Archive for the ‘Speech / Interviews’ Category

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!


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:


What differentiates central bank approach of monetary policy from financial stability policy?

May 14, 2019

Sir Jon Cunliffe in this speech speaks about Brexit risks to UK.

In the speech he serves this useful reminder on what differentiates mon policy from financial stability policy:

It cannot be repeated too often that the Bank’s approach to its financial stability objective is, in one key respect, very different to its approach to its monetary
stability objective. For the latter, the Monetary Policy Committee makes the best forecast we can of the path of the economy and the path of inflation – the central case. We set out clearly and graphically the risks around those forecast, but it is the central case – what we think most likely to happen – that informs our policy decisions.

For financial stability, the focus of the Financial Policy Committee (FPC) is not on the central case – on what is most likely to happen; rather it is on the risks – on what could happen even if it is not the most likely scenario. It is the risks, what could happen, that inform our policy decisions.

A colleague of mine recently asked me why the financial stability side of the Bank was so gloomy, always pointing to risks on the horizon and seeing the glass as half empty at best? My answer was that it was our job to worry about what could plausibly happen – and to ensure that if it did happen, the glass did not
suddenly empty entirely.

This is important. Monetary Policy looks at the mean while addressing risks. Financial stability while looking at the mean has to look at risks. Clarifies a lot on how we think about the two sets of policies…

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.



Undermining Central Bank independence, the Cyprus way (reads much like India’s story!)

May 13, 2019

It has been 5 months since RBI Governor resigned from the central bank. A lot was written exploring several reasons which led to his sudden exit from the central bank. But much of it is still speculation and truth is known to either Governor or someone close to the scenes in the Government. However, there is one book which reads much like what could have happened between the RBI and the Government.

The concerned book is written by Dr. Panicos Demetriades, former Governor of Cyprus (May-2012 to Apr-2014) and is titled as ‘A Diary of the Euro Crisis in Cyprus’. It is highly surprising that such an account by a central banker has not got due attention. The book was written in 2017 and should be on top of the charts. There are other central bankers who have written their accounts recently. But neither had they faced experiences as telling as those faced by Demetriades nor wrote as frankly as Demetriades.  One reason for ignorance is Cyprus being a tiny economy. Even then the book is a must read for those interested in political economy of central banking.

I came to know of this book by reading a recent speech by Lesetja Kganyago, Governor of the South African Reserve Bank. Kganyago speaks on how central bank independence is under attack including South Africa (which requires a separate article of its own) and picks insights from this book to reflect on Cyprus experiences. The events which happened in Cyprus during those 2 years read as the events in India during 2016-18. The resemblance is so striking, that it leaves you in splits.

What happened in Cyprus which is so telling?

First some basics. Before 2008, Cypriot banking sector grew enormously to touch 10 times the size of its GDP. The banks had invested heavily in Greek government bonds as they gave higher yields. Further, Cyprus banks not just offered higher deposit rates but also lend aggressively towards real estate sector. One of the real estate developers even became chairman of one of the Bank Boards. The financial transactions were not limited locally but funds flowed from and to Russia, Ukraine and Romania, becoming a deadly cocktail at the end. The banks were also the main advertisers in the media leading to no one really raising fingers.

Though, this was hardly unique to Cypriot banks as we saw banks in Iceland, Ireland, and US etc. following similar strategies only to end up in crises. In Cyprus too, the Greece crisis and European financial crisis engulfed banking system of Cyprus which was anyways built on shaky foundations. What is unique though is what transpired later.

Enter Panicos Demetriades who was appointed Governor of Cyprus Central Bank in May-2012. He had taken over from Athanasios Orphanides, who in in his send-off remarked that though banking system was quite stable under his tenure but wasn’t sure what would happen next.

Talk about prophecy as what followed was complete meltdown of the Cypriot banking system. The blame lies on Orphinades as well, as the fragile banking system took shape under his tenure. Demetriades knew he was sitting on a time bomb and tried to figure a solution but could not succeed. The troika of IMF, ECB and European Commission wanted to implement stricter norms for recapitalization which were not agreeable to politicians. The banks remained highly undercapitalized, politicians continued to underestimate the scale of problem also on account of high cronyism. Gradually losses mounted and the share of non-performing loans as a percentage of total loans in Cyprus was next only to Greece. Even today the share of NPLs are as high as 20% of total assets.

