollar. 

The HB 2014 easily passed through floor votes of both the House and Senate, although it remained unclear whether or not the bill would be signed into law. Governor Doug Ducey had previously vetoed similar legislation, likely motivated by tax revenue concerns. 

interesting set of developments in US despite all the noise…

A Pretty Peso: Colombia showcases its rich culture on the newest member of its family of banknotes

June 1, 2017

On one hand, we are seeing governments pushing digital money and on the other we see Governments across the world issuing newer and fancier banknotes. It is partly to increase security and partly to keep the feeling of nationalism going. This blog has pointed to new banknotes/coins in New Zealand, Sweden, UK, NorwayFiji and  many more.

Nadya Saber points to Colombia’s new banknote series:

As Colombia progresses on a trajectory of healing and growth, the country has issued new banknotes that pay tribute to former presidents Carlos Lleras Restrepo and Alfonso López Michelsen, anthropologist Virginia Gutiérrez de Pineda, poet José Asunción Silva, painter Débora Arango, and national literary treasure García Márquez—influential Colombians who have shaped the country’s cultural, political, and scientific landscape. 

José Darío Uribe, former governor of the Central Bank of Colombia says, “the new family of banknotes responds to the needs of the economy, pays homage to outstanding personalities of the country, and exalts our biodiversity, turning it into the new image of our banknotes.”

It has a 50,000 Peso note with celebrated author Gabriel García Márquez on the bankote:

A 2016 nominee for the International Bank Note Society Banknote of the Year award, Colombia’s 50,000 peso note featuring García Márquez is a finalist among 18 revamped banknote contenders from around the globe. 

García Márquez’s legacy—bringing Latin America to life through the pages of his poignant prose and giving the world a glimpse of the Colombia he loved—shines through the violet undertones of the 50,000 peso note. And an excerpt of his Nobel Prize acceptance speech is also featured on the bill.  

It’s no surprise then that everyone is talking about the Gabo banknote—especially on social media. Run the search #Gabo and you are likely to find countless posts not only praising the author’s banknote, but also asking how to obtain one.  

Colombia’s new family of banknotes is cause for celebration—proving that the country is ready to cash in on its history to bank on the future.

Hmm..

The Norwegian economy, sea and banknotes

May 31, 2017

Norway has released new banknotes – 100 kroner and 200 kroner. I had earlier pointed to this superb video on its banknotes.

The new notes are inspired from sea as the Norwegian economy gets much from the seas:

The motifs on all of the new banknote series denominations show the importance of the sea for the prosperity and welfare of the people of Norway. The primary motif on the front side of the 100-krone banknote is a Viking ship, while on the 200-krone note, a cod is portrayed facing left. On the back sides, abstract representations of a cargo ship (100-krone note) and a fishing boat (200-krone note) can be seen on the horizon.

The banknotes were designed by Norges Bank’s banknote designers Arild Yttri and Morten Johansen. The designs on the front sides of the banknotes are based on the proposal from Metric Design and Terje Tønnessen. The proposals for the back of the notes were submitted by Snøhetta Design. The primary motifs were drawn by the artist Sverre Morken. The Atlantic puffin watermark motif is based on a photo taken by photographer Tom Schandy.

The new 100-krone and 200-krone banknotes were printed by Oberthur Fiduciare in France.

There is a speech by the central bank chief who links Norway economy to the sea:

This is a day I have been looking forward to for a long time – it’s not every day a new banknote series is put into circulation. The last time was in 1994. And being able to hold the launch here in the Lofoten islands is an added bonus. The sea and the Lofoten islands are inextricably linked – the sea is a defining feature of the landscape and a key source of food, employment and recreation.

Norway’s coastline is embraced by the sea from the northernmost point to the southernmost tip. The sea has shaped our history and our economy, and from today onwards, it will also feature on Norwegian banknotes. Norges Bank has been governed by our elected representatives since 1816 under a clear mandate: to safeguard the monetary system and the value of our money. Norges Bank’s banknotes and coins are the community’s money, and our trust in the value of our banknotes is closely linked to our trust in each other. With this in mind, it was important to design banknotes that would tell a story about us as a community of people. As the sea is a key dimension in that story, it was chosen as the theme of the new banknote series.

