Archive for the ‘Speech / Interviews’ Category

History and evolution of Money in England

March 11, 2020

Nice speech by Sir Jon Cunliffe of Bank of England.

the forms money takes in society is not fixed. Those forms change as the structure of economies changes, as the ways in which we transact with each other change, as technology makes new forms possible.

We think of medieval England as a society using state issued metallic tokens – coins stamped with the monarch’s head – as its main form of money. But transferable debt obligations, recorded on notched sticks of wood, the ‘tally sticks’, also functioned as money, not for day-to-day use, but for large transactions. We think likewise of the gold standard period, following Sir Isaac Newton’s coinage reforms, as one in which  metallic money dominated. But again, although coins were the everyday means of exchange, transferable private sector claims, in the forms of banknotes and ‘bills of exchange’, were still significant in trade and commerce.

This is not just ancient history. We have seen a big change in my lifetime. When I was at school, admittedly a very long time ago, physical cash – banknotes and coins – played a far larger role in our lives. Far fewer people had bank accounts. In the mid-1960s, most workers were paid weekly in cash, and around 70% of the population did not have a bank account.3 Consequently, for every £100 of funds that people held to make payments, over a third would be held as cash. Nowadays, less than 5% is held as cash.

Today, around 98% of households have access to bank accounts. And credit and debit cards have made it much easier to use our bank accounts for everyday transactions – in other words the transfer of claims on the banks in which we hold our money.

That shift from physical cash to electronic transaction has not only been a shift from paper to electronic form. It has also been a shift from using a form of money issued as a direct claim on the state – the seemingly archaic but very real promise on our banknotes – to money created and issued by commercial banks as a claim on themselves.

This shift was not driven by any policy but as a consequence of technology providing more convenient ways for us to transact with each other. The shift as I recall has generated very little controversy or political attention. There has been a political response, but this has more about financial inclusion, about ensuring access to a bank account and to commercial bank money so that people were not left behind by the change. It has not been about the reliability and security of commercial bank money as it has become more dominant in the economy.

It is interesting to observe that in the eighteenth and nineteenth century there was a similar shift from statemoney, in the form of coins, to private money, in the form of banknotes, which in those days were bearer claims issued by private banks. That eventually generated a very different reaction, with the result that private banks in most countries were banned from issuing bank notes.


Three Ds of climate change risks for financial sector..

February 27, 2020

Christine Lagarde, President of ECB in this speech warns on climate change risks for the financial sector. She says there are 3 Ds of risks:

Climate change constitutes a major challenge, causing both threats and opportunities that will significantly affect the economy and the financial sector, depending on which carbon emission scenario eventually unfolds.

That is why central banks need to devote greater attention to understanding the impact of climate change, including its implications for inflation dynamics. At the ECB, the ongoing review of our monetary policy strategy creates an opportunity to reflect on how to address sustainability considerations within our monetary policy framework.

Today, however, I will focus my remarks on climate change-related risks for the financial sector. Broadly speaking, the main risks fall into three categories: risks stemming from disregard, from delay and from deficiency.


The transition to a carbon-neutral economy provides opportunities, not just risks. By shifting the horizon away from the short term and contributing to a more sustainable economic trajectory, the financial sector can become a powerful force acting in our collective best interest. The future path for carbon emissions and the climate is uncertain, but it remains within our power to influence it. As Lyndon B. Johnson said, “yesterday is not ours to recover, but tomorrow is ours to win or lose”.


History of Frankfurt Stock exchange and linkages to monetary system

February 19, 2020

Super speech as always by Jens Weidmann:

People looking to realise their full economic potential need a stable currency.

That is something merchants already knew back in the Middle Ages, when they flocked to Frankfurt’s trade fair to trade in goods. Indeed, they came equipped with a variety of different coins. But what rates were they supposed to exchange their coins at? This question led a group of merchants, in 1585, to ask the city to set the rates. And Frankfurt actually went further still. It established a bourse to review the exchange rates at regular intervals. This move marked the “birth” of the Frankfurt Stock Exchange.[1]

More than 400 years later – in 1999, to be precise – many European currencies were replaced by a single currency. The euro has simplified trade in the internal market further still. The euro’s central promise back then, though, just as it is today, was to be stable money for people in the euro area.

That is why price stability is the primary objective of monetary policy. Since 1999, the average inflation rate in Germany has actually been even lower than the rate observed in the D-Mark era. This has truly been a success story, even if the two periods are difficult to compare.