As banking problems worsened, a scape goat had to be identified and who better than a central banker! The media anyways disliked Demetriades right at his appointment as he was seen as an outsider. Soon, the political parties joined this chorus. The politicians wanted Demetriades to be ousted but as Cyprus was part of Eurosystem and under this system the central bank governor could not be fired. The only way was to pressurize the central banker and push him towards resignation.

The Government did two major things (apart from humiliation) in mid-2013 which pushed Demetriades towards his resignation – firing the Deputy Governor who backed the Governor and pushing the governance powers from Governor to the Central Bank Board!  Under the new legislation, the Government expanded the Central Bank Board membership from 5 to 7 with the two new members becoming Executive Directors. Further, the decisions related to licencing of new and old banks were to be made by the Board and not the Governor. The ECB protested against this legislation but to no avail.

The new Board stopped backing the Governor and even the loyal staff started complaining of harassment. Demetriades began to tire eventually and health started to suffer. The personal attacks mounted even bringing his family into picture. In March-2014, he submitted his resignation citing “personal reasons and difficulties working with the Board as the reason for resignation. This way the government won not just the battle but also the war against its own appointed Governor.

The events in Cyprus showed how governments can undermine central bank independence in interesting ways. The rules prevented the Governor from being fired but one could still build the pressure through the Board and firing the Deputy Governor.

Given this brief, there is a reason why I mention that Cyprus case reads much like India’s case. The RBI Governor was under pressure for rising NPAs, low credit growth and maintaining high reserves, leading to discontent with the Government. There was news on how the powers of governing RBI had shifted from the Governor to the Board members. There were also reports on how Governor Patel was tired fighting these battles and his health was suffering. In the end, these multiple events forced him to resign, also serving for two years just like his Cypriot counterpart. The resignation letter of the Governor also mentions personal reasons but not saying anything else.

The German classical archaeologist Gustav Hirschfeld once said ‘He who would become and remain a great power in the East must hold Cyprus in his hand.’  Paraphrasing the quote, those who believe in great power of central bank independence, should hold and read this account of Cyprus central bank Governor in their hands! Hope Dr Urjit Patel writes his own account as well.

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.


Next generation of Islamic financial institutions: Leadership, values, ethics

May 3, 2019

Mr Adnan Zaylani Mohamad Zahid, Assistant Governor of the Central Bank of Malaysia in this speech talks about the nextgen ISlamic Financial Institutions:

The next generation of Islamic financial institutions would thus be driven by values and not just profit. With a moral outlook for the ultimate good, strengthened by self-discipline, greater accountability and integrity, Islamic financial institutions will have stronger consideration of the impact of decisions made. There should be greater drive to continuously improve their offerings and treatments towards customers and employees, which include fair and transparent disclosure in order to increase the positive impact of their activities. Development of banking practices based on VBI concepts are also anticipated to encourage the creation of new business opportunities and provide the foundation for better returns for Islamic banks over the long term. An example is assessment of financing application by Islamic banks based on value-creation instead of mere credit scoring which would benefit business propositions from new sectors such as SMEs. Another example is refocusing, strengthening and repositioning of personal financing by Islamic banks to best meet the needs and circumstances of customers.  In time, there may emerge greater differentiation between VBI and non-VBI institutions which will be better understood by shareholders, fund providers and financial markets more generally. Furthermore, the more comprehensive and holistic approach of VBI in advancing the good for society could prove to be a key competitive advantage that will influence and shape the future of the financial industry.

The drive for positive changes in the Islamic financial services industry however requires a major paradigm shift in many institutions. It takes a long view to recognise returns beyond financial profits where social and environmental gains are also highly valued. It will also take increasing professionalism and high quality talent that will contribute to this transformation of mind and culture. In Malaysia, we can readily leverage on the available Islamic finance talent development ecosystem, which has a comprehensive and diversified range of offerings, spanning tertiary and professional education, research, training and consultancy services which are globally-recognised. The implementation of VBI has already galvanised many stakeholders including institutions of higher learning such as the International Centre for Education in Islamic Finance (INCEIF) and International Shariah Research Academy (ISRA) to undertake impactful applied research that advances the implementation progress of VBI by the financial industry. Indeed, Islamic finance has greatly benefited through these institutions that have contributed towards enlarging the pool of Islamic finance professionals and deepening expertise through various programmes and initiatives. At the same time, these institutions have also grown in recognition. INCEIF for example, has been awarded the prestigious accreditation by the Association to Advance Collegiate Schools of Business (AACBS) International in recognition of its excellence in various areas, including its diverse programmes that have benefitted students from more than 80 countries.

