Archive for the ‘Central Banks / Monetary Policy’ Category

The problems with “rules-based” monetary policy

December 1, 2015

Rules based monetary policy has been the talk of the town for a while. The debate is getting shriller as US polity is debating on giving Fed a rules based mon policy mandate.

Though, rules based policy looks like a better model than discretion based, we don’t understand there is discretion in making those rules as well. How does one decide what the rule should be? Usually it is the Taylor rule which is suggested as a way to make these rules. But Taylor rule is based on inflation and potential output, both of whose calculation is discretion based.

Tommy Behnke writes on this problem:


Is Bitcoin Only for Crooks and Cheats?

November 18, 2015

William Luther’s short answer is no.

The long answer:


Federal Reserve’s ties to the Barbie doll and why there isn’t a banker Barbie?

November 16, 2015

A really out of the blue post from 

She points to how the Barbie doll is connected to Fed. The doll’s founder sat on the board of San Francisco Fed:


Shiva’s wrath – Divali, creative destruction and central banking

November 13, 2015

First of all, Happy Diwali to all the viewers of this blog. Hope you all had a great time and continuing to have one on a really extended set of holidays.

It has been a while since this blog last posted. What better way to start than to point a speech linking Diwali with central banking. I had pointed earlier how Central Bank of Trinidad and Tobago celebrates Diwali keeping all these mythological stories as its theme. Earlier ones were on Ramayana and this year it is on Lord Shiva:


Resurrecting Glass-Steagall

November 4, 2015

Simon Johnson, the long standing warrior against big banks and fancy finance suggests to reinstate Glass Steagall Act.

The best argument for a modern Glass-Steagall act is the simplest. We should want a lot more loss-absorbing shareholder equity. And, to reinforce this, we should want to make the largest banks simpler and more transparent, with “strong structural firewalls” as Dennis Kelleher, of Better Markets, puts it. Of course, in that context, we should ensure that various activities by “shadow banks” (structures that operate with bank-like features, as Lehman Brothers did) are properly regulated.

Building support for legislation to simplify the biggest banks would greatly strengthen the hand of those regulators who want to require more shareholder equity and better regulation for the shadows. These policies are complements, not substitutes.

Just 20 years back, there was so much noise about removing Glass Steagall Act. And it was of course removed and banks allowed to get into all other activities. Discussions have moved back to square one now..

Linkages between Swiss monetary policy and Swiss financial centre

November 4, 2015

Linkages are obvious. But we usually do not see a speech where one talks about financial centres.

Thomas J. Jordan chief of Swiss National Bank gives a speech on the topic. Most don’t know but Swiss have had three financial centres – Geneva, Basel and Zurich. Eventually, Geneva emerged as the preferred one.


The tragedy of being Ben Bernanke..

November 2, 2015

Brad Delong reviews the book by big Ben and is puzzled what went wrong:


Why inflation fighting is the the wrong war and inflation targeting the wrong strategy for Central Banks..

October 28, 2015

This blog keeps arguing to move towards a world with less and less of central banking. Central banks evolved in times when banking was not well really understood as a business and may be there was a case for a central bank type of an organisation. Even then the interventions of central banks had more unintended consequences. Federal Reserve was formed to resolve banking panics but played a stellar role in aggravating the same in 1929. Same is the case with central banks worldwide as we are so clearly seeing now.

As a result, one is never sure which battle the central bank should fight and whether the strategy is right. A lot hinges on these decisions given their monopoly over monetary forces. In today’s context, some say central banks should maintain their focus on inflation and inflation targeting is the only game. Whereas others say it is not the right battle and they should switch to financial stability and move away from inflation targeting.

Stephen Roach  belongs to the second camp and says they should instead focus on fin stability:


Is it time to reorganise and relocate the Regional Feds?

October 27, 2015

Matthew Jaremski and David Wheelock look at the issue:


How India’s dual economy of cash and credit impacts inflation..

October 20, 2015

An interesting article by Pronab Sen of National Statistical Commission.

He says one has to understand India’s inflation game via dualism between cash and credit:


Why did early governments/city-states allow coinage?

October 16, 2015

Perhaps one of the oldest and fascinating topics on monetary economics. How and why did coinage emerge in places historically?

Prof. Jacques Melitz has a superb piece on the topic. He first discusses places which started coinage and then on the issues with the coinage. There were two of them:


India shouldn’t overdepend on finance and central bankers

October 16, 2015

Jaimini Bhagwati has a piece saying India should not ape the west by overdepending on finance and central bankers.

He highlights how Janet Yellen was put as the most powerful person ahead of Obama in the world. This is even more ironical as Yellen has tried some bit to lower all the hype. She does not draw same attention as her predecessors:


Restricting capital account is the new thing..

October 15, 2015

You can explain much of economics thinking in terms of fashion waves. They just keep coming back and each time the new fashion designers show it as a new look of the town.

This crisis has obviously questioned pre-crisis fashions. Instead we have the post-crisis fashions which is just old wine in new packaging (which isn’t attractive). Capital account convertibility is one such fashion. It was in vogue before crisis and any talk against it was seen as anti-markets. anti -liberal and so on. Post-crisis, thinking has changed and even likes of IMF suggesting capital controls can be used though it should be the last option. From not a choice at all to using it as a last choice is some change by itself.

