Archive for the ‘Central Banks / Monetary Policy’ Category

Greece policymakers and game theory..

February 19, 2015

Nice piece by Anatole Kaltesky of Gavecal Dragonomics.

Using game theory he says the policymakers are playing to loose:


1st hundred years of the Bank of Finland..

February 18, 2015

Mr Seppo Honkapohja of Bank of Finland has a nice speech on the history bit.

It is the 4th oldest central bank in the World:


The Austrian School: The History, The Principles, and How It Got Its Name

February 16, 2015

This is as good as it gets. A really useful audio interview of Mark Thornton on the school which remains ignored in economic teaching.

Right at the beginning Dr. Thornton points how the school teachings were missed in all his economic courses. Then there is a great discussion on how Fischer remains relevant to policymakers but not Mises. He calls central banks as legal counterfeiters of currency which is an interesting oxymoron of sorts.

In this informative interview, Mark Thornton details how Carl Menger started the Austrian school of economics, and the possible Greek and Roman philosophical roots the school observes. Dr. Thornton and host Frank Conway also discuss the important limitations to Austrian economic thinking, how von Mises’ papers got in the hands of Nazi Germany and then the Soviets, and the different economic perspectives and predictions of Ludwig von Mises and Irving Fischer.

Should central banks worry about bottom line?

February 13, 2015

Barry Eichengreen and Beatrice Weder Di Mauro write on the topic.

They say bottom line is the last thing central banks should be worried about. Unlike traditional banks, CBs can remain functional with losses:

Around the world, central banks’ balance sheets are becoming an increasingly serious concern – most notably for monetary policymakers themselves. When the Swiss National Bank (SNB) abandoned its exchange-rate peg last month, causing the franc to soar by a nosebleed-inducing 20%, it seemed to be acting out of fear that it would suffer balance-sheet losses if it kept purchasing euros and other foreign currencies.

Similarly, critics of the decision to embark on quantitative easing in the eurozone worry that the European Central Bank is dangerously exposed to losses on the southern eurozone members’ government bonds. This prompted the ECB Council to leave 80% of those bond purchases on the balance sheets of national central banks, where they will be the responsibility of national governments.

In the United States, meanwhile, the “Audit the Fed” movement is back. Motivated by growth in the Federal Reserve’s assets and liabilities, Republicans are introducing bills in both chambers of Congress to require the Fed to reveal more information about its monetary and financial operations.

But should central banks really worry so much about balance-sheet profits and losses? The answer, to put it bluntly, is no.
To be sure, central bankers, like other bankers, do not like losses. But central banks are not like other banks. They are not profit-oriented businesses. Rather, they are agencies for pursuing the public good. Their first responsibility is hitting their inflation target. Their second responsibility is to help close the output gap. Their third responsibility is to ensure financial stability. Balance-sheet considerations rank, at best, a distant fourth on the list of worthy monetary-policy goals.

Equally important, central banks have limited tools with which to pursue these objectives. It follows that a consideration that ranks only fourth in terms of priorities should not be allowed to dictate policy.

Not sure whether previous examples will work this time. Earlier CBs could work with losses as no one really cared who they were. Now CBs are all over the place and anyone reporting or expected to report losses is going to face huge political ramifications. CBs after fighting for so called independence for many years have just lost it. By trying to be a replacement to Finance Ministry, they have exposed themselves to all kinds of pressures. It will actually be interesting to see how markets react to any major CB reporting losses.

The bottom line is not really in terms of balance sheet. It simply is CBs have become way too big and powerful for anyone’s comfort. Efforts should be made to make them as anonymous as they once were..

NZ to release its first ever coin..

February 10, 2015

NZ is about to release its first ever coin that circulated on its shores 100 years ago. The coin is called Anzac and was then minted by Canada:

The Anzac coin honours the spirit of Anzac that was formed 100 years ago, and continues to live on today. The Anzac coin was launched in February 2015, by His Excellency Lieutenant General The Right Honourable Sir Jerry Mateparae, GNZM, QSO, Governor-General of New Zealand.