Besides talent, strong and visionary leadership in particular at the Board and Senior Management will be crucial for success in this paradigm shift. This leadership and strong professionalism must continuously be complimented with the right ethics to transform the culture, systems and people. Nurturing talent also needs to be extended to the board level. In Malaysia, directors can gain greater appreciation on the dynamics of Shariah principles through programmes such as the Islamic Finance for Board of Directors Programme. This specialised Islamic finance training programme builds on the core foundations on corporate governance as set out in the Financial Institutions Directors’ Education programme. Directors would also be exposed to diverse perspectives from within and beyond the Islamic banking community on contemporary issues in the industry.

Let me conclude. The Islamic financial sector has made great strides over the recent decades. The next growth frontier in Islamic finance however lies in realising its potential to create greater socio-economic impact. Values and ethics, strongly instilled would strengthen trust between people and the system. For the Islamic finance industry, the move towards embracing VBI manifests the larger aspiration of Islamic finance. In shaping positive behaviour amongst industry players, Islamic finance can become a leading agent of change and bring about sustainable positive impacts to the economy and society. Translating this vision into reality then requires our collective efforts, steered by strong and capable leadership.

All financial sector is looking for similar values….

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:


Switzerland monetary policy since 2008: From one crisis to another

April 30, 2019

A spirited speech by Thomas J. Jordan, Chairman of the Governing Board of Swiss National Bank. He defends the policy of the central bank since 2008 which has moved from one crisis to another:

Ladies and Gentlemen, the global financial and economic crisis broke out eleven years ago,  and was followed by a marked decline in economic output and inflation. At that time, the SNB had to switch to an expansionary monetary policy stance in order to fulfil its mandate. We initially responded with conventional measures, and quickly lowered interest rates to virtually zero.

The global financial crisis was swiftly followed by the sovereign debt crisis in the euro area. The attendant uncertainty on the financial markets bolstered demand for the Swiss franc as a safe haven, thus putting appreciation pressure on our currency. To counter these upward forces, we had no option but to resort to unconventional means. We intervened on the foreign exchange market, and in September 2011 introduced a minimum exchange rate against the

From mid-2014 onwards, the international monetary policy environment began to change. On the one hand there were increasingly clearer signs that the US was about to adopt a tightening stance, whereas in the euro area a loosening of monetary policy was becoming more and more
likely. The euro subsequently depreciated markedly against the major currencies. As a result, by the beginning of 2015 the minimum exchange rate was no longer sustainable. To retain control over our monetary policy, we therefore decided in January 2015 to change tack. 

In that exceptional situation, we had to weigh up the pros and cons of using alternative unconventional instruments. It became apparent that we would have to lower interest rates below zero given that various other central banks had already done so. This was the only way we could limit the appeal of the Swiss franc. When we discontinued the minimum exchange rate, we thus also imposed negative interest of –0.75% on banks’ sight deposits held at the

This then brought the level of interest rates in Switzerland back down below that in other countries. Coupled with our willingness to intervene in the foreign exchange market as necessary, the negative interest rate has taken the pressure off the Swiss franc and prevented a sharp drop in inflation.

Pros and cons of negative policy rates:

What would happen if we were to simply stop charging negative interest in the current environment?

Dispensing with the negative interest rate would have a substantial impact on the Swiss economy. Swiss short-term interest rates would again be higher than in other countries, which would clearly increase the attractiveness of Swiss franc investments. This is turn would cause the franc to appreciate, which would be detrimental to economic momentum in Switzerland and would see unemployment rise and inflation pushed into negative territory.

If we stopped charging negative interest, would that at least be beneficial for savers, pension funds, life insurers and banks? The marked weakening in the economy would cast a pall over the earnings prospects of Swiss companies, and Swiss equities would come under pressure.