AV Rajwade writes on the dilemma for emerging markets (he was a member of 1997 Capital Account Committee and 2006 one as well). More interestingly, group of IMF economists suggest Mundell-Fleming model needs to be retweaked to bring this reality. It is the Mundell-Fleming model which has been used by experts to push open their capital accounts.

Actually, much of recent problems around macro today is related to capital flows. People blame advanced country monetary policy over spillovers, search for yields, volatile currency/equity markets and so on. All this is due to rise in capital flows across the world. And capital runs in both the directions seamlessly. That was also the main idea also.

The same people once advocated opening capital accounts in emerging markets strongly. Instead of accepting that they need to rethink on their worldly wisdom, the blame has been pushed to advanced country central banks.

Keep going in circles. Whenever crisis recedes, am sure it will be back to opening capital account…

Do Central Bankers really believe what they say?

October 5, 2015

Nice interview of Patrick Barron of Mises Institute. Exposes all the fancy talk done by central bankers across the world:

Our guest this week is Patrick Barron, a professor of economics and a student of global currency markets. Patrick and I dissect the Fed’s big announcement this past week not to raise interest rates, and consider whether Janet Yellen and other central bankers really believe in what they’re doing.

Is it all just to save themselves from the judgment of history, by kicking the can down the road? Have they read, or even considered, Austrian arguments on money and banking? Or are they simply so wedded to Keynesian orthodoxy that they literally don’t know what else to do? And what type of precipitating events might spell the end of US dollar imperialism?


Fed’s ZIRP policy and Banks’ Net Interest Margins

September 30, 2015

Why is it that banks want Fed to increase rates? Some say, that higher rates will lead to higher net interest margin for the banks.

But Noah Smith says there is hardly any linkage between the two.


Why the Fed buried monetarism?

September 24, 2015

Anatole Kaletsjy of Gavekal Dragonomics has an interesting piece on recent Fed decision to keep rates unchanged.

He says Fed does not believe in monetarism anymore. It has gone back to the earlier idea of trade-off between inflation and unemployment. It realises that monetary policy has a much deeper impact on unemployment than shown by earlier research:


Three Truths for Finance..(and three lies of Harvard)

September 23, 2015

Mark Carney of BoE has a speech on the topic.

He starts with three lies related to Harvard Univ:


How Do We Get Rid of the Fed? The great money debate is finally happening

September 23, 2015

Applies to central banking in general.

Jeffrey Tucker Director of Foundation of economics education has a piece on the topic. He points to how this time elite central bankers met with protesters at the (ill now) famed Jackson Hole Conference. There is also a parallel opposition conference running critically looking at monetary policy:


So much noise over FOMC meeting and yet nothing comes out of it..

September 18, 2015

Fed again chose not to cut rates.

I mean how many times we have had this situation. Not to forget it started way back in 2010 when Bernanke made exit policy really popular. Since then, it has been looking for a gate to exit not able to find one.  Some central banks which did find the exit gate (ECB, Riksbank, Norges Bank, RBA, Australia in 2010-11) found the weather really bad outside and forced themselves back in the theatre,

It has been a while this blog has read any of the central bank policy statements. It is just the same old story over and over again. But still the attention and hyoe keeps rising and getting shriller by the day. Infact after many thousands of years when records on Fed are going to be read by then historians they will surely wonder what all this noise was about. They will compare statements after statements to figure why there was so much attention and noise on this FOMC animal. They will be disappointed to find any correlations and wonder what the world was thinking back then. Same for other central banks as well.

So it took quite something to read the FOMC statement which was released last night. Given the noise one just wanted to see what was it all about. The statement just read like those old ones saying we are trying to do so and so for US economy. I mean how little things have changed really.

The problem is actually much bigger. It is not about whether Fed should cut or ease rates. This is just a much smaller question in the scheme of things. A much bigger question is whether we should allow some 10-12 people to determine economic fortunes of the entire world? The same applies to other central banks in their countries as well. Much of history of money and monetary policy is tragedy and recent events are just a continuation of the same.

Jeff Deist of Mises Institute sums up the breaking news:


While price fixing is generally considered illegal, when the central banks do it, it is called capitalism…

September 16, 2015

Jeff Deist of Mises Institute has a piece which criticises Federal Reserve setting interest rates. But the criticism applies to all central banks generally.

He says generally economics says price fixing by any central agency is a bad thing and deemed as illegal. But when central banks fix interest rates it is called capitalism:

Economists, bankers, fund managers, and investors around the world are absolutely fixated on the Federal Reserve’s anticipated announcement this week, with many fearing that a rate hike could trigger more shocks like the recent Black Monday selloff.

In a world of social media and 24-hour news cycles, it’s fair to say Wednesday’s FOMC meeting in the Eccles Building has been the most widely reported and discussed central bank action in history. But missing from the coverage is one fundamental point: “monetary policy” and bureaucratic control over interest rates is not capitalism, it is outright centralized planning.

What else can we call the orchestration of a pivotal price signal in the worldwide economy by 12 individuals sitting in one room? If one accepts the Fed’s role in setting interest rates, it’s hard to understand where and when to draw the line. 

Why not prices of goods, services, and wages? If experts can determine the price of money, why can’t they determine the price of a bushel of wheat or an automobile? When the former Soviet Union’s State Committee on Prices attempted exactly that, western capitalists scoffed. Yet we accept centralized monetary planning as part and parcel of free markets!

As this blog keeps saying nothing is more ironical than seeing central bankers talk about free markets/capitalism..



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