Archive for the ‘Central Banks / Monetary Policy’ Category

Small country interfaces with the world’s financial rule-makers: Case of Bahamas

November 5, 2018

John Rolle, Governor of Central bank of Bahamas gives a speech on the topic :

My topic tonight is: “How Small Nations Interact with the International Financial Rule-Making Architecture”. The core elements in this architecture include:
– Multilateral agencies, among which the IMF is probably the most impactful for small countries, and the BIS the most impactful for the world’s central banks;
– Rule-making bodies, among which the Basel Committee is probably the most prominent, but including the international Association of Insurance Supervisors (IAIS), the International Organisation of Securities Commissions (IOSCO), and similar groups, with the Financial Stability Board (FSB) assuming prominence in recent years;
– The ever-growing architecture on financial crime suppression, centred on the Financial Action Task Force (FATF); and
– A range of public, quasi-public, and private groups that create, impose, and/or enforce standards in international finance, among which leading examples include the ratings agencies, SWIFT, ISDA, LCH and many others.

What should these international agencies do to hear the small nations:



Should a country print its own banknotes or outsource it?

November 2, 2018

JP Koning has a knack for writing amazing pieces on money.

In this new  piece, he looks at business of printing currency. Should one print own currency or outsource it? The history throws all kinds of lessons:


Primer: The Neutral Rate of Interest

November 2, 2018

Dallas Fed President Robert Kaplan writes a primer on neutral rate of interest:

In the September Federal Open Market Committee (FOMC) meeting, the Federal Reserve raised the federal funds rate to a range of 2 to 2.25 percent. In our statement announcing the decision, we ceased to include language that described the current stance of monetary policy as “accommodative.”

I supported the most recent federal funds rate increase. In my recent speeches and essays, I have been arguing that the Federal Reserve should be gradually and patiently raising the federal funds rate until we get into the range of a “neutral stance.” Once we’ve reached that point, I intend to assess the outlook for the U.S. economy and look at a broad range of factors before deciding what further actions, if any, might then be appropriate.

One challenge in moving toward a neutral stance is the inherently imprecise and uncertain nature of estimating what constitutes “neutral.” This judgment is more of an art than a science and involves observing and analyzing a wide variety of factors. The uncertainty of this judgment is complicated by the fact that 2018 U.S. gross domestic product (GDP) growth has been substantially aided by sizable fiscal stimulus, whose impact is likely to fade somewhat in 2019 and further in 2020.

The purpose of this essay is to explore a number of the key issues associated with using the neutral rate concept in formulating monetary policy. In particular, I will discuss several of the challenges associated with estimating this rate, describe limitations on the use of this concept, and explain how it might best be used in debating and determining the appropriate path for the U.S. federal funds rate.

What is neutral rate?


The history and importance of Section 7 (1) of RBI Act (1934)

October 31, 2018

Lot of talk in media about Section 7(1) of RBI Act 1934. As per media reports, Government has invoked this section to give certain orders to the central bank. See this by Ira Dugal.

Section 7 of RBI Act states:

1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider
necessary in the public interest.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of
Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.

(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this
behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts
and things which may be exercised or done by the Bank.]

I  had blogged about the history of Section 7(1) in an earlier post. Reblogging it:


Sweden moves closer to issuing e-krona…

October 30, 2018

In Sweden, physical cash continues to decline and this has led to Swedes thinking of introducing a cash law.

Parallely, they are now moving closer to issuing a central bank digital currency:


A review of Governance/Board/MPC in State Bank of Pakistan…

October 29, 2018

Pakistan’s central bank which is celebrating its 70th anniversary, is going through its own governance challenges with the change of government as written in this article.

Keeping the challenges aside, it is interesting to review whether and how the governance and policy structure differs in SBP compared to RBI.

As per the SBP Act (1956), SBP’ s Board has 10 directors:


Milton Friedman’s presidential address at 50: One of the defining moments in history of macroeconomics…

October 25, 2018

The year 2018 marks the 50 years of the celebrated and much talked about lecture given by Milton Friedman: The role of monetary policy. It is seen as one of those key moments in history of macroeconomics where Friedman questioned the trade-off between inflation and unemployment as espoused in Philips curve.

It is rather odd to see a journal – Review of Keynesian economics – to dedicate an entire issue on the 50th anniversary.