Although short-term interest rates in Switzerland would no longer be negative, there would be little change in capital market interest rates owing to the deterioration in the economic outlook. All in all, the level of interest rates would thus remain low, and so too would the yields on long-term Swiss franc bonds. Ultimately, there would be scarcely any significant improvement for savers, pension funds, life insurers and banks.

The same goes for the real estate market. Although its momentum would be curbed somewhat if we were to cease charging negative interest, there would be little change in the low level of interest rates and the impact would therefore be limited. In the current situation, the risks to financial stability must be addressed with focused macroprudential measures. This will then curb demand for mortgages and real estate and strengthen banks’ resilience.

Ladies and Gentlemen, abandoning the negative interest rate in the current environment would weigh heavily on the Swiss economy. This would not help either savers or pensionfunds, nor would it be beneficial for financial stability. In other words, as things stand at present, removing the negative interest rate would not be in the interests of our country as a whole.

The critics of central banking will tell you that it is the very SNB interventions which have led to these problems at the first place.

Janet Yellen’ journey from a Fed economist to Fed Chair…

April 25, 2019

Interview of Janet Yellen on Dallas Fed website. She holds a unique role in Fed History:

Janet Yellen holds a unique place in Federal Reserve history. In addition to being the first woman to lead the institution and chair the Federal Open Market Committee (2014 to 2018), she is also the only person to have served as a Federal Reserve bank president (at the Federal Reserve Bank of San Francisco, from 2004 to 2010), Fed Governor (from 1994 to 1997) and Vice Chair (from 2010 to 2014). It all began with a year as a humble Fed staff economist from 1977 to 1978.

For more details on Yellen’s career, read this detailed transcript as well at Federal Reserve website.

Why do we keep getting wrong in financial regulation: Complicated systems vs complex systems

April 24, 2019

A nice different speech by Brian Johnson of CFPB.

He asks this one question: Why do we keep getting this regulation bit wrong in finance? Why do we keep having crisis despite so much work on regulation? His answer is we have got the whole approach wrong. He brings concept of complicated systems vs complex systems:


Competence and not nationality should determine the next ECB chief…

April 23, 2019

Nice interview of Mr Benoit Couvre of ECB.

He says competence alone should be the basis for next ECB chief:


History of US Trade Policy as an instrument of Foreign Policy: Paradigm lost under Trump?

April 22, 2019

Came across this interesting speech by Alan Wolff, Deputy Director of WTO on February 5, 2018.

Wolff points how US has used its trade policy as a mix of foreign policy and economic policy:

For most of the last 100 years, the United States has entered into trade negotiations based upon the belief that open markets foster democracy which in turn supports the maintenance of world peace. This grand credo – that increased trade bolsters the prospects for peace – indicates that U.S. trade policy – aside from its announced goal the opening of foreign markets – has also had an important foreign policy component.  In fact, trade policy has been a bedrock of U.S. foreign policy dating from the Second World War.  If this is no longer the objective of U.S. trade policy, this largely unnoticed change in policy is nothing short of revolutionary. 

Some clarifications are in order to keep the overarching policy objective in perspective: First, the fact that this high foreign policy aim was embraced by political leaders did not regularly affect actual detailed trade negotiations. In the trenches, U.S. trade negotiators, at least for the last several generations, have apparently been oblivious to the greater purpose that their efforts served.  They simply sought to open foreign markets for U.S. goods, services, and investment.  Second, foreign policy objectives can be served not only by opening markets but, as has been the case, through weaponizing trade though the imposition of sanctions.

The question examined today is whether the grand article of faith – that obtaining more open markets leads to the creation of democracies which in turn improves the prospects for world peace – is still accepted U.S. dogma and whether it is operational as current policy.  If it is not, and the evidence suggests that this might be the case, the change in policy, is profound.  If there has been a loss of faith, it is likely to have occurred through erosion over time, and is not solely a question of a new administration coming into office as a result of the 2016 Presidential election. 

This paper attempts to trace the thread of trade policy for peace from its inception, and provide some evidence of whether somewhere along the way that policy was forgotten or discarded.  If so, it is a paradigm lost. 

Why is this so very important?  It means that the basis for U.S. support for the multilateral trading system must now be found in pragmatism, in narrower commercial self-interest, and perhaps much less if at all on the basis of America’s foreign policy interests. 