Fascinating stuff..

An early attack on independence of RBI’s monetary policy committee…(Does it matter?)

May 30, 2017

If there is one topic on economics where one can continue writing it is central bank independence. It is amazing how the term was barely discussed till mid 1980s, has risen so sharply in economic discussions.

Recently, RBI set up a Monetary Policy Committee which was expected to finally resolve the debate forever. Earlier, the onus was on central bank chief who could be pressurized by the government especially towards cutting rates. But the government can of course not pressurize the whole committee. Thus, RBI monetary policy is independent forever.

Right? Not really.

Mint editorial says attacks have begun on MPC independence:

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Why does money depend on trust?

May 29, 2017

Nice primer from Bank of England. Trust is all there is to money..

Norges Bank develops a video on new banknotes..

May 29, 2017

Interesting video from Norway Central Bank celebrating its new 200 kroner banknote which has its favorite fish- cod – on the note.

200front_viii_specimen

There is some explanation here:

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Here is Copernicus doing monetary economics!

May 29, 2017

Brilliant JP Koning has a superb tweet:

There is more here..

Reserve Bank of India will be utilising Army’s services…

May 23, 2017

An interesting update on how central bank uses armed forces to guard itself:

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Why any modern banking system is necessarily uncompetitive?

May 23, 2017

Interesting post by Cameron Murray, a professional economist on Naked Capitalism blog.

He argues why banks are uncompetitive in today’s system.

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Bundesbank joins Bank of England in saying banks are not financial intermediaries but creators of money…

May 19, 2017

We usually understand banks as financial intermediaries which first collect deposits from surplus units and then pass them as loans  towards deficit units.

In 2014, Bank of England turned this wisdom upside down with their research. They said banks first give loans and then put deposits as liabilities to balance the balance sheet. This had massive implications on the way we thought about banking, monetary transmission and so on. The most important being we need to pay more attention on quality of loans than just mobilising deposits. More on this here.

Now it seems other central banks are catching up to this view.

Bundesbank in its monthly report reviews this literature:

The accommodative non-standard monetary policy measures taken by the Eurosystem in response to the financial and sovereign debt crisis caused the reserves of (commercial) banks in the euro area to increase sharply. In spite of this, the annual growth rate of the monetary aggregate M3 has remained at a moderate level over the past two years, reigniting interest in the connection between the creation of reserves and growth in the broader monetary aggregate.

It suffices to look at the creation of (book) money as a set of straightforward accounting entries to grasp that money and credit are created as the result of complex interactions between banks, non-banks and the central bank. And a bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal. Instead, various economic and regulatory factors constrain the process of money creation. From the perspective of banks, the creation of money is limited by the need for individual banks to lend profitably and also by micro and macroprudential regulations.

Non-banks’ demand for credit and portfolio behaviour likewise act to curtail the creation of money. The central bank influences the money and credit creation process in normal times through its interest rate policy, which affects the financing and portfolio decisions of banks and non-banks through various transmission channels. Non-standard monetary policy measures, too, have effects on the creation of money and credit. One such unconventional measure, the Eurosystem’s asset purchase programme, differs from interest rate policy in that it directly boosts the supply of reserves. Moreover, purchase programmes structured in this manner have an immediate expansionary impact (originating directly from the asset purchase) on the stock of money held by non-banks, though this effect is dampened in the euro area by the fact that the Eurosystem does not only purchase the assets from domestic non-banks.

There are also indirect effects resulting from the transmission of the purchase programme and its impact on lending and portfolio allocation. Critics point to the banking system’s capacity to create money as one of the main culprits behind destabilising financial cycles and financial crises, hence the long-standing debate about proposals to fully back deposits with central bank money, a move intended to restrict the extent to which the banking sector can create credit. It is not evident, however, that these constraints do indeed make for a financial system that is more stable overall than might in any case be achieved through targeted regulatory action. At the same time, that kind of transition to a new system would risk impairing important functions which the banking system performs for the economy and are crucial for keeping real economic growth on a steady path.

Lots of other details in the publication..

