Archive for the ‘Central Banks / Monetary Policy’ Category

History of 150 years of monetary policy in 7 sentences….

December 4, 2017

Missed this speech by John Williams of FRBSF which he gave on 16 Nov 2017.

The speech is on low r-star (natural rate of interest) in the developed world. Prof Phelps recently said: there is nothing natural about natural rate of unemployment, this should be extended to natural rate of interest as well.

As he discusses why we have low r-star and what to do about it, there is this bit on 150 years monetary history. He said ideally would have liked to sum the history in 140 characters but that will hardly cover anything. But how about summing the history in 7 sentences. Here are the 7 sentences:



Despite rise in less cash, why do we see rise in currency in circulation /GDP ratio across the world?

December 4, 2017

Clemens Jobst and Helmut Stix of Oesterreichische Nationalbank (Austrian central bank) analyse this paradox: Despite rise in digital money, why have cash holdings increased across most developed world after 2007?


A new monetary transmission channel: Private Debt service ratio

December 4, 2017

Boris Hofmann and Gert Peersman in the recent BIS quarterly review introduce another monetary transmission channel:

Conceptually, however, the impact of monetary policy on the DSR is not clear a priori. In particular, the DSR depends on the debt-to-income ratio of the private sector, as well as on the effective lending rate that has to be paid on the debt. While there is a positive link between changes in the stance of monetary policy and the effective lending rate that is likely to dominate in the short term, the impact on the debt-to-income ratio that kicks in over medium-term horizons typically goes in the opposite direction. Put differently, a policy easing lowers the interest rate that debtors have to pay, but also raises the stock of debt relative to income, and vice versa for a policy tightening. Moreover, the evolution of the policy rate itself, ie the persistence of the policy tightening or easing, also matters for the dynamic response of the DSR to the monetary policy impulse. How monetary policy affects debt service burdens over different horizons is hence ultimately an empirical question.

In this special feature, we explore the transmission of monetary policy through the DSR in the context of an otherwise standard vector autoregression (VAR) for monetary policy analysis. Specifically, extending the approach in Hofmann and Peersman (2017), we analyse the impact of a monetary policy shock (ie a conventional interest rate shock) on the private non-financial sector DSR and its components in a panel of 18 economies over a sample period from the mid-1980s to the onset of the GFC.

There are two main findings. First, a monetary policy tightening triggers a significant and persistent increase in the DSR. Higher policy rates increase effective lending rates, and this effect dominates a fall in debt-to-income ratios, a finding that is consistent with the results of Juselius et al (2017). Second, monetary policy has a stronger impact on DSRs, as well as on economic activity, the price level, house prices and credit, in economies where private sector debt is higher. Although there might be alternative explanations, the stronger effects of monetary policy in high- debt countries may reflect the presence of a debt service channel of monetary transmission. Specifically, a higher debt-to-income ratio mechanically boosts the impact of a change in interest rates on DSRs, and through this channel possibly also on the wider economy.


The humble 1 rupee note completes 100 years!

December 1, 2017

It was launched in 30 Nov 1917, as British Government was unable to mint Rs 1 coins:

The first ever ‘One Rupee Note’ completes 100 years of its inception on 30 November 2017. Issued for the first time as a promissory note in 1917, the journey of the lowest paper denomination note has been fascinating.

Its genesis lies in the World War I where the inability to mint coins forced the then colonial authorities to shift to printing Re 1 notes in 1917.

Introduced with the photo of King George V, the note has gone through lot of travails although retaining many of its unique distinctions, including being called a ‘coin’ in legalspeak.Here are some crazy interesting facts about the one rupee note:

Wow. What a journey..

How financial systems work: evidence from financial accounts (History of Funds Flow accounts..)

December 1, 2017

Bank of Italy is conducting a conference by the same title.

Here is the speech/opening remarks by  Luigi Federico Signorini, Deputy Governor of the central bank. He points to this interesting history of development of financial accounts, how central banks warmed up to these accounts, the decline of them in research and again their importance post-2008 crisis:


An interdisciplinary model for macroeconomics

November 29, 2017

Andy Haldane and Arthur Turrell of Bank of England in this paper:

Macroeconomic modelling has been under intense scrutiny since the Great Financial Crisis, when serious shortcomings were exposed in the methodology used to understand the economy as a whole. Criticism has been levelled at the assumptions employed in the dominant models, particularly that economic agents are homogeneous and optimising and that the economy is equilibrating. This paper seeks to explore an interdisciplinary approach to macroeconomic modelling, with techniques drawn from other (natural and social) sciences. Specifically, it discusses agent-based modelling, which is used across a wide range of disciplines, as an example of such a technique. Agent-based models are complementary to existing approaches and are suited to answering macroeconomic questions where complexity, heterogeneity, networks, and heuristics play an important role.

 Lots of stuff to figure in the paper..

As cryptocurrency debates heat up, traditional banknotes are revving up their technology as well

November 29, 2017

Nice interview of Dr Mang of Louisenthal (HT: J.P. Koning, who else?).

It is a subsidiary of technology company Giesecke & Devrient, is a recognised leading international manufacturer of banknote paper, security paper and security features. We know so little about these firms which are behind the world monetary economics.

Trends and Insights: There are various substrates on the market. Why should central banks choose the HybridTM banknote?
Dr. Thomas Mang: HybridTM banknotes are ideal for challenging conditions. By uniting cotton and polymer banknote technologies, we have succeeded in creating a perfect composition. HybridTM banknotes combine proven security with a considerably longer service life – and the result is a banknote that is slow to soil, does not become limp, and yet still enjoys the trust of the population because of its similarity to the well-known cotton banknotes.

What does the combination of different materials actually look like?

The easiest way to understand the special structure of a HybridTM banknote is to imagine a cross section. The inner cotton core is surrounded by a polymer film to which a special printable layer is applied.

This is how the picture is:


How old style chits still work as money: A case from Bangalore Buses..

November 28, 2017

With all this rise of digital/crypto currencies, the world is increasingly becoming complicated to figure. So stories of simple money forms are always welcome.

Rajagopalan Venkataraman of Times of India writes on how a Bangalore city bus conductor manages the currency show in his/her bus economy:


What the world’s Central Banks really think about bitcoin: A summary

November 28, 2017

Eric Lam sums the views of quite a few monetary authorities on bitcoin/cryptocurrency. Fair bit of variety in the views..

If central banks cannot provide anonymous payments in digital currency world, they should give up their monopoly

November 28, 2017

Tyler Cowen recently started this debate recently where he said central banks should mint their own cryptocurrency or not. Cowen said central banks should keep away from the cryptocurrency space as they are conservative bureaucracies which shall kill all innovation.

There was a response from David Andolfatto disagreeing with Cowen and says currency is a central bank game and they will have to eventually play it.

And then there is this post by JP Koning who manages to sum up issues on monetary economics really well. In this new post, he says central banks have been focusing all this while on monetary stability which is obvious. But they came into being monpolising currency function and anonymity was central feature of their issued currency. But this was long ago and central banks neither more remember nor care much for this function as they take it for granted.

Now for the first time in many years they have to rethink on this currency function as cryptocurrencies are providing competition:


100% gold standard vs fractional gold standard

November 27, 2017

An old piece written by Henry Hazlitt in 1979 who wrote the famous book: Economics in One Lesson.

He says we moved from a pure gold standard where money would be created backed by 100% gold reserves to a fractional one where only 50% or lower gold reserve was needed. This move to full backing to fractional backing sowed seeds for multiple monetary and financial crises:


Research on cash usage…

November 27, 2017

There are three research pieces looking at cash and other means to make payments.

First is this blogpost by  John Williams (President of San Francisco Fed) and Claire Wang. Second is this paper by ECN economists Henk Esselink and Lola Hernández on cash usage in Euroarea. Third is RBI Memo which looks at how non-cash transactions are rising across the country.

First the San Francisco Fed Blog says cash usage remains high and its death is widely exaggerated:


How to get rid of banking supervisors?

November 24, 2017

Central bankers are increasinly talking about culture, incentives etc. There have been two recent speeches which revisit these topics using bank supervision lens. First by Norman Chan of HKMA and second by Andreas Dombert of ECB.

Norman Chan of HKMA in this speech goes back to banking history when there were no banking supervisors:


When do people prefer to use coins and when they prefer to use cards for small payments?

November 23, 2017

Superb paper (minus all the modelling) in Bank of Canada series by Heng Chen, Kim P. Huynh and Oz Shy.

They look at this simple problem. When do people prefer to pay via notes/coins and when via card? When you expect to get a lot of coins in return you pay via card. If not, then via cash/coins:


50 years ago: When banks closed for two days in Pakistan following devaluation on 19-Nov-1967..

November 21, 2017

India devalued the Rupee in 1966 amidst fair bit of drama.

Pakistan followed in 1967 with its own set of drama:


When the definitive history of demonetisation is documented, RBI’s valiant defence of financial stability hopefully gets its due?

November 21, 2017

It is like when the kings force war onto its people and then saying look how well I defended you.

RBI Executive Director and MPC member Michael Patra in this speech reviews one year of RBI’s Monetary Policy Committee and comments:


Open your eyes to (the ills of) Federal Reserve

November 20, 2017

For a moment one thought this piece would have been written by an economist who was a follower Austrian School.

But it is written by Joel Thornton who is a businessman in Tallahassee. He says Federal Reserve is the “greatest business monopoly and swindle in the history”.


Bernanke, Geithner, Paulson to lead new project explaining decisions of financial crisis…

November 17, 2017

One does not know how to react to such research projects. When the chief actors during the 2008 crisis get to figure what was behind their very decisions:

Ten years after the onset of the worst financial crisis in generations, the first-person “we were there” accounts by the those who led the rescue have been published, journalistic accounts have been written—and even turned into made-for-TV movies—and the Financial Crisis Inquiry Commission has disbanded after publishing its report on the causes of the crisis.

But in one important respect the record is incomplete: There is no coherent and detailed explanation of the dozens of design decisions the first responders made as they crafted the many rescue and stabilization programs. Why, for instance, did the Federal Reserve conduct auctions for its Term Auction Facility on Mondays, but provide winning banks the cash on Thursdays instead of immediately? (So no one would conclude that a bank that borrowed this way was so desperate that it needed the cash to open the next morning.) More generally, what options were rejected and why? In hindsight, what worked as anticipated and what did not? Besides completing the historical record, answers to such questions may clear up some lingering controversies and may prove useful the next time the U.S. or any other country confronts a severe financial crisis.

To fill that gap, the Hutchins Center on Fiscal and Monetary Policy at Brookings has teamed up with the Yale Program on Financial Stability to commission papers from those who crafted the rescues in the Bush and Obama administrations and the Federal Reserve.

The project will be led by former Treasury secretaries Tim Geithner and Hank Paulson and former Fed Chair Ben Bernanke, and will culminate in the presenting of research at a Brookings conference close to the tenth anniversary of the crisis on September 11 and 12, 2018. The conference will end with reflections by Messrs. Bernanke, Geithner and Paulson. My colleague, J. Nellie Liang, Miriam K. Carliner Senior Fellow in Economic Studies at Brookings and former director of the Fed’s Division of Financial Stability, will serve as editor for the papers.

Scholars will be studying and writing about the causes and consequences of the global financial crisis and the Great Recession for decades to come.  We hope the unique nature of this project—the first-hand accounts by those who were in the trenches—will inform that work.

Looking forward to this…

A closer look at history of small denomination coins…

November 16, 2017

Nice post by Hillery York. It also has a picture of the Lydia coin, the first ever coin produced.


Great Depression research remains the holy grail..

November 15, 2017

Bernanke called Great Depression the holy grail of macroeconomics.  It is perhaps one of those few events despite being historical continues to inspire so much research after all these years. Books continue to be written and debated vigorously on the crisis .

Came across two recent posts in this regard:

  • David Glasner argues how Friedman was not the first to argue about France’s role in gold standard which eventually was one of the key reasons for the Depression to become global. Lots of history of monetary thought in the post.
  • In another post, Robert Murphy says Gold Standard was not responsible for Depression.

Phew…Keep breaking heads over it…

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