Further details are available in this media release and these questions and answers.

It is the first time in New Zealand’s history that a coloured circulating coin has been produced. The coin will be in circulation as legal tender and available for collectors.

The Anzac coin design features a New Zealand and Australian soldier standing back to back with their heads bowed in remembrance. The mangopare (hammerhead shark) pattern symbolises strength and determination, and the silver fern reflects New Zealand’s national identity.

One million Anzac coins have been minted and will be released to coincide with the 100th anniversary of Gallipoli. This number represents the size of the New Zealand population in 1914, of which 10 percent served in the First World War.

New Zealand Post is coordinating the release and distribution of the Anzac coin. The coin will be available in New Zealand Post/Kiwibank stores from 23 March, 2015 and will be sold at ‘face value’ – 50 cents.

Great way to honor history.

The illusion of independent mon pol under flexible exchange rates

February 9, 2015

All wisdom gained during last 20-30 years of macro/monetary policy is being questioned. One such idea is working through the impossible trinity – where countries can choose two of the three things – independent mon pol, fixed exchange rates and open capital accounts. The best way for economies is to choose open capital accounts and independent mon policy and abandon fixed exchange rates (or choose flexible rates).

This was working for a while and seen as the new god standard.  Sebastian Edwards of UCLA says the standard is more of an illusion now:

Why are there deflation fears across the world when we were warned of inflation?

February 5, 2015

After Eurozone, the “d” fears are hitting the Australian shores as well. Moreover, most are also worried about asset price bubbles as well. The warnings by various econs that we will only see inflation in future (barring the Krugman camp) have been proved wrong for sure.

We were told that central banks can create inflation at will but even this wisdom is under pressure for sure..

Persistent overoptimism about economic growth….

February 3, 2015

Kevin Lansing and Benjamin Pyle look at this perennial issue of being overoptimistic on economic growth.

They question the dominant rational expectations theory:


From Greenspan /Bernanke put to Central Bank put and some game theory..

February 3, 2015

Vineet Bhansali of PIMCO on the topic.

He says how central banks are responding to PIMCO’s outlook. Calls them credible irresponsible institutions:


Central Bank talking…from too much to too little?

January 27, 2015

Economists continue to remain silent about the many theories/ideas they had created in the 1990s and won a lot of admiration/tenures in the process. Most of these ideas are being questioned now but the hype over what econs can do continues. One such idea was importance of central bank talking which was euphemistically called central bank communications. The  notion was that central banks should communicated as much as possible to markets, communications are a potent tool as open mouth operations as important as open market ones and so on. Be more and more transparent. These talks were to guide market expectations, anchor inflation expectations and what not. From a non-entity, central bankers became a highly followed figure with each word being tracked and analysed.

Cometh the crisis and things like forward guidance were seen as a highly important tool. Central bank after central bank came with new ways to guide markets. Some indicated a date, some indicated amounts and some both.  We are all seeing these ideas failing badly now. Central banks have become victims of their own perceived success. All these things like communications and transparency have just made markets highly reliant on central banks. This has created huge uncertainty as we have seen in the last 4-5 years.

Satyajit Das has a piece on the same:


What if Utah breaks from American Monetary Union and introduces its own currency?

January 22, 2015

The Swiss shock has again led free banking scholars to come out and attack the hallowed world of central banking. The free banking scholars prefer to abandon central banks and let banks introduce their own currencspeaks oaies.

Ryan Mcmacen has this interesting column on the topic. He mentions Utah which did introduce its own currency albeit in a limited way in 2011:


How the SNB rollback has a historical precedent which ended dangerously..

January 20, 2015

Nice article by Markus Brunnermeier and Harold James.

They say sudden Swiss rollback of peg was due to political pressures. And this was nothing new. Similar pressures piled on Germany in 1971 too leading to breakdown of BW:


The Swiss shock…

January 16, 2015

There seems to be something brewing given two central banks made policy changes outside of their policy days. The disillusionment over growing powers of central banks is rising with every passing day. With governments in equal shambles, one does not know what really is the way out.

