Alberto Cavallo, Guillermo Crucas and Ricardo Perez-Truglia have this post in voxeu on the topic.
Archive for the ‘Central Banks / Monetary Policy’ Category
Ken Rogoff writes an article which is a must read for all central bankers and the media which hypes them.
He wonders what is all this hype about central bankers? Why do we care so much about each word they say, their color of tie and god knows what all. Most central bankers love the publicity and hype and don’t shy from photo-ops and enjoy their sudden new popularity. In the process they don’t realise they are becoming victims of financial markets and governments:
A one week old news..not sure how many saw it.
IMF charges an interest rate for lending against SDR. These rates are calculated on a weekly basis. These interest rates are in turn calculated by the prevailing interest rates in developed economies, With rates even touching negative, there was a threat to SDR rates as well. So IMF has set the floor rate at 0.05%:
The International Finance Centres are now discussing questions like these which were bread and butter (or mickey mouse) before the crisis. Even asking such qs was a crime and laughed upon.
The Fair and Effective Markets Review (FEMR) has today published a consultation document on what needs to be done to reinforce confidence in the fairness and effectiveness of the Fixed Income, Currency and Commodities (FICC) markets.
The Review was established by the Chancellor in June 2014, to conduct a comprehensive and forward looking assessment of the way wholesale financial markets operate, to help to restore trust in those markets in the wake of a number of recent high profile abuses, and to influence the international debate on trading practices.
The Chancellor, George Osborne, said:“The integrity of the City matters to the economy of Britain. Markets here set the interest rates for people’s mortgages, the exchange rates for our exports and holidays, and the commodity prices for the goods we buy.
I am determined to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them. I want to make sure it is done in a way that preserves the UK’s position as the global financial centre for many of these markets, with all the jobs and investment that brings.
The consultation that the Fair and Effective Markets Review has launched today is comprehensive, balanced and rigorous, and asks all the right questions. I look forward to the Review’s final recommendations in June next year.”
Wholesale fixed income, currency and commodity markets ultimately make it possible to do business across almost every sector of the global economy. They help determine the borrowing costs of households, companies and governments, set countries’ exchange rates, influence the cost of food and raw materials, and enable companies to manage financial risks associated with investment, production and trade.
However, in recent years there have been a number of high-profile abuses in these markets. These have included the attempted manipulation of benchmarks, alleged misuse of confidential information, misleading clients about the nature of assets sold to them, and collusion.
Interesting times..Despite all this, hype over finance and financial development continue..
It is all about operating in secrecy. Central banks end crisis by making sure no one knows what you are doing and who are the partners (Banks and FIs) in crime.And general public is made to feel that as if there is some magic going on.
Gary Gorton and Guillermo L. Ordoñez in this paper explain the importance of secrecy in ending crisis:
Yellen has this useful speech to show how inequality has risen so much in US.
This is a trend which has clearly caught US econs napping. Economists is around two questions: How much to produce and how to distribute. The question of distribution was dismissed by most economists in recent years. There was a widely held belief that just like econs have resolved the problem of depression, they have resolved for distribution as well.
And now both, depression and inequaity have hit these economies hard. And what is worse that there were clear signs of this but were ignored.
David Miles of BoE has this article on forward guidance. FG was something which was slated to replace all mon pol tools or supersede them. With all these inflation targeting forward looking central banks came the idea of guiding markets towards the future policy decisions. So statements like what central bank is likely to do etc became fashionable. Some central banks started even giving paths over how their interest rates shall move going ahead. In other words central banks became nothing but Gods. There is a reason why they are so hyped and celebrated after all.
This was all good till this crisis and things have become crazy since then. FG was taken more seriously as economies dived to assure markets but as things moved ahead one is not sure how to forward guide. Whatever you say, it is usually the opposite making you look mere human.
So Miles says, we should not be so precise. C-banks FG statements should be more qualitative:
Central Bank of Trinidad and Tobago has taken Ramayana really seriously. Last year this blog pointed, how the bank compared central bank to Lord Hanuman (to which this blog did not agree).