Looking to the future and the willingness to modernise are important not only for monetary policy, they are also crucial for the financial markets. Back in the 18th century, Frankfurt evolved into a financial centre of international renown – thanks to the newly established trade in government bonds. However, Frankfurt bankers long wanted nothing to do with shares, which resulted in Frankfurt being eclipsed by Berlin in the 19th century.

Phew…Did not know this!

8th NCAER C.D. Deshmukh Memorial Lecture: David Lipton of IMF speaks on India in a Changing World

February 18, 2020

Apart from RBI, NCAER also organises CD Deshmukh Lecture Series as Deshmukh was the founder father of NCAER. The lecture series started in 2013.

In 2020, David Lipton of IMF gave the lecture:

Good afternoon. I am honored by your invitation to deliver the 8th C.D. Deshmukh Memorial Lecture.

The late Chintaman Deshmukh, a towering figure as RBI governor and later finance minister, helped guide India’s economy through the immense challenges of independence. Perhaps less well known, he also holds a place in the annals of the IMF as a senior member of India’s delegation to the 1944 Bretton Woods Conference, which laid the foundations of the post-war economic order.

There, C.D. Deshmukh had the foresight to insist that the IMF and World Bank address the development needs of the countries that would soon emerge from colonialism.

John Maynard Keynes, deeply impressed by his contributions, is reported to have recommended that he run the IMF. I hope that one day we will have an Indian managing director.

Last year, at this podium, Martin Wolf spoke of the “Challenges to India from Global Economic Upheavals.” Since then, we have seen the threat of two of those upheavals recede, if not fade—the U.S.-China trade conflict and a hard Brexit. But new uncertainties always arise, casting a cloud over the global economy. For example, we are only beginning to see the impact of the coronavirus epidemic, which has struck at the heart of global value chains.

But beyond these headline-grabbing problems, governments around the world are struggling to solve a complex policy problem: how to address the secular stagnation that is reflected in anemic productivity growth, falling inflation, and weakening global trade. This is in part the legacy of the global financial crisis. But it is also the new normal of a maturing, globalized world, reinforced by aging societies in Japan, Europe and the U.S., and posing the fiscal challenge of meeting the needs of their senior citizens.

For the most part, secular stagnation is an advanced economy issue, but one with spillovers that concern the rest of the world. Moreover, secular stagnation may be a preview of coming attractions for some rising and aging middle-income countries.

That said, many of you may be correct in thinking that all of this is a long way from India, which in recent years was the fastest-growing large economy in the world. Indeed, your country—with its young and growing population, and a reservoir of untapped demand—already has shown the potential to play an increasingly important role in the global economy.

That is surely the case, despite the recent slowdown. The latest IMF forecast for the global economy underlined the impact on global growth of India’s sharp slowdown in the second half of 2019, which was caused by weak domestic demand and falling credit growth, and problems in the financial system. Clearly, there are significant balance sheet challenges that must be addressed to return to the levels of growth that India has enjoyed in recent years.

If this happens, and India achieves a sustained takeoff, your country can play a unique role. India could be in a position to help invigorate global growth, transform global patterns of trade, and spur investment and innovation. With the right policies—and a supportive global environment—India could become a source of “secular dynamism,” if you will allow me to coin a phrase. If other countries can find their way as well, secular dynamism in the developing world would become the needed counterweight to the secular stagnation of the advanced economies.

\These are the topics that I would like to focus on today: an important part of the global economy struggling with secular stagnation; how, in this setting, India and other countries can achieve sustained dynamism; and the crucial role for multilateral cooperation in preserving the integration that will best promote both of these effort.


Narratives about the ECB’s monetary policy – reality or fiction?

February 17, 2020

New ECB Board member Isabel Schnabel questions the German criticism of ECB monetary policy. That she is German makes it even more interesting.

In recent years, Germany has experienced one of the longest economic upswings since the Second World War.[1] Since 2010 the German economy has grown at an average annual rate of 2%. Unemployment has fallen to its lowest level since German reunification.

The monetary policy of the ECB has contributed significantly to that expansion. By lowering interest rates and making use of new monetary policy instruments, the ECB has created financing conditions that support investment, growth and job creation across the euro area.

And it was the ECB’s decisive action in 2012 that prevented a break-up of the euro area.

Despite these considerable successes, the public debate about monetary policy has become more heated in parts of the euro area, and especially in Germany.

The conversation is dominated by various narratives, such as the “expropriation” of German savers through “punishment rates”, the “flood of money” that will inevitably lead to massive inflation, and the creation of “zombie firms” as a result of expansionary monetary policy.

