Archive for the ‘Central Banks / Monetary Policy’ Category

What has changed since the 2008 financial crisis?

March 13, 2018

The more we say they have changed, the more they remain the same.

V. Anantha Nageshwaran in his Mint piece asks What has changed since the 2008 financial crisis:

So, what do we have now? Post-2008, Greenspan blamed lack of regulation but still maintained that markets would self-regulate. That has not happened. The industry has replaced one set of derivatives products (credit default swaps) with another (ETF). These products have enjoyed exponential growth. Not all ETFs are alike. Some of them hold illiquid assets and yet promise daily liquidity to ETF holders. Volatility is now traded; derivative products have been launched on volatility and they are spiced with leverage (debt). Despite strong growth, investors expect interest rates to stay on hold or stay low. To round it off, regulators now suspect manipulation after having watched these products being launched and leverage piled on top of them. So, what has changed since 2008?

Two things have changed. One is that we have a new chairperson of the Federal Reserve. There are tentative signs—based on his past public comments—that he does not set as much store by asset prices as three of his predecessors had done. As I had noted in my piece on his testimony to the US congress two weeks ago, he is willing to take into consideration the overheating, as evident in financial market prices, even if consumer prices are rising at a slower pace. Gavyn Davies argued in his regular blog in the Financial Times that not just the Federal Reserve chairperson but six of the seven board members would be nominated by the current administration when the process is completed next year. Davies thinks the new Federal Reserve board might be inclined to confront rising asset prices, and might be less gradual in raising interest rates. Both might be welcome departures from the monetary policy framework of the last one or two decades.

The second thing that has changed is that the US 10-year government bond yield appears to have ended its long-run trend of declining. It now stands at 2.90%. In July 2016, it had reached a low of 1.38%. If it breaches 3%, it could create big losses for leveraged investors. On Friday, American stocks greeted the employment report showing strong job gains and tame wage gains with glee. James Montier calls this a cynical bull market. I am not sure if providence is known to be kind to cynics.



Fiji pays tribute to its rich animal and plant life on its banknotes..

March 13, 2018

Nice bit from Eszter Balázs of IMF.


Central Bank of Ireland to review Culture and Behaviour at key banks

March 12, 2018

I just blogged about how other central bankers are under pressure on banking crisis in other countries and there is no such pressure on Indian central bank. Ireland is one such example which is going through so called tracker mortgage scandal which saw how banks missold mortgage products.

In this speech, Derville Rowland (Director General at the central bank) says they are reviewing culture and behavior at key Irish banks:


Making Indian central bank more accountable for ongoing banking troubles (and generally too)…

March 12, 2018

One has been following a fair bit of debates and discussions around the ongoing banking scam/crisis in the country.

One is also following what has been going on in other countries. Infact, banking crisis and frauds are common across most countries. The mechanics of frauds/crisis differ but the outcome is the same: banks under trouble. Though what is different is how central bank officials are under pressure and are asked to explain how and why such fraud happened right under the nose. But this is unfortunately not the case here.

There is generally a lot of fire and fury around Indian central bank’s independence and its actions on interest rates. But very few of such pieces mention that independence should be backed by accountability as well. However, what we saw in demonetisation was near complete unaccountability by RBI top management and its Board members to explain to people the rationale behind their decision. So much so, the RBI Governor could refuse to attend Parliamentary hearings.

The same thing applies on the banking matters as well. First much of our attention remains on interest rates and hardly on nitty gritty of banking where bulk of the problems lie. Second, just like monetary policy, there is no accountability in banking matters as well.Neither they are called by the government to explain the crisis nor the officials have cared beyond a lame press release to explain things on their own.

It is amazing how RBI despite having extensive powers to regulate and inspect banks goes through a scam like the recent one in PNB. On top of this, they have two departments for bank management:

Plus there are seperate departments for non-banks. cooperatives etc. So it is not as if the banking department would be too burdened. If it is, we need to be told about this as well.

Plus, the Central Board is assisted by three committees: the Committee of the Central Board (CCB), the Board for Financial Supervision (BFS) and the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). One would assume BFS to be discussing these very ongoing issues and its members sharing their views with the public.

Plus, the RBI Act mandates the central bank to release a report on banking  developments which is named as: Report on Trend and Progress of Banking in India. This is now released along with the Financial Stability Report which is just following the  global fads.