If the sole motivation for participation in the world trading system is obtaining reciprocity, can the system be maintained, much less improved?  Which countries will act and to what extent for the global public good?  This question is independent of providing “special and differential treatment” for developing countries.  The answer to the question of how much countries will be willing to act on the basis of a broader definition of national interest is fundamental to the well-being of all. 

He starts the history from Woodrow Wilson era where subsequent Presidents used trade policy to push foreign policy agenda. However, those on the other side would argue US used trade policy for neither foreign or economic purposes but to just puts its nose in all global matters.

Is Trump era doing a reversal of this trade driven agenda:

It is too early to judge what the foreign policy of the Trump Administration will be, nor anticipate the potential for interaction of this administration’s foreign and trade policies. (21)  What do we know so far?  I have not seen any reference to date from the Administration of its espousing the formula to which Woodrow Wilson, Franklin Roosevelt, and their successors subscribed to – namely that international trade fosters the growth of democracies which in turn leads to enhanced prospects for world peace. 

If there is a discontinuity, why did it occur?  What has changed? 

First and foremost, the current administration has announced that it intends to redress what are taken to be imbalanced trade relationships with other countries.  This, the primary announced goal of current U.S. trade policy, clearly resonates with a not inconsiderable number of American voters.  These supporters of the President, concerned with their own failure to participate in the benefits of globalization, are likely to believe that America has done enough for the world trading system.  More pointedly, in the view of some, it is time for America to be paid back for the investments it made for the global public good.  This is not a majority public view according to polling data.  Members of the American public, when asked whether they back free trade agreements, say that they do. (22)  There is not a lot of evidence of a widespread movement toward isolationism which critics of the Administration feared in the early days of this presidency.

Second, there is little belief at present, in American policy circles, that movement in the direction of free markets, at least in the foreseeable future, is accompanied by movement toward democracy.  The progress toward greater political freedom does not appear to be linked to rising standards of living and greater market orientation.

The WTO has 164 members.  By signing up to the WTO, the trade of each acceding country is freer than it otherwise would have been.  The trend to democracy, however, is not encouraging.  According to one source that measures progress toward democracy in the most recent period, seventy-one countries suffered net declines in political rights and civil liberties, with only 35 registering gains in 2017.  And 2017 marked the 12th consecutive year in which declines outnumbered improvements. (23)  According to the IMF, world GDP growth has averaged nearly 4% per year since 1980, including this eleven-year period. (24)  The march to prosperity does not seem to be in lockstep with the march to democracy based on present data. What the future holds, decades from now, is not available.  Suffice it to say that in the case of the largest developing country that joined the WTO, U.S. policy makers would not say that the paradigm is working. 

If freer trade is not leading to greater democracy, than the logic of free markets leading to democracy then peace, does not hold. 

third answer may be that it is felt the post war reconstruction has accomplished all that it could accomplish through trade.  The case is not being made that the Trans-Atlantic Trade and Investment Partnership (TTIP) is needed to shore up European security. (25)  During the Cold War, European reconstruction was seen as critical to preventing a slide to communist domination.  Similarly, trade is not seen as a foreign policy tool with respect to Japan.  During the Korean War, accelerated development of the Japanese economy was seen to be in America’s interest. 

The United States and China have massive bilateral trade and are at the same time enhancing their armaments as a priority for the contingency that these weapons may be needed primarily with respect to each other. The U.S. and China each view their major trading partner as a strategic competitor with which conflict is likely to occur.

The U.S. government does not see external threats to smaller countries where it has interests solved through enhanced trade.  As a result, it is not seeking trade agreements to bolster any particular regime, either because more is needed than a trade agreement, or nation building is no longer considered desirable or feasible, or both.  As an example, the stability of Mexico, a concern when NAFTA was being negotiated, has not been articulated as a current U.S. motivation for re-negotiation of NAFTA. 

Enhanced U.S. trade with Russia and Iran are not seen as practical inducements to change their current conduct in international affairs.

fourth answer may be that the U.S. does not have much more to give in terms of lowering trade barriers in an era where industrial tariffs are on average very low for all developed countries. (26)  The world of trade has become multi-polar.  The U.S. is no longer the largest trading country, and adding in the European Union as a whole, it is only the third largest trader.  