Being realisitic about cash vs digital payments debate

May 19, 2017

Interesting speech by Bank Negara Malaysia’s Deputy Governor – ncik Abdul Rasheed Ghaffour. He speaks on the burning issue of cash vs digital payments.

He says there are three aspects to this debate:

 

As a policy maker, I would think that there are three elements, or the ‘3S’, that we should consider in determining an optimal balance of paper and digital, cash and cashless.

Security
The first consideration is security. Counterfeiting is as old as money itself. However, cash has become more secure in recent years. In Malaysia, the amount of counterfeits discovered reduced by 25% in the past year. The currency industry is continuing to make good progress in enhancing security features. I am particularly pleased to note the recent efforts to make such features intuitive – so that the man on the street is likely to notice when something is amiss

The security challenge will not disappear by going cashless. The latest being the recent Ransomware attack. Cyber risk remains a real threat that must be managed. Significant efforts have been made to strengthen resilience against cyberattacks. The banking and payments systems industry has made this a key priority in recent years. However, cybersecurity is ultimately a shared responsibility between the provider and the consumer. Even the most robust systems can be breached if consumers do not exercise adequate caution or are deceived by fraudsters. In this regard, consumer education plays an important role in keeping cashless payments secure.

In addition, cash is also a choice payment instrument for illicit activities. Unlike digital transactions which almost always leave a trail to the parties, payments in cash are anonymous. In his recent book, The Curse of Cash, Kenneth Rogoff points out a very sobering reality – the amount of US Dollars in circulation outside of banks suggests that each American should have around USD4,200 in their wallet. This is not the case. According to him, most of this money is used to hide transactions.

However, this alone does not warrant moving away from cash entirely. Rogoff himself acknowledges this, and proposes the solution of eliminating large denomination notes – such as the United States’ hundred dollar bill. The logic is simple. With the next largest bill being USD50, such a move would immediately make it twice as cumbersome to hoard and pass around suitcases of cash. This is in fact a policy call which Malaysia has made, when we phased out the RM1000 and RM500 notes in 1999. At the same time, the case for removing large denominations becomes weaker as each year goes by. This is because the effect of inflation plays a similar role in making cash transactions more difficult for illegal activities.

Social cost
The second element for consideration is the social cost imposed by the form of currency chosen. On the surface, cash may appear to be costless. Consumers do not have to worry about subscription fees and exorbitant interest rates lying in wait. Retailers are not required to pay fees to accept cash, and so need not pass on any servicing charges to the consumer. There is no need for banks and merchants to invest in and maintain sophisticated software and hardware to support digital payments.

However, cash does not come cheap. Money needs to be printed and minted, and then transported, counted and guarded – several times over. Each step here poses a significant cost to various actors within the economy. Central banks have to deal with the rising cost of producing secure and durable money. Storing and moving money around under tight security can be expensive for both commercial banks and retail businesses. This does not yet account for the losses relating to under-reported taxes which is directly enabled by a cash economy – a cost borne by society as a whole. A 2005 study estimated this figure to be USD100 billion annually in the United States alone

The task of calculating the relative total cost of cash and cashless payments is a difficult one. Apart from the methodological challenges, the findings for each study are also likely to differ according to the nuances of each country. Nonetheless it is a worthwhile endeavour. Policy makers around the world have made positive progress in this area, and I believe we will see more efforts on this front in the coming years.

This leads to another dimension of the social cost consideration, which is the impact on financial inclusion. Millions of people live in rural areas globally, with little or no access to the modern infrastructures necessary to facilitate cashless solutions. The availability of cash is therefore paramount in ensuring that they continue to be seamlessly included in the financial system. At the same time, the success of mobile payments operator M-Pesa in rural Kenya has demonstrated that cashless alternatives can in fact be a means to promote financial inclusion for the unbanked. Here in Malaysia, where mobile banking transactions have tripled in the past year, there is potential to leverage the high mobile penetration rate to improve financial inclusion.