Milton Friedman’s American Economic Association (AEA) presidential address, ‘The role of monetary policy,’ was published 50 years ago in the 1968 Papers and Proceedings issue of the American Economic Review. Friedman’s influence as an economist is undeniable and he is widely viewed, together with John Maynard Keynes, as the most important macroeconomist of the twentieth century. His contributions were extensive but, in our view, his AEA address has been the most influential.

In that address, Friedman introduced the concept of the natural rate of unemployment (NRU), which can be paired with Wicksell’s notion of a natural rate of interest. The idea of the NRU represents a clear theoretical return to pre-Keynesian views, which Friedman had tacitly defended throughout his career and which were connected to his revival of the quantity theory of money in his book, A Monetary History of the United States, co-authored with Anna Schwartz. However, as shown in the monetarist debates of the 1960s, his earlier work on monetary theory lacked a convincing macroeconomic theory in which to ground his policy conclusions.

Friedman’s address provided that missing theory by revamping the Keynesian IS–LM model to include a Phillips curve which was vertical at the NRU in the long run. Thus, not only did Friedman fill the gap in his own thinking, he also co-opted the Keynesian macro model.

The idea of the NRU provided an anchor for the simple monetary rules that have since come to dominate the theory of monetary policy. In effect, in the same way that Keynes’s The General Theory of Employment, Interest and Money had done a generation earlier, Friedman’s address provided both a theoretical framework and a simple policy prescription. That framework and prescription fell on fertile ground in the 1970s, when the neoliberal revolution swept through the political landscape.

It should be clear that Friedman’s monetary rule for a constant rate of money-supply growth never became dominant, and these days most central banks are concerned with rules about the rate of interest. However, Friedman’s concept of the NRU remains overwhelmingly dominant within the profession and has proven incredibly resilient. Indeed, the founding of the Review of Keynesian Economics (ROKE) was to some extent a reaction to the dominance of the Friedmanite notion of an NRU.

The current symposium aims to reflect on the reasons for the success of Friedman’s address and its consequences for macroeconomic analysis and policy. We hope the contributions of this distinguished group of economists will enrich understanding of the current macroeconomic consensus. Beyond that, speaking from a personal point of view, we hope it will help pave the way for wider engagement with Keynesian responses to Friedman’s natural rate hypothesis, leading to reassessment of the real-world relevance of the idea of a natural rate of unemployment.


Most of the papers of the issue are gated. But there are nongated versions of some of the papers on the web…

What’s Wrong With the 2 Percent Inflation Target: False precision can lead to dangerous policies.

October 25, 2018

Paul Volcker’s new book,KEEPING AT IT – The Quest for Sound Money and Good Government, should be an interesting read.

In an extract from the book, he questions the 2% inflation target obsession:


Ethics in banking – from Gordon Gekko to George Bailey (It’s a wonderful life)

October 24, 2018

I had written a recent piece on how culture and ethics has become one of the central topics of discussion in central banking.

Danièle Nouy, Chair of the Supervisory Board of the ECB in this speech looks at two characters from the two Hollywood movies. One is Gordon Gekko of Wall Street who epitomized greed and was fine with any conduct in finance as long as it brought more returns/income. Another is George Bailey of It’s a Wonderful Life who used his own money to pay depositors and save his bank.


European Central Bank’s List of supervised entities in different Euroarea countries

October 24, 2018

This is an interesting list put up by ECB of the entities it has supervised lately. It is country-wise. It has even given reasons for their supervision which varies from large size to Significant cross-border assets. There are 118 such entities. What is interesting is that within the 118, there are several subsidiaries as well.

It also has a huge list of other financial entities which are not significant “as of now”….


True finance and three lies of finance..

October 24, 2018

Interesting lecture by Mark Carney of Bank of England.

He talks about how the GFC has led to changes in the financial system for the good. But there can be no progress if we don;t know the three lies of finance:

  • Lie I: “This Time Is Different”
  • Lie II: “Markets Always Clear”
  • Lie III: “Markets Are Moral”


He says we should work towards true finance. Call it truer finance actually:


Imposing an obligation on Swedish banks to handle cash and redefining legal tender…

October 23, 2018

From the Riskbank:

The Riksbank Committee, consisting of representatives from all the parliamentary parties, has been tasked with performing a review of the monetary policy framework and the Sveriges Riksbank Act. In June, the Committee published its interim report “Secure access to cash” (SOU 2018:42).