Hence, it is not as if the central bank does not have much powers to regulate and inspect banks. It is supposed to be its most important work given the powers and resources it deploys for the activity.

Yet, we know nothing about RBI’s role when the scam was brewing in PNB. There is pressure on the PNB employees and auditors but we have not heard anything from RBI top management. There should have been Parliamentary hearings which should be televised and the statements of the key guys should be recorded and stored on the Parliamentary websites, just as we see in some other central banks.

This then becomes the evidence for what was said earlier and how it matters. Those who call all this unnecessary should read the case of Charlotte Hogg of Bank of England who did not disclose that her brother worked at Barclays at the time of joining the Bank. Likewise, central bankers have been under immense pressure to explain their decisions/lack of decision on matters. I have been following a few of those debates and there is no easy getting away.

It is amazing how little all this is done here. We are neither informed about the the appointment process nor the dismissal. If a crisis like PNB happens, there is just no explanation needed either.  Just do a cover-up job and follow all the crisis with more regulations…

Surprise Surprise: Which Central Bank Has the Most Twitter Followers?

March 12, 2018

It is Central Bank of Indonesia which has 625,000 followers (increased by 1000 since the article was written). This is really surprising.

From Bloomberg Quint:


Artificial intelligence (AI) in finance – six warnings

March 9, 2018

Prof Joachim Wuermeling of the Deutsche Bundesbank cautions against all this rise of tech and AI in finance:


The Central Bank of Lithuania to issue the world’s first digital collector coin

March 8, 2018

Well, central banks keep surprising.

Most major central banks in Europe have expressed doubts over issuing digital currencies. But the smaller country central banks are taking some liberty and giving these innovations a chance.

For instance Lithuania central bank plans to issue a digital collector coin to mark the country’s 100th year celebrations.


Should Czech issue e-koruna?

March 8, 2018

Central bankers of different countries are joining the debate of whether they should issue digital currencies. This blog has pointed to several such views: NZ, Denmark, Sweden, Finland, Australia and so on.

Mojmír Hampl, Vice Governor of the Czech National Bank in a recent speech gives the Czech perspective.

He says though there are many limitations with the idea , the philosophy behind the idea needs to be supported. It is ironical that econ academia was sleeping over any possible monetary reform and these ideas have instead come from IT sector. Atleast one central banker has honestly admitted this.


The case for central bank electronic money and the non-case for central bank cryptocurrencies

March 8, 2018

Aleksander Berentsen and Fabian Schar of University of Basel have a piece on the hot topic of cryptocurrencies.

They point to this interesting diagram on types of money (Just like the money flower):

They say yes to central bank e-money but not for central bank cryptocurrencies. They say e-money is a straight forward case and is easily doable.

We believe that there is a strong case for central bank money in electronic form, and it would be easy to implement. Central banks would only need to allow households and firms to open accounts with them, which would allow them to make payments with central bank electronic money instead of commercial bank deposits. As explained earlier, the main benefit is that central bank electronic money satisfies the population’s need for virtual money without facing counterparty risk.9 But there are additional benefits.

We believe this because we conjecture that “central bank electronic money for all” would have a disciplining effect on commercial banks.11 To attract deposits, they would need to alter their business model or to increase interest rate payments on deposits to compensate users for the additional risk they assume. The disciplining effect on commercial banks will be reinforced by the fact that, in the event of a loss of confidence, customers’ money can be quickly transferred to central bank electronic money accounts. In order to avoid this, the banks must make their business models more secure by, for example, taking fewer risks or by holding more reserves and capital, or they must offer higher interest rates. This simplicity of moving funds to central bank accounts has the potential to create additional volatility. For example, there could be rapid shifts of large quantities of money from commercial bank deposits to central bank accounts that have no real causes (bank panics that are unrelated to fundamentals). In this case, the central bank is called upon to provide commercial banks with the necessary temporary liquidity by offering standing facilities where commercial banks can obtain central bank money against collateral in a fast and uncomplicated way.

In a way, the authors agree with the ongoing Swiss initiative of Sovereign money .

Recently Denmark had rejected electronic money for the opposite reason that it will lead to instability in banking. This is also like monetary policy coming full circle. How central banks emerged to monopolise the currency function from private banks and now they are being seen as competition to these banks over deposits!