Stability
The third element is stability. The ability to make retail payments reliable is crucial for the effectiveness of the financial system. As discussed earlier, we have come a long way in developing a reliable way of transacting electronically – through solutions such as credit cards, mobile transfers and prepaid balances. Central banks are now carefully monitoring newer developments, particularly digital currencies based on the use of a distributed ledger. Digital currencies have tended to be volatile and subject to speculative hoarding. This raises the potential for runs on the digital currency, triggered for instance by a loss of confidence in the currency itself or a third party provider like an exchange. This risk is likely to be augmented where the digital currency is not backed by an issuer, and where there is no lender of last resort function. If digital currencies are widely used, such a shock could have systemic repercussions. At the same time, some of these concerns may be addressed if the digital currencies used are issued by a central bank. Many policymakers are studying this option.

In addition to facilitating payments, cash has been a powerful instrument for central banks to build trust and credibility with the public. The notes issued by central banks provide us with a direct and tangible link to the people – making it a key branding tool. Trust and confidence in the central bank are crucial for us to effectively deliver our mandate. This dynamic is augmented in jurisdictions like Malaysia, where the central bank is responsible for promoting both monetary and financial stability. If we were to go completely cashless, central banks might lose this traditional means of maintaining a strong brand.

Hmm..

Despite all the criticism, RBI Board still remains empty..

May 18, 2017

It is really puzzling. Despite much criticism on role of RBI Board in recent demonetisation, the board still remains empty.

Just to reiterate, the decision to demonetise the notes was taken by RBI Board. RBI Board comprises 21 members but just 10 were appointed on the eve of demonetisation. Out of the 10, only 8 were present to take a decision as momentous as this one. Imagine any Corporate Board taking a decision at that kind of magnitude with around 40% Board members being present.

So, on 8-Nov-2016 table looked like this:

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When silver ended as a unit of account…

May 18, 2017

Superb note by Ricardo Fernholz, Kris Mitchener, Marc Weidenmier. It is based on a bigger paper here.

They show how silver declined and ended as a unit of account. Moreover, it had sharp mpact on agricultural commodities:

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Denmark issues a tender to outsource printing of banknotes…

May 17, 2017

This blog had earlier pointed how Denmark has outsourced minting of its coins to Finland. The post also mentioned that Denmark will also be outsourcing printing of banknotes.

No agreement has yet been concluded with a supplier of banknotes. Danmarks Nationalbank has just published a timeline for the forthcoming tender for banknotes, and a supplier is expected to be found in early 2018.

Now Denmark Central Bank has issued a tender and a timeline for the same:

Danmarks Nationalbank has decided to discontinue internal printing/production of banknotes by the end of 2016. Like a number of other central banks, Danmarks Nationalbank will outsource this function to an external supplier. Danmarks Nationalbank will still be the issuing authority of banknotes in Denmark and will retain its expertise within banknote design and quality.

It is with great pleasure to announce that today, Monday 15 May 2017, Danmarks Nationalbank has initiated a competitive procedure with negotiation by sending a Contract Notice to the Tenders Electronics Daily (TED).

Danmarks Nationalbank expects the Contract Notice providing access to the procurement documents to be published within the next few days.  

Expected timeframe:

Dispatch of contract notice:                                                                                15 May 2017
Timelimit for request for participation:                                                              15 June 2017
Invitation to tender:                                                                                             1 September 2017
Timelimit for first indicative offer:                                                                       3 October 2017
Timelimit for best and final offer:                                                                        8 January 2018
Signing of contract:                                                                                            16 February 2018
Expected delivery of the first final batch of banknotes (one denomination): mid-2019

Interested banknote suppliers are invited to sign up for Danmarks Nationalbank’s news service for further news.

Will be interesting to see who gets the tender..

New government in Gambia fires the central bank chief

May 11, 2017

Interesting times for central bankers. After Barbados, Ukraine and Ghana, another central banker is fired. Though reasons for each are different.

The latest is from Gambia. This reason is more straight forward. A new government comes to power and fires the existing team:

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Lessons from Government intervention in Nigeria

May 10, 2017

An interesting account from Feyi Fawehinmi who is an accountant.

He points how interventions from Central Bank of Nigeria and the Government have benefited the two Palm oil producers in Nigeria. They have made more profits while producing less, employing less thanks to the bank which does not allow foreign competition in palm oil.

Lessons:

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