In a consultation response to the report, the Riksbank writes that all banks and other credit institutions that offer payment accounts and associated services shall be obliged to offer cash services to their customers.

The Committee proposes a requirement that companies shall be able to deposit their daily cash takings in their bank accounts. The Riksbank wishes to go a step further even in this regard. Banks should also be obliged to ensure that private individuals can make deposits. “The possibility to make deposits shall be included in the concept of cash services. This is a service that consumers can reasonably expect of banks,” says Governor Ingves.

The Riksbank also considers it important that the status of cash as legal tender be clarified. For example, it needs to be clear which services, in addition to public medical care, shall be obliged to accept cash.

As cash use is declining rapidly, it is important that the Riksdag adopt a position on the issue of what constitutes legal tender in Sweden and its connection to the Swedish krona as a currency. Any legislation should be as technology-neutral as possible in order to also be applicable to any future means of payment issued by the Riksbank.


Featuring lifeboat and lighthouse in banknotes: Case of Norway…

October 19, 2018

Norway and Sea are connected deeply. They had earlier included cods in their 200 kroner note.

Now the new 50 kroner has lighthouse and 500 kroner has lifeboat as key themes.

Governor Øystein Olsen in this speech explains:


Promoting financial education using cinema…

October 19, 2018

Banca D’Italia oe Central Bank of Italy is promoting financial education using cinema:

As part of Financial Education Month, on 19 October at 9.30, Marco Onado, Senior Professor at Milan’s Bocconi University and expert in the law and economics of financial intermediaries, will give a talk to the students present at the screening of Adam McKay’s film ‘The Big Short’ at the Bank of Italy’s convention centre in Via Nazionale 190, Rome. The aim is to encourage high school students to reflect on themes relating to the economy and finance.

They even have a poster. Nice bit.

The Indian government/regulators could not just screen movies but even teach economics/finance lessons from them via Housefull Economics columns run by Think Pragati

The peso and Philippine economic history

October 19, 2018

The recent Agustín Carstens, (General Manager of the BIS) speech discusses the discovery of trade route between Philippines and Mexico:

In 1565, an Augustinian friar, Andrés de Urdaneta, discovered the return route from the Philippines to Mexico – then New Spain. This discovery meant that galleons could do round trips between America and Asia in an efficient way. Chinese silk, porcelain, spices and other goods travelled from Manila to Acapulco. The merchandise was then transported to Veracruz on Mexico’s east coast, from where it was on-shipped to Europe. From Mexico to the Philippines, the galleons would carry mostly Mexican silver, a widely accepted means of payment at the time. This trade route lasted for approximately 250 years, up to 1810-15 when Mexico fought for its independence from Spain. I bring this up because that trade route could be considered an early manifestation of globalisation.

The speech was given at the 20th anniversary of BIS’s Asia office in Hong Kong.

Notice that he mentions how the trade led to Solver coming to Philippines which becomes its main form payment.

Gerardo Secat in a series of posts (one, two)is looking at history of Philippine Peso and Philippines economic history. In these he points how the Peso got its value from this Spanish silver. He also discusses the later linkages between US dollar and the Philippine Peso:

The story of the peso is inextricably linked with our economic history as a nation. It is also part of Philippine political history. A monetary currency is adopted by the government to set up a means (and guarantee) of payment to enable normal commerce to proceed.

Spanish colonial times. During the 16th century (the age of explorations and European colonization of the world), the peso was a royal silver coin minted by the Spanish royal crown, much like the thaler (or “dollar”) within Europe.

Also known as real de a ocho (or “piece of eight”), the peso was also minted in larger quantities in colonial mints of the crown in Mexico and Peru, where bountiful mines were located that produced great wealth and power for the Spanish empire.

The peso would find great currency in the Spanish colonies (including the Philippines). Spanish colonial administration would adopt the peso as the means of payments in trade and financing of the government.

Throughout Spanish colonial period, the peso would delineate the story of Philippine trade and domestic prices. It was the currency that financed the Galleon Trade with Mexico and life within the colony up until the contemporaneous life of Jose Rizal  who was executed by the Spanish authorities shortly before the Spanish-US War of 1898.

The peso in American colonial times. One of the first decisions of the American military government when it took control of Las Islas Filipinas (the Philippine Islands) from Spain was to continue to use the peso as the local currency for transactions in the new colony unit.