In my remarks today, I would like to take a closer look at some of these narratives and discuss them in the light of the facts.

I will demonstrate that the ECB’s current monetary policy stance is necessary in order to achieve sustained price stability in the euro area, and that the use of unconventional monetary policy tools, such as negative interest rates and asset purchases, is largely a consequence of structural changes in the economy that lie beyond the ECB’s control.

I will also discuss the potential side effects of these monetary policy measures and show that many of the fears that are frequently being expressed are based on half-truths and false narratives. The excessive criticism of the ECB is dangerous because it not only jeopardises trust in our single monetary policy, but also undermines European cohesion.

In her interview, she explains:

You want to clear up misunderstandings about the ECB. Would you say that you are now on a type of peacekeeping mission to mediate between the central bank and the German public?

No, that is not what this is about. I am not a mediator between two parties; I am now a member of the ECB’s Executive Board. But in my new role as a board member I am committed to seeking greater public understanding and clearing up misunderstandings. For people to constantly hear that the ECB’s policy is harmful to them is misleading and it undermines their trust. This worries me. 

 Which misunderstanding do you wish to clear up specifically?

The expropriation of savers is the main misconception. Even the term itself is legally incorrect. It would imply that the ECB is taking something away from people that rightfully belongs to them. But that is not the case. 

But rather?

The real interest rate – that is, the interest rate adjusted for inflation – emerges from the economy’s growth potential in the long run. Sweeping macroeconomic trends – such as demographic ageing and weak productivity growth – have caused a worldwide decline in real interest rates. The ECB cannot change these fundamental developments but can only steer its key interest rates around the trend. If it wishes to fulfil its mandate and stimulate the economy at a time when inflation is too low, it has to lower interest rates even further. If the policy rate then approaches zero, it becomes increasingly difficult to attain its objective with conventional tools. We see this constellation all over the world.

You’re suggesting that the ECB is a victim rather than a perpetrator in respect of negative interest rates. Are there any robust economic studies that back this up?

There are countless studies that estimate the equilibrium interest rate, using various methods and delivering different outcomes. But the trend is clear, it is pointing downward. I understand the frustration about low returns on savings, but that is not the whole picture. Borrowers and property owners have benefited, as have the government and employees. Analyses have been conducted on what would have happened without the ECB’s loose monetary policy. They found that economic growth would have been considerably slower, inflation would have been lower and unemployment higher. The one-sided, negative presentation of the consequences of the ECB’s policies is misleading. All in all, Germany has benefited from the ECB’s monetary policy.

You are saying that savers are not being expropriated at all. But the ECB’s negative interest rate policy effectively means that we can forget about traditional forms of investment such as savings accounts or life insurance policies. At the same time, people are being advised to provide for their retirement. How are they supposed to do that? 

If the ECB were to increase interest rates in the current environment, it would be harmful for everyone – not least for savers. I can’t give people any investment tips. But there’s no doubt that, in today’s interest rate environment, it is not especially advisable to put all your funds in savings or time deposit accounts. Politicians also have a duty to inform citizens about the alternatives to interest rate products.


Understanding macro policy using the Stone Soup story

February 11, 2020

Mary Daly, President of San Francisco Fed in this speech cites the stone soup story to help audience understand the challenges the policymakers face:


Vijay Kelkar Convocation Address at BHU: Three development paradigms of Indian economy

January 30, 2020

Vijay Kelkar gave the convocation address at BHU on 23 Dec 2019. The lecture is up on the NIPFP website:

Today I want to share with you my reflections on our country’s journey towards what our first Prime Minister Pandit Jawaharlal Nehru so eloquently expressed in his mid-night speech on 15th August 1947 as our “Tryst with Destiny.” To my mind, this “Tryst with Destiny” meant wiping out the curse of poverty from our land and make our nation a prosperous and liberal Republic and thus contribute handsomely our due share to the wellbeing of every nation and to the advancement of global peace.

He points to three development paradigms:

It is hard to even comprehend the India of 100 years ago, where our leaders like Gandhiji, and Nehru got going on building the freedom movement. It was an India of incredible backwardness. To give you one illustration of how things were, here is an astonishing fact: literacy in India in 1920 was 8%. Today we’re at about 75%. We know how bad it is, that 25% of India is illiterate. But can you even imagine an India where 92% is illiterate? That was the starting point, where our founding fathers had the nerve to challenge the British, and also ambitions to envisioning what a free India would look like. They wanted India to
aspire to be a great and prosperous Democratic Republic. The founding fathers of our republic drew their inspiration from our syncretic civilizational heritage as well as from the French Revolution, American Resolution and the Revolutionary Magna Carta and most importantly from the robust good sense of the people of India.