Swiss National Bank which had pegged its currency against expectations decided to remove the peg in a knee-jerk reaction. It also pushed the interst rates to a negative zone of -1.25% to -0,25%:


How about having a necktie mommemorating end of Fed stimulus

January 9, 2015

Superb post and some innovation by asset management firm Van Eck:

Janet Yellen was off the Christmas list at Van Eck Global this year.

The asset manager Van Eck helped the Federal Reserve chairwoman to her caricature debut on the their central bank-themed holiday ties—riding a white dove, no less. This year, the $30 billion firm cast off in a rather more literal direction.

This year’s ties (and matching tote bags) show a boat called the “QE III” sailing into the sunset. The boat appears to be empty, though there are queasy waves ahead.

As we reported last year, Van Eck’s ties have earned somewhat of a cult following. Prior iterations have featured “Helicopter Ben Bernanke” and a “Super Mario” version ofMario Draghi, the president of the European Central Bank. This one, of course, is referring to the end to the third round of the Fed’s stimulus measures, called quantitative easing. The massive bond buying program ended earlier this year.

Memorable holiday gifts are a way to get noticed in the financial world, and the Van Eck ties–va neckties, if you will–aren’t the only game in town. Among the competitors:Berkshire Hathaway Inc. Chairman Warren Buffett sends out a goofy picture with a box of chocolates from Berkshire-owned See’s Candies. And the effort that Kingsford Capital Management, a small Northern California-based hedge fund, puts into its oddball gifts earned it a front-page story in the Wall Street Journal in 2013.

Van Eck sends out thousands of its custom-made ties to its clients every holiday season. As always, the ties are made by Vineyard Vines, a preppy favorite in the Northeastern financial world.

Click on the post to see the previous design and the current one as well..

Bank of England fails its transparency test..

January 7, 2015

Barry Eichengreen and Petra Geraats review the various measures taken by BoE to improve transparency.

They say the measures do just the opposite:

This blog used to believe in all this central bank transparency earlier. Not any more. Too much noise and less substance.

What BoE is trying to do:

The Bank currently provides a drip feed of releases.  First comes its monetary policy decision, a week later its quarterly Inflation Report, and with a delay of two weeks, the minutes of its Monetary Policy Committee meeting. The Bank now proposes instead to release these items all at the same time, as a single combined monetary policy announcement.

But replacing a drip feed by a deluge will make the information provided harder to digest.  The result, ironically, will be to leave most observers less well informed about the rationale for monetary policy decisions.  Academic researchers, and indeed the Bank itself, will no longer be able to identify the separate impact of the policy decision, the Inflation Report and the minutes by looking at how asset prices react to each, since they will all be released together. 

Moreover, in order to publish the minutes along with the policy announcement, the Bank will have to alter the policymaking process in undesirable ways.  The Monetary Policy Committee (MPC) currently meets on two consecutive days.  Free-flowing deliberations on the first day are followed on the second day by set-piece presentations, known as “policy discussion”, in which each MPC member explains his or her policy decision. The decision supported by a majority of members is then announced on the same day, and the minutes follow two weeks later.

The Bank now proposes replacing this two-day MPC meeting with three separate meetings stretching over a week to allow the minutes to be prepared in time for the policy announcement.  The genuine deliberations would take place seven days before the policy is announced and would be excluded from full transcripts to be released after eight years.  The “policy discussion” would be staged three days before the policy announcement. The MPC would then vote on the eve of the big, all-in-one policy release.

Under this scheme, MPC members would be restricted in their public engagements for a prolonged period.  The blackout on public statements, which starts five days before the MPC meeting and ends the day after the policy announcement, would have to be extended to 14 days. This would leave MPC members with less opportunity to explain monetary policy in speeches and interviews, perversely reducing transparency.

Moreover, new economic data, geopolitical events and developments in financial markets could significantly alter policy considerations over the course of seven days.  At best, this would be inefficient, since the MPC would have to redo its deliberations.  At worst, policy decisions would be distorted if MPC members, having already deliberated, disregard the new information.