The islands were a booty won from war in 1898. The US destroyed Spanish colonial rule over the islands, overcame also militarily the local struggle for independence, and took political possession. The transfer of political control through a treaty of peace and the payment of $20 million equivalent for “improvements” that Spain made as the former colonial master saved face as the loser.

In adopting the peso as the unit of currency, the US colonial government fixed its value at one-half the US dollar. Thus, one US dollar became equivalent to two Philippine pesos.

That made the Philippine peso become a currency based on fixed exchange rate with the US dollar. Hence, it was a currency operating under a “dollar exchange” standard. It was common practice among colonial powers to base local currencies after a fixed exchange with their own stronger currency.

Throughout the almost five-decades of strictly being under American colonial administration, the Philippine peso had a fixed value of two pesos per US dollar.

Superb bit of history and know how….

Inviting Government to “observe” monetary policy meetings: How RBNZ is revisiting many older ideas which were questioned…

October 19, 2018

It was interesting to read the letter exchange between Reserve Bank of New Zealand  and NZ Government.

RBNZ press release explains:

The Secretary to the Treasury, Gabriel Makhlouf, has accepted Reserve Bank Governor Adrian Orr’s invitation to attend monetary policy deliberation and decision meetings as an observer from the end of this month.

Mr Orr extended the invitation to deepen Mr Makhlouf’s understanding of the process leading into a monetary policy decision, with the aim of ensuring a smooth transition to a new monetary policy framework.

This invitation comes ahead of the proposed creation of a formal Treasury observer position in the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill. This Bill is currently being considered by the Finance and Expenditure Committee.

As outlined in his letter to the Governor, Mr Makhlouf recognises and respects the highly confidential nature of these meetings. Mr Makhlouf’s letter outlines how he intends to manage issues related to confidentiality, and any actual or perceived conflicts of interest. The letter also details how Mr Makhlouf will avoid any perception of conflict in relation to his statutory responsibility for the Treasury’s debt management function. 

This is interesting. Worldwide, the whole thinking is to minimise government’s role in central banks. The Government representative is there on central bank boards which is also seen as too much interference at times.

But in case of NZ, they are inviting a Government official to “observe” monetary policy meetings of all things. The government person has no voting power but will be preview to discussions and even share his/her views.

In many ways we came to the two ideas of “central banks for price stability only” and “keep governments away from central banks” from Reserve Bank of NZ’s adoption of inflation targeting mandate in 1989. Since the new NZ government in 2017, both these ideas have been redone quite a bit. First, The central bank has recently added employment to its price stability mandate. Second, asking government to be an observant to monetary policy decisions.

I am not saying all this is bad stuff. It is just that times are changing and we are coming back full circle.


Revisiting role of a central bank: For monetary stability or financial stability or both?

October 17, 2018

Nice overview Speech by Sabine Lautenschläger of ECB:

….going back in time, the relationship between the different functions of central banks have generated quasi-existential questions.

What a central bank is, can be defined by what it does.1 And the “what it does” part mostly revolves around the question of whether a central bank cares about two types of stability.

The first is monetary stability: the creation of a monetary regime that can ensure price stability. The second is financial stability which, when central banking was born, was essentially the same as “bank stability”. So, throughout history, the most popular definitions of “central bank” have revolved around their role in ensuring monetary stability, financial stability or both.


The role of culture and values in finance and how it shows up during financial crises…

October 16, 2018

My recent article in Moneycontrol.

Finance has risen from being a controversial field and even hated field of work to being one of the most sought after careers. The early philosophers had long warned about how finance is this immoral activity one should not get into. Religions such as Christianity and Islam not just considered lending against usury as a sin but even looked down on those who dealt with money matters. They understood compared to other economic activity, it is in finance where one can make more money over other’s misery.

Yet, no one can deny that finance has been crucial to human progress. Any new idea or invention needs finance to back it and access of finance is seen as a vital ingredient to progress. How does one figure this dilemma?

In the piece, I show how we have not really figured this dilemma. In earlier times, we were concerned more with morality and traded off progress. Now we care much about progress and not much about morality.

This is important as one clear concern which emerged post global financial crisis is how lack of culture and ethics has become so central to financial sector. There have been inquiries about financial sector conduct in US, UK, Ireland, Australia etc and all show how financial market participants have been cheating  customers, manipulating their own markets as seen in Libor, high bonuses and so on. Even worse is how all this was being done with so much panache.