The Second Paradigm was developed by thinkers from the mid 1960s onwards. Critical elements of this were built by the Ph.D. Thesis of Manmohan Singh and many other thinkers such as Arun Shourie, Abid Hussain, Jagdish Bhagwati and T. N. Srinivasan. These thinkers were acutely aware of India rapidly falling behind other dynamic economies of East Asia. These countries achieved great success in exploring export opportunities. For accelerating growth and removal of poverty, our reformers argued in favour of trade liberalization, scaling back the license-permit-raid raj, a flexible exchange rate, and a greater role for the private sector and linking actively with the global economy. These ideas were put into practice, slowly, from 1977 onwards, with Morarji Desai as PM
and changed course in Indian economic policy, gradually and carefully. Trend growth rose from 1979 onwards.

Third paradigm needs to be discussed:

In India today, we are veering towards “the administrative state”, which essentially means the rule by officials who possess arbitrary power, and who creep into legislative and judicial functions. We need to push back against this. Laws must be drafted through negotiation in the legislature, and not by the joint secretary. We need a much better functioning judiciary. And the arbitrary power of officials needs to be replaced by a rule of law system with elaborate checks and balances, which give protections to private persons.

These are the key ideas that need to go into the Third Paradigm that our thinkers need now to construct. These are the requirements of India at our present state of development, where a middle income economy has emerged, where weaknesses of the state have created fear in the minds of private persons who have retreated into low investment and consequently to deceleration of productivity growth and national income. Addressing these problems will put us on the path of growth over next few decades and thus will become an advanced and high income economy.

The essential features of the First and the Second Paradigms are principles, and a conceptual framework. Once the framework is understood, there is the practical process of looking at the short term situation and taking practical actions. In similar fashion, the third wave or policy paradigm is about ideas and principles. The First Paradigm was developed through a process of debate from 1920 to 1947. The Second Paradigm was developed through a process of debate from 1964 to 1977 and then all the way to 1991. In similar fashion, we must embark on a long journey of ideas, to debate the elements of the Third Paradigm, and flesh it out from high ideas into a practical program of action. This is our task in India today.

Nice way to summarise Indian economy in a mere 6 pages!

A monetary policy framework for all seasons?

January 13, 2020

Mark Carney of Bank of England in this speech argues that Inflation targeting has been a framework for all seasons in UK:

To set the stage for today’s discussions, I would like to do two things. First, I will review the conduct and performance of inflation targeting during my time as Governor. This period, which roughly coincides with the post-crisis recovery and which has seen more than its share of shocks and structural developments,
provides some insights to the ability of inflation targeting to deliver price stability and support macroeconomic outcomes. I will suggest that, so far at least, inflation targeting has proven to be a framework for all seasons, an essential part of a robust foundation for economic prosperity.


To conclude, the flexibility in the UK monetary policy framework means that the MPC has been able to support the UK economy through the changing of the seasons.

Despite the economy being buffeted by diverse and sizable shocks since the recovery began, inflation has averaged 1.7%; GDP growth has generally been robust, averaging around 2%, and above the subdued rate of potential supply growth. The wide margin of spare capacity present after the crisis was absorbed,
unemployment is at multi-decade lows and employment at an all-time high. Real wages have finally returned to relatively strong rates of growth. Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.

This performance underscores that the bar for changing the regime is high. But it is nonetheless healthy to review it periodically, and that review is supported by the Bank’s active research agenda. Today’s workshop is organised with that in mind, and we appreciate all your contributions to help focus our research efforts.

There is an old saying that there is no such thing as bad weather, just inappropriate clothing. With the economic climate changing, let’s ensure that the Bank remains well suited to deliver its mission to maintain price and financial stability in support of the Good of the people of the United Kingdom


I would actually argue that more than the framework, central bankers have been really flexible to bring all kinds of changes in the monetary policy.

Christine Lagarde interview: Owl, Green ECB, Taking ECB closer to people etc..

January 9, 2020

Interview of Christine Lagarde.

Given the obsession with ornithology of central bankers, she considers herself as an owl:

You have described yourself as neither a dove nor a hawk, but rather an owl. Why exactly this rather unusual type of bird?