Lot more in the speech…

Lessons from the Greek crisis – past, present, future

April 16, 2019

Mr Yannis Stournaras, Governor of the Bank of Greece, looks at the lessons from Greek crisis:

Despite some missteps and delays and political resistance to the implementation of the required reforms, Greece has made notable progress since the start of the crisis in 2010. The implementation of a bold economic adjustment programme has eliminated several macroeconomic imbalances. Moreover, the economy is now recovering and has started to rebalance towards the tradable, export-oriented sectors. Nevertheless, significant challenges and crisis-related legacies remain (e.g. a high public debt ratio, a high NPL ratio, and high long-term unemployment), while the brain drain and underinvestment weigh on the long-term growth potential. To address these challenges, emphasis must now be placed on implementing the reforms described above. These reforms would facilitate the sustainable return of the Greek State to the international government bond markets and the rebalancing of the economy towards a knowledge-based and export-led growth model.

Finally, it is high time to take bold steps towards the completion of EMU, promoting greater political solidarity and fostering private and public risk-sharing. The next crisis should not find us unprepared and we should not rely solely on the ECB’s monetary policy to deal with it.


What it means for an economist to work in tech firms: Interview of R. Preston Mcafee

April 12, 2019

Tech firms are becoming ‘the workplace’ for economists.  This article reported how Amazon has hired 150 PhDs, Niranjan wrote a piece on the opportunities, Susan Athey also wrote on Economists in the tech space.

Here is an addition to this series of write-ups. Richmond Fed has a must read interview of R. Preston McAfee, who quit academia to work as an economist in firms such as Yahoo, Google and Microsoft.

He says the opportunities at tech firms provide opportunities to microeconomists:

EF: You were one of the first academic economists to move to a major technology company when you joined Yahoo as chief economist. You’ve since spent more than a decade as an economist at major technology companies. What has changed in the way that economic research is used in these firms?

McAfee: The major change is the relevance of microeconomics — the study of individual markets. 

Economists have had a big role in companies doing macroeconomics for forever, worrying about inflation, GDP, and how those broad aggregates influenced demand for the firm’s products. Microeconomists bring a very different skill set and answer very different questions.

That’s a major change in roles. Amazon, for instance, has more than 150 microeconomists. A really big thing there, and at Microsoft and at Google, is the problem of causality. Microeconomists have been studying how to get at causality — what caused something as opposed to what’s just correlated with it — for 40 or 50 years, and we have the best toolset.

Let me give an example: Like most computer firms, Microsoft runs sales on its Surface computers during back-to-school and the December holidays, which are also the periods when demand is highest. As a result, it is challenging to disentangle the effects of the price change from the seasonal change since the two are so closely correlated. My team at Microsoft developed and continues to use a technology to do exactly that and it works well. This technology is called “double ML,” double machine learning, meaning it uses machine learning not once but twice.

This technique was originally created by some academic economists. Of course, as with everything that’s created by academic economists, including me, when you go to apply it, it doesn’t quite work. It almost works, but it doesn’t quite work, so you have to change it to suit the circumstances.

What we do is first we build a model of ourselves, of how we set our prices. So our first model is going to not predict demand; it’s just going to predict what decision-makers were doing in the past. It incorporates everything we know: prices of competing products, news stories, and lots of other data. That’s the first ML. We’re not predicting what demand or sales will look like, we’re just modeling how we behaved in the past. Then we look at deviations between what happened in the market and what the model says we would have done. For instance, if it predicted we would charge $1,110, but we actually charged $1,000, that $110 difference is an experiment. Those instances are like controlled experiments, and we use them in the second process of machine learning to predict the actual demand. In practice, this has worked astoundingly well.

The pace at which other companies like Amazon have been expanding their microeconomics teams suggests that they’re also answering questions that the companies weren’t getting answered in any other way. So what’s snowballing at the moment is the acceptance of the perspective of economists. When I joined Yahoo, that was still fairly fragile.

He speaks about several things such as firms vs markets, big data, machine learning, regulation, antitrust, work culture at top tech firms and so on.

This bit on the tech industry is fascinating:


Promoting diversity at central banks…

April 11, 2019

Bank of England is taking diversity very seriously. The are trying to increase representation of Black, Asian and Minority Ethnic (BAME) member in the central bank.