Though, they reject that central banks issue their own cryptocurrency:

The distinguishing characteristic of cryptocurrencies is the decentralized nature of transaction handling, which enables users to remain anonymous and allows for permissionless access. These key characteristics are a red flag for central banks, and we predict that no reputable central bank would issue a decentralized virtual currency where users can remain anonymous. The reputational risk would simply be too high. Rather, central banks could issue central bank electronic money. This money would be tightly controlled by them, and users would be subject to standard KYC (“know your customer”) and AML (“anti-money laundering”) procedures.

Some central banks supposedly are evaluating the issuance of a central bank cryptocurrency. However, a closer look at these projects reveals that these are not cryptocurrencies according to our definition in Figure 1. The projects usually are highly centralized.

In general, we don’t think that a central bank should be in the business to satisfy the demand for anonymous payments. We believe that such a demand can and will be perfectly satisfied by the private sector, in particular through cryptocurrencies. History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.

Whatever be the outcome of all this e-money and c-money, it is fascinating to go through the same debates when physical currency was issued…

What insights do taxi rides offer into leakages of Federal Reserve decisions/policies?

March 7, 2018

This looks like a crazy bit of paper and could generate controversy.

It tries to link unusual taxi traffic around NY Fed area around FOMC days to some sort of information sharing between Fed and Commercial Banks.

The author David Andrew Finer tries to explain the complex linkages and teasing it from data:

The taxi data can shed light on one small sliver of Federal Reserve interactions: face-to-face meetings with individuals associated with the Federal Reserve Bank of New York (New York Fed, FRBNY). Insiders of the New York Fed and commercial banks can take black cars, the subway, and other modes of transportation, so I will obtain a lower bound. While monetary policy is primarily the purview of the Board of Governors in Washington, DC, the New York Fed plays an important role. It houses the Fed’s trading desk and supports decision-making by, for example, providing economic briefings. In addition to its actions as a regulator, the New York Fed regularly communicates with commercial financial institutions to obtain market commentary pertinent to monetary policy.

If one accepts the proposition that the Federal Reserve’s monetary-policy meetings in Washington, DC, impact interactions between insiders of the New York Fed and major commercial banks much more than interactions involving the businesses and residences around the New York Fed and those banks, one may identify significant changes in rides with significant changes in meetings relevant to this study. I cannot conclusively demonstrate a link between rides and face-to-face meetings, but evidence that individuals are in very close proximity to each other more often around FOMC meetings would complement more indirect evidence of regular informal communication presented in the academic literature. Given my limited observations, the magnitudes of the changes in meeting counts that I find should be viewed as lower bounds.

Need to read the fine print…

On Persian rugs as alternative monetary assets…

March 7, 2018

Interesting bit from @arbedout (need a twitter account to see) (HT: JP Koning).

“A fine modern Qum rug in silk […] is preferable as a low-risk store of value […]; the demand for the former is widespread and is a fairly stable function of well-known macroeconomic variables” – on Persian rugs as alternative monetary assets


Seven fallacies concerning Milton Friedman’s ”The Role of Monetary Policy”

March 6, 2018

Edward Nelson says there are 7 common fallacies around Friedman’s paper – The Role of Monetary Policy – which celebrated 50 years recently.

This paper analyzes Milton Friedman’s (1968) article “The Role of Monetary Policy,” via a discussion of seven fallacies concerning the article. These fallacies are:

(1) “The Role of Monetary Policy” was Friedman’s first public statement of the natural rate hypothesis.
(2) The Friedman-Phelps Phillips curve was already presented in Samuelson and Solow’s (1960) analysis.
(3) Friedman’s specification of the Phillips curve was based on perfect competition and no nominal rigidities.
(4) Friedman’s (1968) account of monetary policy in the Great Depression contradicted the Monetary History’s version.
(5) Friedman (1968) stated that a monetary expansion will keep the unemployment rate and the real interest rate below their natural rates for two decades.
(6) The zero lower bound on nominal interest rates invalidates the natural rate hypothesis.
(7) Friedman’s (1968) treatment of an interest-rate peg was refuted by the rational expectations revolution.

The discussion lays out the reasons why each of these seven items is a fallacy and infers key aspects of the framework underlying Friedman’s (1968) analysis.


Debating Switzerland’s referendum on sovereign money initiative…

March 6, 2018

I had blogged earlier about the new Swiss referendum on sovereign money. Under this, all money can only be created by SNB and not by banks.