Owls are traditionally seen as birds of wisdom that can see well in the dark and have a wide range of vision. However, what I really wanted to highlight was my wish to ensure that discussions within the Governing Council take place in an efficient, of course, but also composed manner.


Taking ECB closer to people:

Given the major challenge posed by populism, how can the ECB be brought closer to the citizens?

This is one of my priorities. Bringing the ECB closer to the people requires dialogue and explanations. We need to engage with our fellow citizens and enter into dialogue with them. We need to explain to them – also through you – what the ECB does and that we are committed to doing its work effectively. We should bear in mind that three-quarters of euro area citizens are in favour of the euro.

Your mandate is to ensure price stability. Is this the main issue today?

Doesn’t asking the question imply an assumption that price stability has been maintained? I would take that to be a compliment for the ECB. Indeed, since the introduction of the euro, annual inflation has averaged around 1.7% in the euro area. However, inflation currently stands at 1% and inflation projections are still low, at some distance from the level of below, but close to, 2% that we would like to reach over the medium-term.

Green ECB?

The President of the European Commission, Ursula von der Leyen, has presented her “Green Deal”. How will it interact with ECB policy? Are you going to transform the ECB into a green bank?

I commend the determination of my friend, Ursula von der Leyen, and her commitment to the environment. This battle is to our credit in Europe, with all of us acting within our remits. In this, I also include the European Investment Bank. We will play our part within the framework of our mandate of maintaining price stability and of banking supervision. What effects do climate-related risks have on our growth and inflation projections? What signals do we send through our bond purchases and what assets are held by the banks that we supervise? The stakes are high enough to arouse a keen interest in these questions, while pursuing our primary mission. As regards monetary policy, the review of our strategy will be the ideal time to address these questions.

The decade of 2020s will continue to be challenging for ECB..

45 years of Central Bank of Barbados: 1972-2017

December 23, 2019

Central Bank of Barbados has released a book on its website (freely available). The book is written by Harold Codrington, retired deputy governor of the Central Bank of Barbados where he worked for 37 years.

Both Sides of the Coin tells the history of the first forty-five years of the Central Bank of Barbados. It outlines the Bank’s role and function, explains its operations, and details how its employees helped to fashion a modern society and economy and build an institution of which all Barbadians can be proud. As Professor Andrew Downes commented “readers would be engrossed in the intricacies of economic policy making from a central bank perspective.”

CBB Governor Cleviston Haynes gives a speech on the occasion:


Earlier ECB resembled Bundesbank, now ECB resembles Fed?

December 20, 2019

Benoît Cœuré, member of ECB’s last day at the central bank is on 31 Dec 2019. ECB just organised a colloquium in his memory. This is a tradition which RBI should adopt as well  and organise conferences for the outgoing top management.

In this interview, he is asked to reflect on his tenure, ECB and so on. One question is changes in ECB design:

Since you started at the ECB in January 2012, the institution has undergone a fundamental transformation. It used to be much like the Bundesbank, but now it acts more like the US Federal Reserve.

The existential crises we went through, first with Spain and Italy in summer 2012 and then with Greece in summer 2015, and the actions of one man, Mario Draghi, who was President of the ECB until November this year, gave us the necessary maturity to make full use of the instruments granted to us by the treaties. Does this mean that we have become like the Federal Reserve? In a certain sense, yes, because we are equipped with a comprehensive toolbox to support the euro area economy at all times, using tools like quantitative easing inspired by the US model, and the capacity to intervene in the markets. But there are also significant differences. For a start, we don’t have the same mandate – the Federal Reserve has a dual mandate that gives equal weighting to price stability and full employment, while the ECB’s mandate prioritises price stability. And our financial markets are not the same – bond markets in the United States are very deep and liquid, which gives the Federal Reserve an almost unlimited capacity for intervention. In Europe, there is no capital markets union – bond markets are fragmented across 19 countries, which limits the capacity of monetary policy.

Interesting. Usually, European central bankers refuse any similarity to US ones.

Further on accomplishments and regrets:


Why Australian banks remain stable?

December 17, 2019

Apart from Canada, Australia also seems to be a country with fairly stable banking system.

In a speech, Jonathan Kearns, Head of Financial Stability at RBA points to this remarkable history:

Australian banks in particular serve critical functions in the Australian economy by providing credit intermediation and more generally facilitating economic activity. Australian banks are profitable and resilient and a strong banking sector has contributed to Australia’s extended run of economic growth. It’s hard to imagine a modern economy without a banking sector. The eight largest Australian banks can trace their history back, on average, over 140 years. 