Mark Carney, the Governor discusses the issues:

It’s a pleasure for the Bank of England to host this workshop on Investing in Ethnicity & Race.  To pursue its mission, Bank of England must reflect the diversity of the people it serves. 

That hasn’t always been the case. Historically, central banks were run by the City for the City. The Bank’s first female Court member, Frances Heaton, was appointed only in 1993, while our first Black, Asian and Minority Ethnic (BAME) member, Lord Morris, followed five years later. I’m the 120th in a very long line of male, white Governors of the Bank.

Over the last five years the Bank has implemented a concerted strategy to increase diversity and foster inclusion. These initiatives have had a material impact on all aspects of diversity at the Bank. We are now reinforcing them to further improve the retention and progression of BAME colleagues in particular, and to
deepen progress on inclusion more generally.

The Bank values diversity for at least three reasons.

  • First, it is the right thing to do: a public institution should reflect the public it serves.
  • Second, diversity helps to build the trust we need to fulfil our remits.
  • Third, greater diversity leads to better decision making


“What is the future of cash in the UK? Less cash but not cashless

April 11, 2019

Sarah John, Chief Cashier of Bank of England (one who signs the banknotes) in this speech looks at this question most central bankers are asking: What is the future of cash?


How to develop a “financial Eurosystem” post-Brexit?

April 8, 2019

Mr François Villeroy de Galhau, Governor of the Bank of France in this speech reflects on post-Brexit financial Eurosystem.

In earlier speeches Mr Villeroy de Galhau said that post-Brexit, Paris could be shaped as a financial centre. Now he mentions, a polycentric network of financial centres in Europe:

The unfortunate reality is that Brexit leaves us no other choice: we must now reshape the European financial system and develop its autonomy. The euro area can already build on strong assets: an effective monetary Eurosystem, the legal framework for a single financial market and essential components of a Banking Union. However we do not, as yet, have a “financial Eurosystem”, made up of stronger pan-European financial institutions and market infrastructure. Let’s be clear: there will not be a single City for the continent, but rather an integrated polycentric network of financial centres, with specialisations based on areas of expertise. A polycentric system of this nature can function, as illustrated by the United States: New York’s financial centre is favoured by corporate and investment banks, Chicago’s financial centre handles futures, while Boston specialises in asset management.

Hmm.. This is interesting. So what specialities do European financial centres such as Paris, Frankfurt, Amsterdam etc have?

He then discusses the two unions which will help in this polycentric network:

Starting with the Banking Union, its success depends on the completion of a robust resolution mechanism, probably even more than a full common deposit insurance scheme. Regarding the backstop of the Single Resolution Fund, in the interests of financial stability, we should consider extending the maturities on the credit lines. But we will not achieve an effective and profitable Banking Union without cross-border consolidation in Europe: there are still too many roadblocks and not enough cross-border restructuring. Compared to the US market, the European banking sector remains fragmented: the market share of the top 5 European banks amounts to 20%, compared to more than 40% in the US. So we should aim to create a “single banking market”, as recently proposed by Annegret Kramp-Karrenbauer, where genuine pan European banking groups could operate more effectively and better face foreign competition. 

Together with the Banking Union, a genuine Capital Markets Union (CMU) is essential to strengthening financial integration in Europe: we advocated it strongly with Jens Weidmann, President of the Bundesbank, in a joint paper published yesterday, and it will be a key topic of today’s informal Ecofin, thanks to the Romanian Presidency. Despite some recent achievements, progress on this topic is proving difficult and slow. Let us finally move on from a rhetorical consensus in principle to concrete headways, notably on instruments, access to finance for SMEs, and supervision.

In this respect, I welcome the progress achieved on a Pan-European Personal Pension Product (PEPP): this product is portable across member states and offers consumers a wider range of investment opportunities. We should also make progress towards the harmonisation of insolvency regimes. It should facilitate cross-border investment.

One of the most challenging issues of the CMU is to provide cheaper and easier access to equity for SMEs in order to support their growth. Equity financing is a key driver of innovation: it is better suited to the uncertainty and offers long-term returns associated with innovative projects. The euro area is seriously lagging behind in this respect: equity only accounts for 80% of GDP, compared with 122% in the United States.