In India, we were patting our backs that first we avoided the crisis and the financial excesses were not seen here. But what was a global trend, was bound to happen here too given our integration with the world. Integration is not just about liberalisation and globalisation of goods and services but cultural exchange too! Eventually we are seeing all this coming out in mess in private banks and non-banks such as IL&FS. We are seeing similar stories of overpaid executives, compromised credit ratings and equity analysts’ scorecard, sleeping independent high-profile directors and so on. Travelling to Mumbai and seeing the glitzy offices of financial-sector companies, one is obviously asking “Where are the customer’s yachts”? So far, our responses to these problems have been usual. We need to probe deeper like other economies and try figure the “missing culture” in Indian finance as well.

Modern Monetary Theory: Why a Hot New Idea in Economics is Actually a Bad Idea

October 15, 2018

New article by Scott Sumner and Patrick Horan.

In recent years, a radical and unorthodox school of thought called “Modern Monetary Theory” (MMT) has become popular with some progressive economists, as well as with policymakers and activists on the political left.  One of MMT’s most prominent advocates is Stephanie Kelton, a professor at Stony Brook University who advised Senator Bernie Sanders during his 2016 presidential run. The theory has received enough traction that the popular Planet Money podcast recently ran an episode on the topic.

A central idea of MMT is that a government that issues its own fiat currency can pay its bills in that same currency.  These governments need not worry about budget deficits when contemplating additional spending. Thus because the US government has a monopoly on money creation, our federal government does not need to raise all its revenue through tax or bond finance. A government with its own currency cannot go bankrupt because it can always issue more currency to cover any budget deficit. Kelton and other MMT advocates argue that this why the US government can afford expensive programs such as a jobs guarantee and universal healthcare.

While MMTers do not see government debt per se as a problem, they do concede that were the government to spend beyond the capacity of the economy there would be a risk of higher inflation. MMTers argue that if high inflation were to become a danger, the government can increase taxation to remove excess currency from the economy. In the Planet Money podcast, however, Kelton indicated that she is not currently worried about inflation. When asked if putting even more money into the economy might lead to higher inflation, she noted that inflation has been quite low in recent years:

“Well, where is it? We’ve been doing it. We just did it with a $1.5 trillion tax cut. We did it with the $300 billion in additional spending. We’ve done it and done it and done it. Where is the inflation problem? I don’t see it in the UK. I don’t see it in Japan. I don’t see it in the US.”

Kelton is right that inflation has been low in the US and other developed countries, but she and other MMTers are wrong in assuming that fiscal policy determines inflation in those economies.  Since 1990, inflation in the US and many other developed countries has averaged two percent.  This was accomplished through very specific decisions taken by monetary authorities, indeed fiscal policymakers wouldn’t even know how to begin the difficult process of inflation targeting.


Sorry Mystics, Central Banks cannot finance Government spending: Lessons from Yemen

October 15, 2018

John Tamny on Yemen experiences:

Before Yemen’s civil war began in 2015, its currency (the rial) was worth 1/215th of a dollar. According to a report in the Washington Post last week, the rial has plummeted to 1/800th of a dollar, thus “sending food and fuel prices soaring.”

The tragedy underway in Yemen exists as yet another reminder that the Federal Reserve’s definition of inflation is completely upside down. While economists at the Fed believe that economic growth causes inflation, unstable countries in other parts of the world continue to reject the U.S. central bank’s simple-mindedness.

Indeed, it can’t be stressed enough that the biggest driver of rising prices is paradoxically a lack of economic growth. Growth is always and everywhere an effect of investment, and a falling currency repels the very investment necessary for the increased productivity that results in falling prices. In short, true inflation burns its victims twice: through rising prices in the near-term as the cost of goods reflects a shrunken currency, and through slower growth over time as the investment necessary for progress migrates away from the country that is irresponsibly pursuing devaluation.

The tragedy taking place in Yemen also offers a useful lesson about the well-oversold capabilities of central banks. Even certain members of the Austrian School claim that their very existence enables wasteful government spending as far as the eye can see. 


Though various economic schools relentlessly try to revive Santa Claus through their mysticism about governments, central banks and printing presses, the reality is that wealth and economic growth are always produced in the private sector. Government spending and printing presses are a consequence of the latter, and never a driver.

Hmm… These battles will continue forever perhaps…


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