This year, the chief of the bank Jwala Rambarran looks at five more characters of Ramayana and once again points to lessons for central banking:
The newspapers/websites are full of Jean Tirole’s policy prescriptions. Some quote him and others pick his research to show the implications. However, if you read the research you wonder where is the prescription? Most of this scholarly research is ambivalent and laden with assumptions. It also tells you that either people who write such pieces have not read Tirole (and other past winners) or have not really understood the ideas.
David Colander writes a much needed post. He says people should not look for policy prescriptions from the prize winners. The Prize is for economic research which may have nothing much to do with policy.
He begins with the lamppost story and says we draw wrong lessons from it:
A fascinating speech by SNB’s Jean-Pierre Danthine. The title of the speech is “Are central banks doing too much?”. To which he of course says no 9it is surprising to hear that he thinks we will be surprised to hear his answer as no).
Anyways, what interested me in the speech was this thing called “Save our Swiss Gold” referendum. Referendums have become fashionable but I read somewhere they decide everything in Swissland via referendums. It is as close to near people’s democracy as one can get. So what is this?
The initiative is calling for three things: first, the SNB should hold at least 20% of its assets in gold; second, it should no longer be allowed to sell any gold at any time; and third, all of its gold reserves should be stored in Switzerland.
Hmmm. The voting is to happen on 30 Nov. If yes, SNB shall back to quasi gold standard…
This worries SNB:
Let me address the last point first. Today, 70% of our gold reserves are stored in Switzerland, 20% are held at the Bank of England and 10% at the Bank of Canada. As you know, a country’s gold reserves usually have the function of an asset to be used only in emergencies. For that reason, it makes sense to diversify the storage locations. In addition, it makes sense to choose locations where gold is traded, so that it can be sold faster and at lower transaction costs. The UK and Canada both meet that criterion. In addition, they both have a strong and reliable legal system and we have every assurance that our gold is safe there.
The initiative’s demand to hold at least 20% of our assets in gold would severely restrict the conduct of monetary policy. Monetary policy transactions directly change our balance sheet. Restrictions on the composition of the balance sheet therefore restrict our monetary policy options. A telling example is our decision to implement the exchange rate floor vis-à-vis the euro that I mentioned above: with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros, but also to buy gold in large quantities. Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.
Even worse consequences would result from the initiative’s proposal to prohibit the sale of gold at any time. An increase in gold holdings could not be reversed, even if necessary from a monetary policy perspective. In combination with the obligation to hold at least 20% of total assets in gold, this could gradually lead the SNB into a situation where its assets would mainly consist of gold: each extension of the balance sheet for monetary policy reasons would necessitate gold purchases, but whenever the balance sheet needed to be reduced again for the same reasons, we would not be able to resell our gold holdings. This would severely restrict our room for manoeuvre.
Furthermore, because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the Confederation and the Cantons would be impaired.
As a final point, note that currency reserves which cannot be sold are not truly reserves. It does not make sense to call for an increase in emergency reserves – gold holdings – and simultaneously prohibit the use of these reserves even in emergencies.
The SNB’s overriding objection to the gold initiative stems from the danger it poses to the conduct of a successful monetary policy. It would severely impair the SNB’s ability to fulfil its constitutional and legal mandate to ensure price stability while taking due account of economic developments, in the interests of the country as a whole.
Hmm.. Basically the points people had towards gold standard apply here as well.
Will be really interesting to see how Swiss vote on this..
James Forder of Oxford Univ writes this stirring paper saying much of what we know of Philips curve is a myth. He has written a series of papers questioning the idea.
He says what we know of the famous curve is just a cooked up story. First, Philips did not really point to a new relationship. Second, he did not wish it be known as a trade-off. Third, the glorification of how Phelps and Friedman dismantled the curve is another cooked up story. The idea of expectations was always there and their contribution was questioning that we could run inflation permanently. So, we need to reconsider how this idea has become mainstream macroeconomics where as it is just stories: