Archive for the ‘Economics – macro, micro etc’ Category

Modern Monetary Disasters (Examples from Latin America)

May 21, 2019

Prof Sebastian Edwards of UCLA in this piece:

MMT, or some version of it, has been tried in several Latin American countries, including Chile, Argentina, Brazil, Ecuador, Nicaragua, Peru, and Venezuela. All had their own currency at the time. Moreover, their governments – almost all of which were populist – relied on arguments similar to those used by today’s MMT supporters to justify huge increases in public expenditure financed by the central bank. And all of these experiments led to runaway inflation, huge currency devaluations, and precipitous declines in real wages.

Four episodes in particular are instructive: Chile under President Salvador Allende’s socialist regime from 1970 to 1973; Peru during President Alan García’s first administration (1985-1990); Argentina under Presidents Néstor Kirchner and Cristina Fernández de Kirchner from 2003 to 2015; and Venezuela since 1999 under Presidents Hugo Chávez and Nicolás Maduro.

In all four cases, a similar pattern emerged. After the authorities created money to finance very large fiscal deficits, an economic boom immediately followed. Wages increased (helped by substantial minimum-wage hikes) and unemployment declined. Soon, however, bottlenecks appeared and prices skyrocketed, in some cases at hyperinflationary rates. Inflation reached 500% in Chile in 1973, some 7,000% in Peru in 1990, and is expected to be almost ten million percent in Venezuela this year. In Argentina, meanwhile, inflation was more subdued but still very high, averaging 40% in 2015.

The authorities responded by imposing price and wage controls and stiff protectionist policies. But the controls did not work, and output and employment eventually collapsed. Worse still, in three of these four countries, inflation-adjusted wages fell sharply during the MMT-type experiment. In the periods in question, real wages declined by 39% in Chile, 41% in Peru, and by more than 50% in Venezuela – hurting the poor and the middle class.

In each case, the central bank was controlled by politicians, with predictable results. In Chile, the money supply grew by 360% in 1973 alone, helping to finance a budget deficit equivalent to an astonishing 24% of GDP. In Peru in 1989, money growth was 7,000%, and the fiscal deficit exceeded 10% of GDP. In Argentina in 2015, the deficit was 6% of GDP, with the annual rate of money creation surpassing 40%. And Venezuela currently has a deficit of 32% of GDP, with the money supply estimated to be growing at an annual rate of more than 1,000%.

As inflation increased in these countries, people greatly reduced their holdings of domestic money. But because governments required taxes to be paid in local currency, it did not completely disappear. Instead, the speed at which money changed hands – what economists call “velocity of circulation” – increased dramatically. No one wanted to be holding paper money that lost 20% or more of its value every month.

When the demand for money collapses, the effects of money growth on inflation are amplified, and a vicious circle develops. One serious consequence is that the currency depreciates rapidly in international markets. MMT supporters conveniently ignore the simple fact that demand for local money declines drastically when its value tumbles. Yet this is perhaps one of the theory’s biggest weaknesses, and one that makes it extremely risky for any country to implement.

The experience of Latin America should serve as a clear warning for today’s MMT enthusiasts. In a variety of countries, and at very different times, fiscal expansions that were financed by printing money resulted in an uncontrollable loss of economic stability. Economic-policy ideas are often as dangerous in practice as they are flawed in theory. MMT may be a case in point.

Hmm..

One key thing which MMT bashers miss is the context. MMT is being suggested in countries such as  US where despite record deficit levels, interest rates on government bonds have been low. Another point is this whole governance bit. In Latin America kinds of cases lot of this money was used not for any economic gains but for politicians gains and was a very different political game. Third, it is unlikely US Dollar will depreciate as sharply as it did in these economies. Most of US borrowings are in their own currency and depreciation will not effect them as much as it affected all these Latam countries.

MMT has its limitations for sure. But so is it the case with mainstream macroeconomics. Infact, both have similar diagnosis. The mainstream macroeconomics guys also say despite record debt levels, interest rates remain low. Hence, fiscal policy can be expanded to take advantage of this situation with central banks playing a supporting role.  MMT folks say the same and bring central bank directly into the picture.

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Why do central bankers buy and collect art?

May 21, 2019

Jens Weidmann of Bundesbank in this speech:

It gives me great pleasure to join you here today in opening this exhibition of artworks from the collections of the National Bank of Belgium and the Deutsche Bundesbank. I must say, this is an impressive and exceptionally pleasing space for an exhibition of this kind. We jumped at the chance of sending exhibits from our collection on a journey to Brussels, to our friends at the National Bank of Belgium in the capital city of Europe. It’s a premiere for us – never before have we shown our works outside Germany.

Both the National Bank of Belgium and the Bundesbank have been avid collectors of art for many decades now. Over the years, we have each gathered quite sizeable collections which shed some light on how art has evolved in Belgium and Germany. But why do central banks collect art in the first place? There are two reasons for that. First, because we’re looking to engage with society at large. As public institutions, we have a sense of commitment to the arts and culture in our respective countries. Second, we also feel that it is crucial to incorporate art into working life, because that brings our colleagues, and our guests and visitors, too, face to face with artistic expression. So over the years, collecting and exhibiting art has become part of our institutions’ DNA.

Encountering artworks on an everyday basis makes art part of our routine, a commonplace occurrence in our daily lives. Not just that: art also has the ability to surprise, challenge and inspire us. It lets us see things from a different angle and opens up a world beyond our own horizons. And in my experience, it can quite often be a cue for some fascinating conversations.

This exhibition now marks our own attempt to spark a special type of dialogue. Not just between visitors and the artworks, but also between two art collections which have evolved at two similar institutions in neighbouring countries. And that’s what makes the title of this exhibition – “Building a Dialogue” – so apt.

In this day and age, it’s certainly not a question of finding out what aspects of the collections are “typically Belgian” or “typically German”. Not least because artists in Europe, as we know, have been seeking to build a dialogue across national borders for centuries now. And yet for all that, it’s interesting to observe how well the works from the respective collections complement each other, and how the individual artistic statements interact.

Well, central banks also have the money!

Venezuela crisis leading to food shortages in Cuba…

May 20, 2019

One usually sees how financial crisis in one country moves to other.

This article shows other kinds if interlinkages working. Venezuela’s economic crisis is leading to a food crisis in Cuba:

At first, flour was missing. So by the end of 2018, buying bread or cookies was hugely difficult. Around Christmas, red flags were waving about continuing shortages. The price of pork, the symbolic Dow Jones of Cuba’s domestic economy, skyrocketed, and by last month it had reached 70 Cuban pesos (CUP) per pound (€2.30; $2.60), two days worth of wages for the average Cuban professional.

Chicken and typical dishes such as Cuban picadillo — made with ground meat — hamburgers and hot dogs all rose in price. Hot dogs have been a regular meal for hundreds of thousands of families for years, since at a little more than one euro for a package of 10 hot dogs, they offered the best value for money.

The government has attributed the lack of food to problems with international providers, the poor state of the milling industry, which processes imported wheat, and has blamed hoarders for making it harder for everyone to have enough goods. It avoids using the word “crisis” and has also censored the national media’s use of the term “Special Period,” the euphemism under which the economic disaster that followed disintegration of the socialist model in the 1990s was known.

Fridges remain empty as the ideological discourse has intensified. Incendiary rhetoric seeks to blame the shortages on the US embargo, even as economists and analysts agree that the real cause is Venezuela, which has cut back significantly on its oil shipments to the island.

Havana used to resell a portion of that oil on the international market for cash, which meant a lifeline for an economy with little productivity and an excessive state apparatus that is inefficient and expensive to maintain.

Hmm…

Evolution or revolution: What next in macroeconomics?

May 20, 2019

Olivier Blanchard and Lawrence Summers have edited a book: Evolution or Revolution?  Rethinking Macroeconomic Policy after the Great Recession.

They share the afterword on voxeu:

 

Who wants a central bank job?

May 18, 2019

Debut piece for Business Standard.

I discuss how and why central bankers’s positions and authorities are being undermined in interesting ways across the world..

Can the three musketeers click? Finance, technology, trust

May 16, 2019

Ravi Menon, Managing Director of Monetary Authority of Singapore in this speech names Finance, technology, trust as the three musketeers:

  • Set in the 17th century, the novel recounts the journey of D’Artagnan, who left for Paris to join the Musketeers of the Guard, and how he overcomes all adversities.
  • Together with him are three musketeers with contrasting personalities:
    • Athos who is intelligent;
    • Porthos who is adventurous; and
    • Aramis who is true and faithful.
  • But together they form a well-balanced trio that supports D’Artagnan on his journey.

The three musketeers today are Finance, Technology, and Trust, corresponding to Athos, Porthos, and Aramis.  Society is D’Artagnan. 

  • Can the three modern musketeers work together to support Society? 
  • Can they complement one another?  Can they click?

Finance is Athos, Tech is Porthos and Trust Aramis:

Like Athos, Finance is wise but can be complicated, and to some extent, mysterious and non-accessible to many people.  As a result, Finance – at least in its traditional form – is losing its appeal.

Technology is akin to Porthos, the fearless musketeer who is eager to try new ways for a better future.  In a similar vein, Technology presents us opportunities to revitalise Finance.

Trust is similar to Aramis, the third musketeer who is faithful and values friendship. Trust is a key attribute for the success of a financial ecosystem.

Hmm..Nice way to present the complex ideas…

Some lessons from cricket to tackle development constraints

May 15, 2019

Niranjan in Mint writes on how fast bowling has emerged and risen in India.

He compares the rise to development economics:

The dominant view in India during our long decades of fast bowling drought was that it was a lost battle. All sorts of pessimistic explanations were bandied about. The Indian weather is too hot for fast bowling. A country where meat eating is uncommon will be unable to produce the muscular young men needed to hurl the ball at opposing batsmen. A culture rooted in the principle of non-violence does not have the attitude needed to bowl a bouncer aimed at the head. Indian soil is too loose to have pitches that support fast bowling.

Many of these cultural or geographical explanations may have seemed convincing back then, very similar to how experts were pessimistic about Asia’s development prospects after World War II. A couple of American academics even wrote in 1967 that the US should send food aid only to countries that could be saved; it was prudent to let overpopulated countries such as India starve. This was just years before India broke the hunger barrier with the Green Revolution.

The Indian fast bowling renaissance in recent years would have been impossible if the cultural or geographical explanations had indeed been so potent. An editorial published in this newspaper in May 2018 rightly pointed out that the turning point was the emergence of Kapil Dev—the sort of historical accident that economists write about when thinking about economic development. He proved that it was possible to match the best in the world.

Then policy took over. One important milestone was reached when the MRF Foundation got Lillee to coach young fast bowlers after 1987. Think of this as technology transfer. Many of the best Indian fast bowlers after 1990 came from within this system. Suddenly, you had Indian opening bowlers who could make good batsmen duck in a hurry. More youngsters followed the path as they saw Indian quickies getting their due. The pitches in some recent Ranji Trophy seasons got greener. The IPL opened another window of opportunity for young fast bowlers in India.

An entire ecosystem is now in place to nurture Indian fast bowlers. The role of cultural or geographical factors are indeed important—but they can be overcome if there is effective policy support, the spread of new ways of doing things and an initial big push to overcome the older path dependence. The broader lessons of development economics are actually not very different from the broader lessons from the Indian fast bowling renaissance.

Just hoping we don’t lose sight over our potent weapon of spin bowling…

RBI’s once used multiple indicator approach is becoming preferred approach for EME monetary policy…

May 15, 2019

BIS chief Agustin Carstens in this speech reviews monetary policy framework in emerging markets.

He says it was thought that have an inflation target and allow the currency to float and find its own level.  However, this approach is not what emerging markets have strictly followed:

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Models, Markets, and Monetary Policy: From Friedman to Taylor to Data dependent policy

May 14, 2019

Nice speech by Richard Clarida.

Let me set the scene with a very brief—and certainly selective—review of the evolution over the past several decades of professional thinking about monetary policy. I will begin with Milton Friedman’s landmark 1967 American Economic Association presidential address, “The Role of Monetary Policy.”2 This article is, of course, most famous for its message that there is no long-run, exploitable tradeoff between inflation and unemployment. And in this paper, Friedman introduced the concept of the “natural rate of unemployment,” which today we call u*.3 What is less widely appreciated is that Friedman’s article also contains a concise but insightful discussion of Wicksell’s “natural rate of interest”—r* in today’s terminology—the real interest rate consistent with price stability.

But while u* and r* provide key reference points in Friedman’s framework for assessing how far an economy may be from its long-run equilibrium in labor and financial markets, they play absolutely no role in the monetary policy rule he advocates: his well-known k-percent rule that central banks should aim for and deliver a constant rate of growth of a monetary aggregate. This simple rule, he believed, could deliver long-run price stability without requiring the central bank to take a stand on, model, or estimate either r* or u*. Although he acknowledged that shocks would push u away from u* (and, implicitly, r away from r*), Friedman felt the role of monetary policy was to operate with a simple quantity rule that did not itself introduce potential instability into the process by which an economy on its own would converge to u* and r*.4In Friedman’s policy framework, u* and r* are economic destinations, not policy rule inputs.

Of course, I do not need to elaborate for this audience that the history of k-percent rules is that they were rarely tried, and when they were tried in the 1970s and the 1980s, they were found to work much better in theory than in practice.

….

That vacuum, of course, was filled by John Taylor in his classic 1993 paper, “Discretion vs. Policy Rules in Practice.” Again, for this audience, I will not need to remind you of the enormous impact this single paper had not only on the field of monetary economics, but also—and more importantly—on the practice of monetary policy. For our purposes today, I will note that the crucial insight of John’s paper was that, whereas a central bank could pick the “k” in a “k-percent” rule on its own, without any reference to the underlying parameters of the economy (including r* and u*), a well-designed rule for setting a short-term interest rate as a policy instrument should, John argued, respect several requirements.

Hmm..

 

Is all economics local?

May 13, 2019

Interesting speech by Andy Haldane of Bank of England.

The speech uses lots of interesting data and graphs to understand local economy of UK. There are all kinds of patterns which suggest income inequality both between and within UK regions. The location matters a lot to well-being.

In his speech, our Chief Economist Andy Haldane looks at the economy at the local level. He uses data maps to show how peoples’ experiences of income, wealth, health and wellbeing vary depending on where they live.

Andy then considers how the latest developments in economic modelling and data could help give us a clearer, bottom-up picture of what’s happening in the economy.

Finally, he explains what we’ve been doing to make the Bank of England more engaged with what’s going on in local communities.

 

Targeting financial stability: macroprudential or monetary policy?

May 10, 2019

David Aikman, Julia Giese, Sujit Kapadia and Michael McLeay in this ECB paper look at this question:

Monetary and macroprudential policies are set with reference to economic and financial cycles. This paper develops a simple macroeconomic model with the possibility of a financial crisis that describes how interest rates and macroprudential policy – as captured by the countercyclical capital buffer (CCyB) – interact in response to different shocks. It characterises situations in which the policy instruments move in the same, and in the opposite, direction. And it considers the appropriate design of policy under a range of potential shocks and challenges which policymakers may face.

First, the paper finds that there are minimal gains from monetary and macroprudential policy being set by a single policymaker compared with two distinct policymakers, one with a monetary policy objective and the other with a macroprudential policy objective.

Second, the paper shows that if monetary policy becomes constrained by the effective (zero) lower bound to interest rates, the trade-off faced by policy makers is worse because the CCyB must balance both objectives.  In particular, it should be activated later than otherwise, because its demand costs are larger without monetary policy to offset them.

Third, the paper explores a case in which there are leakages from tight macroprudential policy applied to banks into greater credit growth in the marketbased finance sector.The presence of market-based finance limits the effectiveness of the CCyB relative to monetary policy which affects all sectors equally and so it should be used less actively in the face of a credit boom.

In a final extension, the paper explores the risktaking channel of monetary policy. Tightening the CCyB is, by assumption, now less effective in constraining credit growth as low interest rates continue to induce high risktaking. But the CCyB remains a somewhat effective tool as it still improves resilience.

Hmm…

 

Iceland economy since the 2008 crisis

May 10, 2019

Iceland economy was one of the worst effected during the 2008 crisis.

Már Guðmundsson, outgoing Governor of the Central Bank  faced much of the brunt. In this final speech reviews the developments since 2008.

First, the crisis:

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Nominal GDP Targeting as “Optimal Monetary Policy for the Masses”

May 8, 2019

St Louis Fed President James Bullard in this speech says NGDP targeting is an optimal mon pol for the masses.  The speech is based on this co-written paper.

In this blogpost, he explains the essence of the paper. The current models are silent on how mon pol leads to distribution and inequality:

Since the financial crisis, the topic of income inequality has become more important in monetary policymaking circles. In particular, monetary policy has been criticized as redistributing income to various parts of the population.

Along with income inequality among households, consumption inequality and financial wealth inequality are important considerations. Wealth inequality tends to be higher than income inequality, which tends to be higher than consumption inequality.

Many models used to assess the aggregate implications of monetary policy assume a representative agent. That is, a single household is meant to represent the distribution of households, and that household could be the median or average along some characteristic, for instance.

By construction, these models are silent on the redistribution effects of monetary policy. Instead, our model includes substantial heterogeneity (or differences) among households in terms of consumption, income and financial wealth and allows us to study the distributional effects of monetary policy.

In their paper, they work around addressing inequality:

The model in our paper is an extension of the model in a paper with Aarti Singh.2 In these models, private credit markets play an important role in reallocating uneven income across the life cycle so that people can consume smoothly. As a practical matter, we can think of privately issued debt as similar to mortgage-backed securities.

However, there is a problem with the credit markets—households borrow in nominal (rather than real) terms and pay a nominal interest rate, neither of which depends on the state of the economy. This imperfection in the credit market is referred to as “non-state contingent nominal contracting.” This is an issue because optimal allocations of resources require contracts to be tied to the realization of aggregate productivity shocks.

Monetary policy fixes this problem in the credit markets by adjusting the aggregate price level in response to aggregate productivity shocks, which makes the nominal contracts real and state-contingent. The optimal monetary policy in these models is something very close to nominal GDP targeting because it calls for countercyclical price-level movements. To keep nominal GDP on its targeted path, the monetary policymaker would follow a policy rule whereby inflation would be relatively high when growth is low and it would be relatively low when growth is high.

In our recently released paper, the new aspect is the substantial heterogeneity among households. The amount of consumption, income and wealth inequality generated by our model is close to that in U.S. data, as measured using Gini coefficients. Nevertheless, in this environment, the optimal monetary policy—nominal GDP targeting—fixes credit markets for all agents.

Hmm..

 

The Empire Marketing Board, 1926-33: Britain’s failed attempt at soft trade policy

May 6, 2019

David M. Higgins and Brian Varian in this interesting research:

Pakistan fires its central bank Governor and appoints a new one

May 6, 2019

The weekend was action packed in Pakistan. The Government removed both the central bank governor and head of Tax body:

Pakistan’s government has fired the governor of the central bank and the chairman of the tax collection body, two senior government officials told Reuters on Friday, in another setback to efforts to tackle economic turmoil.

The removal of the two comes only weeks after Finance Minister Asad Umar was asked to step down amid vital bailout negotiations with the International Monetary Fund, suggesting the government wants to overhaul its financial team amid weakening growth rates and soaring inflation.

“The government has decided to remove the governor of the State Bank and the chairman of FBR,” a Finance Ministry source said, referring to State Bank of Pakistan Chairman Tariq Bajwa and Federal Bureau of Revenue Chairman Jahanzeb Khan. A source at the prime minister’s office confirmed both had been sacked.

Central bank spokesman Abid Qamar told Reuters that Bajwa had “resigned”, and that it was unclear who would replace him.

Bajwa, appointed governor in 2017 during the tenure of the previous government, was one of the key figures in Pakistan’s ongoing bailout negotiations with the IMF. He was also seen to be close to Ishaq Dar, the former finance minister who appointed him and who championed a “strong rupee” policy that many analysts blame for Pakistan’s current economic woes, including ballooning budget and current account deficits.

The Government appointed a new Governor – Dr Reze Baqir,of IMF:

Dr. Reza Baqir has assumed the charge of Governor State Bank of Pakistan after President of Pakistan appointed him as Governor State Bank of Pakistan for a period of three years in pursuance of Section 10(3) of the State Bank of Pakistan Act 1956.

Dr. Reza Baqir has eighteen years of experience with the IMF and two years with the world Bank. He was the Head of the IMF’s Office in Egypt and Senior Resident Representative since August 2017. He has also held positions as IMF Mission Chief for Romania and Bulgaria, Division Chief of the IMF’s Debt Policy Division, Head of the IMF delegation to the Paris Club, Deputy Division Chief of the IMF’s Emerging Markets Division, IMF Resident Representative to the Philippines, and numerous other positions.

Dr. Baqir’s research has been published in top journals of the economics profession, including the Journal of Political Economy and the Quarterly Journal of Economics. Dr. Baqir holds a Ph.D in Economics from the University of California at Berkeley and an A.B. (Magna cum Laude) in Economics from Harvard University.

Not surprisingly, the opposition parties have called the appointment as new colonisation:

Pakistan Peoples Party Senator Raza Rabbani on Sunday branded the International Monetary Fund (IMF) as the “new East India Company”, adding that the appointment of the Fund’s Dr Reza Baqir as new governor of the State Bank of Pakistan (SBP) was “deplorable” and akin to “colonisation of Pakistan by international financial imperialists”.

The former Senate chairman said that “the SBP governor being an employee of the Fund which is giving a bailout package is a conflict of interest as it is obvious that his loyalties will not be with Pakistan.”

He said “it is a matter of shame that provincial finance ministers were made to appear before a middle ranking officer of the IMF (Baqir) and make promises of good behaviour.”

Rabbani said that Baqir’s appointment coupled with Dr Abdul Hafeez Shaikh’s induction into the cabinet as the prime minister’s adviser on finance means that the IMF has its “men in place” and “Pakistan’s financial sovereignty and national security has been compromised.”

The senator’s sentiments were also echoed by PML-N Vice President Maryam Nawaz, who in a series of cryptic tweets suggested that the government has surrendered the economy to the IMF.

“We will not go to the IMF; we will instead call the IMF here and hand over Pakistan to them,” Nawaz said, sarcastically referring to Prime Minister Imran Khan’s pre-election statements of never asking the Fund for another package when in power.

How politicians first mess up economy and then look for scapegoats. And how most of the time the scapegoat is the central banker who most likely would have warned of the economic mess for a while.

Finance and monetary policy beyond neoliberalism: The way ahead for emerging markets

May 3, 2019

Rakesh Mohan in his new paper:

Broad consensus had been achieved around dominant neoliberal thinking in relation to financial sector regulation and monetary policy in the two decades leading up to the North Atlantic financial crisis (NAFC) that erupted in 2007-08. Whereas this thinking was essentially developed and applied in the advanced economies (AEs), similar policy prescriptions were advocated for emerging market economies (EMs). The general view was based on two theoretical propositions: the Efficient Markets Hypothesis (EMH) and the Rational Expectations Hypothesis (REH). “The EMH defines an efficient financial market as one in which securities prices fully and rationally reflect all available information…”[1] The REH “proposed that individual agents in the economy—be they individuals or businesses—operate on the basis of rational assessments of how the future economy will develop.”[2] Based on the belief that financial markets operate efficiently, it was assumed that free competition in financial markets would result in the efficient allocation of capital across the economy, and hence promote growth. And belief in the REH suggested that both individuals and financial institutions are capable of managing risks. The corollary was that regulation should be light touch only. [3]

Continued development of financial markets should therefore be encouraged; increasing financial depth and intensity is good for promoting economic growth, along with financial inclusion; and continued financial innovation helps price discovery, which promotes efficiency in the allocation of financial resources. “The pre-crisis orthodoxy was built on the idea that even if financial markets were in some ways imperfect, market liberalization and competition would at least bring us closer to perfection.”[4] Such a theoretical view saw the economy and financial markets as being inherently self-stabilizing and efficient in allocating resources. A process of financial deregulation and deepening was therefore the order of the day, starting in the 1980s and lasting till the NAFC. Policy advisers to EMs and policymakers in EMs were not immune to this dominant strand of thinking.

Although this period was characterized as the Great Moderation, since the advanced economies experienced relatively consistent growth and low inflation, significant financial instability was experienced in different jurisdictions. Approximately 100 crises occurred during the 30 years before the NAFC, during which financial liberalization policies were dominant.[5]Over this period, the financial sector grew much faster than the real economy in the advanced economies: private sector debt grew from around 50 percent of GDP in 1952 to 170 percent by 2006; trading in foreign exchange markets grew much faster than exports and imports; trading in commodities exceeded growth in commodity production; gross cross-border capital flows grew far in excess of investment; and financial innovation flourished with the introduction of widespread securitization and derivatives.[6] The financial sector began to serve itself much more than the needs of the real economy. This relative explosion in financial sector development across the world was clearly not reflected in the real economy.

The excessive growth in overall debt and leverage in financial institutions, explosive growth in cross-border capital flows, along with the development of global macro and financial imbalances, finally led to the outbreak of the NAFC. This shock, the worst financial crisis since the Great Depression, has been instrumental in raising fundamental questions with respect to basic tenets of the neoliberal financial order outlined above.

The key lesson from this crisis has to be that financial markets on their own are not necessarily efficient, stable, or self-correcting: “serious economic and financial crises can happen, even in low inflation advanced market economies.”[7]

Thus governments, central banks, and financial regulators have a crucial role to play in overall economic and financial sector regulation and management. Light financial regulation can no longer be sustained.

Hmm..

100 years of Keynes Economic Consequences of Peace: Lessons for today?

May 1, 2019

Mark Carney, Governor Bank of England revokes Keynes (who else) to drive home gains from technology:

A century ago, John Maynard Keynes resigned as a delegate to the Paris Peace Conference over his concerns about the scale of reparations in what would become the Treaty of Versailles. He returned home to write The Economic Consequences of the Peace. In that seminal work, Keynes marvelled that before the war:

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth… [or] adventure his wealth in the natural resources and new enterprises of any quarter of the world that fancy or information might recommend.”

Such global trade and portfolio management were made possible by new technologies ranging from the telegraph to the first transatlantic cable.

Replace “telephone” with “tablet” and “tea” with “turmeric latte” and you have not the start of the Twentieth Century but of the Twenty First. The second great wave of globalisation is cresting. The Fourth Industrial Revolution is just beginning. And a new economy is emerging driven by immense changes in technology, the reordering of global economic power, and the growing pressures of climate change.

Carney believes gains from technology would be better distributed this time:

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The predictive power of real M1 for real economic activity in the Euro area

April 30, 2019

ECB is of the few central banks which still looks at Money supply as an indicator of economic/price activity.

In this short research, Alberto Musso of ECB looks at power of real M1 on real economic activity in Euroarea. This graph shows real M1 follows the business cycle quite closely:

The leading and pro-cyclical properties of real M1 with respect to real GDP in the euro area remain a robust stylised fact. These properties, which can be found for the relationship between real narrow money and real economic activity in both levels and growth rates, have been documented in various publications for earlier time periods.[1] An illustration of such properties can be derived from a visual examination of monthly data from January 1970 to February 2019 for annual growth in real M1, which is defined as the nominal narrow money aggregate M1 deflated by the HICP. Specifically, it is notable that this growth rate went well into negative territory for prolonged periods just before (or in coincidence with) all historical euro area recessions, as dated by the CEPR Euro Area Business Cycle Dating Committee (see Chart A).

Chart A Real M1 annual growth and euro area recessions (annual percentage changes)

Real M1 growth is again moderating in 2019:

Turning to the current juncture, a formal econometric analysis based on probit models exploiting the predictive power of real M1 does not point to significant recessionary risks in the euro area for 2019 and early 2020. On the basis of data since 1970, the probability of a contraction in euro area real GDP derived from a probit model based on real M1 (lagged by 12 months) increased sharply before all previous euro area recessions (see Chart D), providing strong evidence of the usefulness of narrow money in predicting recessions in the euro area. Forecasts based on this model point to recession risks increasing slightly in 2019, from about 1% in January 2019 to between 5% and 7% in the second half of 2019 before falling to below 5% in February 2020, that is to say remaining very low (blue line). Controlling for the slope of the yield curve changes results only marginally (yellow line). Overall, the current level of real M1 growth is still comfortably above the zone that would be associated with risks of a recession in the near future.[4]

Chart D

Euro area recession probabilities based on probit models with lagged real M1

(percentages)

Hmm..

When RBI Played Angel Investor To India’s Early Financial Institutions

April 29, 2019

Last week, RBI transferred its stake in NABARD and NHB to the Government. Now RBI just has three subsidiaries on its balance sheet.

However, there is a long history of how RBI played the role of VC in developing India’s Financial Institutions of different kinds. Perhaps RBI is of the few central banks which are unique in this aspect.

My BQ piece (behind paywall) tracks this interesting journey, which is one of several in RBI’s history.

Modeling Financial Crises needs to include 4 facts

April 25, 2019

Pascal Paul in this research note (based on his bigger paper), that research on fin crises should include four empirical facts:

This Economic Letter describes four empirical facts about financial crises: (1) crises are rare, (2) they occur out of credit booms, (3) they are severe macroeconomic events, and (4) they are not necessarily the result of large shocks. Macroeconomic models of financial crises should replicate all of these features to accurately reflect what occurs around a typical crisis. The model in Paul (2019) reproduces these real-world regularities and illustrates how standard macroeconomic models can be extended to incorporate occasional financial crises. Such a framework provides a suitable laboratory for additional research that can help policymakers understand how to reduce the likelihood and the severity of future crises.

 


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