Moreover, publishing the MPC’s minutes together with the policy decision is not a good substitute for a concise statement that summarises the rationale for the decision of the majority.  The minutes already run to around a dozen pages. They would now cover an entire week, during which circumstances would be changing, affecting the coherence of any explanation.

The tamasha runs for a much longer time..

How the first thing Nazis did after invasion of a country was to rob central banks ..

December 18, 2014

Fascinating history and there is a book on this – Chasing Gold: The Incredible Story of How the Nazis Stole Europe’s Bullion. by George Taber.

This article summarises the main idea behind the book:

To keep Hitler’s war machine going, the Nazis captured bullion from European central banks that today would be worth $19 billion, writes George M. Taber, author of Chasing Gold: The Incredible Story of How the Nazis Stole Europe’s Bullion.

Hjalmar Horace Greeley Schacht was Adolph Hitler’s moneyman, and for six crucial years he formulated the dictator’s economic program. At the time, Schacht was Germany’s most famous and respected financier because he had broken the country’s hyperinflation of 1923, one of history’s worst. At the height of that financial crisis, one American dollar was worth 4,210,500,000,000 marks. Schacht in 1932 threw his immense reputation and economic skills behind Hitler and became both the president of the Nazi central bank and the finance minister.

….The centerpiece of Schacht’s economic policy for Hitler was autarky, or total self-sufficiency. During World War I, the British blockade had starved the German people and eventually defeated them. Nearly a half million Germans died of starvation. That prompted Berlin in 1917 to resume submarine warfare in hopes of defeating the Allies before the Americans got into the war. The strategy failed. That blockade experience left the Germans with the post-war determination never again to depend on other countries for vital imports.

Nature had not blessed Germany with all the vital products needed for the country’s war machine. Without them the Nazi army would be little more than toy soldiers.

There was only one problem. Nature had not blessed Germany with all the vital products needed for the country’s war machine. Without them the Nazi army would be little more than toy soldiers. While Germany had plenty of low-grade iron ore to make weapons, it lacked the high-grade steel used in the manufacture of tanks and bombers. Low-grade iron ore, though, could be turned into a higher quality product with the help of a metal known as tungsten or wolfram. That could be bought from Spain and Portugal.

Germany was also short of oil to fuel tanks and bombers. The Germans began a successful crash program to make synthetic oil, but they could still not produce needed high grade oil. That they bought largely from Romania, which fueled the Nazi tanks that invaded the Soviet Union in June 1941. Chromium was another natural resource needed for warfare that Germany lacked. They bought that from Turkey. Sweden also supplied the Germans with ball bearings, another important material.

These five neutral countries wereok with Gold but not with Marks:

Those five supposedly neutral countries would not accept German Reichsmarks in payment for the war goods, but they would take gold. Part of the world’s bullion resides in private hands, but the vast majority of it is in central banks. Willy Sutton robbed banks because that’s where the money was. The Nazis robbed central banks because that’s where the gold was. Swiss bankers played a crucial role in the transactions by being the financial middlemen.

Austria was the first victim of Nazi aggression in the spring of 1938. Because of his close relations with the Bank for International Settlements, which he had helped start, Schacht knew that the Austrian central bank had about 100 tons of gold. That was almost four times as much as the Germans had at the time. When the Wehrmacht marched into Vienna on Saturday morning March 12, Wilhelm Keppler, a businessman and early Hitler backer, and two armed Nazi commandoes arrived at the Austrian Central Bank and took the Austrian gold to Berlin. The Germans forced the Austrian central bank to transfer an additional 5.7 tons that it had shipped to London for safekeeping.

The Nazis also demanded that Vienna’s large and wealthy Jewish community hand over to Berlin 14.3 tons of their private gold. Schacht immediately departed for Vienna to lead the Nazi takeover of the Austrian central bank. In a festive celebration at its headquarters, he led the staff in a pledge of allegiance to Hitler, asking them to join him in “a triple Sieg Heil to ourFührer.”