SNB has released a series of documents arguing against the initiative.

Why has the SNB become involved in this political discussion in the first place?
– It is true that the SNB does not usually make pronouncements on political issues. However, it has decided to take a position on this matter as acceptance of the Swiss sovereign money initiative (Vollgeldinitiative) would fundamentally change the Switzerland’s monetary system, create new tasks for the SNB and have a direct impact on its monetary policy.

– Generally speaking, the SNB bears a responsibility when it comes to political discussions that directly concern the monetary system and the fulfilment of the SNB’s statutory mandate. In such cases, it acts on its duty to provide information to ensure that voters can make an informed decision.

SNB can shrug all  this but such demands are coming from the instability it imposed on the system..

Amidst talks of higher inflation target, Norway reduces its target…

March 6, 2018

This is interesting from Norway. In a new remit to the central bank, the Finance Ministry reduced the inflation target from 2.5% t0 2%.

The numerical target is 2
When inflation targeting was introduced, Norway was experiencing a period where substantial oil revenues were to be phased into the economy. This would entail a real appreciation of the krone, and the reasoning was that this could occur in the form of somewhat higher inflation than in other countries. This was a key reason for setting the inflation target at 2.5 percent. The period of phasing in oil revenues is now largely behind us. A key argument for maintaining a higher inflation target than other countries is therefore no longer relevant. Against this background, the inflation target for Norway is now set at 2 percent, in line with that prevailing in comparable countries.

Econs are debating about the need to have a higher inflation target. Infact, Krugman in his recent paper says inflation targeting has opened a can of worms for advanced economies.

Further, the govt, has also added financial stability to the objective, in line with global sentiments:


It’s Baaack, Twenty Years Later

March 5, 2018

In 1998, Paul Krugman wrote a paper on Japan’s woes.

He recently revisited the paper on its 20th anniversary:

This paper is an exercise in self-indulgence and self-aggrandizement…

In early 1998 I set out to reassure myself by writing down a little model to show that if Japan was having troubles, it was simply because the Bank of Japan wasn’t trying hard enough. But as sometimes happens when you try to model your intuitions explicitly (and is one of the main reasons for doing formal analysis), the model ended up telling me something quite different –namely, that when short-term interest rates are near zero it is not, in fact, easy for the central bank to reflate the economy. In fact, even very large increases in the monetary base will have essentially no effect unless the private sector is convinced that there has been a permanent shift in the central bank’s objectives, a new willingness to accept and even promote inflation. As
I put it, the central bank needed to “credibly promise to be irresponsible.”


More central bank transparency only worsens financial and macroeconomic forecasts

March 5, 2018

Thomas Lustenberger and Enzo Rossi of Swiss National Bank go full circle on central bank transparency:

When two Central Bankers walk into a Restaurant, and should central bank be a pawnbroker for all seasons?

March 1, 2018

Superb post by Conversable Economist.

He links to a recent speech by Merv King. It has this interesting anecdote on how Paul Volcker paid for the lunch with King by cheque. But Volcker forgot to put a date on the cheque and it bounced!

Then King says central banks should be more like pawnbrokers for all seasons. Willing to lend to banks based on their forward looking estimate of collateral.

It is interesting to see the word pawnbroker being used by a former central banker as former has always been looked down upon by the elite central bankers. Now the idea is to emulate them..


Failing banks, bail-ins, and central bank independence: Lessons from Cyprus

March 1, 2018

Panicos Demetriades, Former Governor of the Central Bank of Cyprus shares insights on the Cyprus banking crisis.

Banking woes have only become worse since the crisis.

The government of Canada seeking authority to remove legal tender status from old Canadian bank notes…

February 28, 2018

It is interesting how certain constitutions/rulebook restrict powers of the central government.

For instance in case of Canada, the Government does not have the authority to withdraw legal tender status of notes. Thus even some old notes issued since 1935 (when Bank of Canada started) which are barely in circulation remain legal tender. This is different from other countries where the Government can just withdraw legal tender of all possible banknotes.

Bank of Canada updates on this bit:


Money and monetary stability in Europe, 1300-1914

February 27, 2018

K. Kıvanç Karaman, Sevket Pamuk and Seçil Yıldırım-Karaman write on the monetary stability  in Europe over 6 centuries since 1300:



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