Despite setbacks. European policymakers keep talking about more and more unions…It is a one-way club membership..

The international role of the euro: down but not out

April 5, 2019

Claudio Borio of BIS in this speech:

Much has been said about the role of the euro in the international monetary and financial system and about the currency’s prospects. And much of it is not particularly encouraging.

Some of what has been said is about the future. Based on the lessons of history, there is a broad consensus on the financial and political preconditions for making that future a bright one.2 One can only conclude from those lessons that the distance to travel is, to put it mildly, considerable. I can hardly add
anything of value to that aspect of the debate.

Some of what has been said has been about the evolution to date. Take the IMF’s tally of the share of official foreign exchange reserves denominated in euros. This shows a sizeable diminution, from about 25% in 2012 to some 20% recently.3 Moreover, the ECB’s composite index of the euro’s international
role paints a similarly unflattering picture.4 One might conclude from all this that the euro has lost clout across the board.

Today, I would like briefly to question this verdict. My thesis is that the verdict is too categorical – a more nuanced assessment is in order.

I would like to argue that, in some significant but underappreciated respects, the euro’s heft has actually grown in recent years. I shall highlight three aspects: the euro’s influence on global bond markets; its influence on exchange rates globally; and its influence on the “effective pricing“ of commodities, regardless of the currency in which their prices are actually denominated.

Interesting sets of graphs in the speech..

Managing natural resources – lessons from Norway

April 1, 2019

Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway) in this speech outlines :

Norway is a small, open economy, which was transformed by the discovery of oil on our continental shelf almost 50 years ago. Back in 1970, the year after the first discovery, income levels were relatively low compared with other western countries. That picture has changed completely. Today, Norway ranks among the richest countries in the world.

For some countries, natural resource discoveries have been identified as a curse. For Norway, the discovery of oil has been a blessing. We have managed to transform oil and gas resources into real and financial assets. Luck has been supplemented with what I dare to claim is sensible resource management, based on a well-functioning democracy and longstanding and trustworthy institutions.

Key lesson?

Policymakers’ handling of Norway’s newly discovered petroleum wealth got off to a rather bumpy start. During the first 25 years of oil production, Norway experienced two deep recessions. Both downturns were rooted in wildly optimistic income expectations. In the 1970s, public spending surged before oil export revenue started to kick in. Eventually the government had to tighten fiscal policy. In the 1980s, a credit-fuelled consumption boom in the private sector led to necessary cut-backs after the oil price plunge in 1986. The turbulence made clear how vulnerable a small economy is to terms of trade disturbances. Let that part of our history stand as a warning. But lessons were learned, and formed the basis for the framework that was put in place from 1990 and onwards.

During the past 50 years, Norway has experienced how oil prices can change almost overnight in response to international politics, economic disturbances or disruptive technologies. Recently, a new risk factor has emerged. Impacts of global warming are high on the international agenda. Policy measures and shifts in consumption patterns and production methods towards lower emissions will reduce demand for fossil fuels. The change to a more climate-friendly policy may have a considerable impact on petroleum prices.

Looking ahead, Norway must now be prepared for a time when the petroleum industry is no longer expanding, but gradually declining. We will need innovation and growth in other industries to pick up the slack. We have always known that oil and gas activities will be phased out sooner or later. Oil and gas are non-renewable resources. A stricter global climate policy or a green-technological breakthrough may mean that this will occur sooner than foreseen earlier.

In contrast to Norway, Mozambique is at the beginning of its gas era. I hope the lessons from Norway can give you some guidance on your way forward.

One main lesson is that depletable natural resources must be viewed as part of a country’s wealth. Revenues from extracting oil and gas is just a transformation of this wealth and should be managed with a long-term prospective.

At the same time, the development of oil and gas reserves can have valuable spillovers to the rest of the economy. Not only demand from the petroleum industry, but also innovations and technological skills developed in the industry can be of great value to other sectors. The productivity gains to the economy can be more long lasting than the petroleum industry itself.

And never forget: The real test of how a petroleum producing country has managed its fortune, will come when the boom in the petroleum industry ends. Oil and gas resources do not last forever. Emphasis should therefore be given to further development of human capital as the primary source of long-term prosperity and wealth.


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