The windfall arrived at a crucial time for the Nazis. By mid-1938, Berlin was almost out of foreign currency and gold largely because of its rearmament program and would have been forced to cut back their war buildup. On October 3, 1938, Emil Puhl, who soon became vice-president of the Reichsbank, wrote in a memo, “The rapid implementation of rearmament was only possible because of the use of available gold, foreign exchange from the former Reich, and the immediate recovery of Austrian gold, foreign raw material, and valuable securities reserves.”

When the Germans later invaded other European countries, one of their first stops was always the local central bank. After quickly learning what had happened in Austria, foreign central bankers desperately tried to get the gold out of their countries. Usually the bullion was sent an ocean away to Canada and the United States, where it was stored temporarily at the New York Federal Reserve vaults in lower Manhattan but eventually went to Fort Knox. Even the Vatican secretly sent nearly eight tons of gold to New York.

In the darkest days of the Blitz in May 1940, the Bank of England shipped 2,000 tons across the U-boat infested Atlantic. That included not only Britain’s gold but also large stashes held for other countries. Amazingly, not a single ship was sunk. The British nicknamed the secret cargo margarine. After the Nazis invaded the Soviet Union in June 1941, Stalin’s Politburo voted to send by train their three most valuable properties 900 miles to the Eastern side of the Ural Mountains to keep them out of Hitler’s hands. The three: Lenin’s embalmed body, the art works of Leningrad’s Hermitage Museum, and 2,800 tons of gold.

 In the end they had around $600 mn worth of gold:

The Nazis eventually captured some $600 million worth of gold, which today would be worth $19 billion Twitter . That kept Hitler’s war machine going for five years. At the end of World War II in 1945, the Reichsbank still had nearly 300 tons on hand, which was more than it had at the beginning of the conflict. Without the stolen central bank gold, Adolph Hitler would have been an insignificant player in world history.



Was Milton Freidman a true libertarian?

December 12, 2014

One serious misgiving of ignoring history of economic thought is inability of students to argue against the other side of an econ debate. This lacunae becomes deeper if we try and argue against the mainstream thinking and that too on a topic as suggested by the title of the blogpost.

Murray Rothbard of Austrian school had written this article  in 1971 arguing that Friedman is not the libertarian as idolized by free market believers:


How the Banking Union has transformed banks’ IT requirements..

December 10, 2014

This is an unusual speech but seeing how banking is shaping up could be the most usual thing to talk about. In things like banking union, one would usually see things like banks’ capital requirements, quality of assets and so on.

Dr Joachim Nagel, of the Bundesbank talks on IT requirements of banks post the banking union:


Monetary Policy Transmission in India: Pre and Post LAF period

December 9, 2014

A nice research by Nandini Sengupta of KC College Mumbai.

She looks at the impact of monetary policy on things like credit markets, asset markets, interest rate and so (this is standard monetary policy transmission). More importantly, the paper divides the research into two periods- pre LAF (before 2000) and post LAF (post 2000) and sees whether the transmission has changed in the transition. The findings are:

It is found that the bank lending channel remains an important means of transmission of monetary policy in India, but it has weakened in the post-LAF period. The interest rate and asset price channels have become stronger and the exchange rate channel, although weak, shows a mild improvement in the post-LAF period.

Bank lending channel has weakened as now firms have much wider choices to raise capital. Banks are not the only option..

Improving the security and cost-effectiveness of banknotes…

December 8, 2014

Management of currency notes is  one of the least focused tasks of monetary management. The origin of central banks largely came from this activity. There were many banks which issued their own notes convertible into some commodity (mainly gold). Some of these banks over-issued these notes, leading to problems of liability management. The governments then decided to have one bank issue notes which eventually came to be known as central bank. Then gradually, these banks were given additional tasks. Earlier, the banks had both deposits and currency as liabilities. But with central banks coming in picture, the currency became liabilityty of the central bank and deposits of banks.

Mr François Groepe of the South African Reserve Bank has comments  on this currency management business:



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