140 years is quite good! Some of the bank names are here.

He also reviews developments in Australian banking sector which is really nicely done. The speech is a prototype of how central banks should tell the public about performance of banking sector.

U.S. Regulations and Approaches to Cryptocurrencies: Drawing lessons from history

December 13, 2019

Most major countries are talking about digital currencies barring US.

Interesting speech by Michael Held of NY Fed who reviews existing regulations in US regarding digital currencies:

Thank you, Diego, for “volunteering” me to speak about digital currencies—a field in which I count myself as very much a trainee, not an expert. Today I will focus on the U.S. regulatory landscape for digital currencies, in particular on digital currencies issued by private organizations that are intended to be used like money. As always, the views I express are my own, not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.1

Policy makers and regulators in the United States, to date, have not developed an overarching framework for regulating private digital currencies. The field has been seen as too new for a comprehensive regulatory response. To be sure, the digital nature of new private currencies will raise challenges to which policy makers must respond. In my view, however, we spend so much time wrestling with the novelty of digital currencies that we forget that private currency is nothing new. The theme of my talk today is accordingly best encapsulated by a quote that is attributed—perhaps wrongly—to Mark Twain: “History may not repeat itself, but it does rhyme.”

He draws lessons from US history on free banking:


Time for e-Euro?

December 6, 2019

I have just recently written for Moneycontrol on how European central bankers particularly French are really keen on introducing a central bank digital currency.

Christine Lagarde (who is French!), recently appointed at helm of ECB in her first hearing at the European Parliament interestingly spoke on CBDC:

The other topic you have asked me to discuss today is the future of money. Indeed, as central banks navigate a complex and changing landscape, we should not only aim to anticipate future trends, but also seek to shape them. In doing so, we should be particularly attentive to risks and perform a thorough analysis of their costs and benefits.


A central bank digital currency would allow citizens to use central bank money directly in their daily transactions. However, depending on its design, a central bank digital currency could pose risks. For instance, they could alter the way in which monetary policy is conducted and transmitted to the real economy. They could also carry implications for the functioning of the global financial system and its stability. The question of central bank digital currencies and their optimal design therefore warrants further analysis.

Our ultimate goal is to foster safer, innovative and integrated payments in euro. This will in turn benefit everyone in the euro area and strengthen the euro internationally.

François Veilleroy De Galhau of Banque De France in a recent speech (4 Dec 2019), gave a more detailed speech on CBDC:

I shall turn now to a topic that is a major challenge for the future of the international monetary and financial system: the possible creation of a central bank digital currency (CBDC). The creation of a new form of currency by central banks goes beyond the challenges I have just mentioned: it is neither a precondition for nor a guarantee of more efficient payments. However, we as central banks must and want to take up this call for innovation at a time when private initiatives – especially payments between financial players – and technologies are accelerating, and public and political demand is increasing. Other countries have paved the way; it is now up to us to play our part, both ambitiously and methodically.

To this end, the Banque de France is to be reorganised. The current Direction de la surveillance des paiements et des infrastructures de marché (DSPM – Payments and Market Infrastructures Oversight Directorate) will become the Direction des infrastructures, de l’innovation et des paiements (DIIP – Infrastructure, Innovation and Payments Directorate), and its scope will be extended to cover all payment innovations, infrastructures and central bank digital currency. Additional skills will be recruited to strengthen its expertise, and, with the help of our Lab, the DIIP will work with industry innovators from the private sector: we want to start running experiments rapidly and will launch a call for projects before the end of the first quarter of 2020. We are particularly keen to take part in experiments to integrate a “wholesale” CBDC into innovative procedures for exchanging and settling tokenised financial assets. Nathalie Aufauvre, Director General of Financial Stability and Operations, will coordinate the Banque de France’s acceleration process. Our actions will naturally contribute to the work of the Eurosystem, which should make looking into the possibility of an “e-euro” one of its next focuses: Christine Lagarde referred to it on Monday in front of the European Parliament. Beyond this, we intend to take part in the work of the “innovation hub” recently created by the BIS.

On a substantive level, I would like to share with you some first thoughts – which are still open to discussion, of course – on three aspects: the objectives, externalities and possible modalities of a central bank digital currency.

1/ At this stage, I can see three different – but not mutually exclusive – objectives for digitalising central bank currency. The first relates to the desire, in countries such as Sweden where cash use is declining rapidly, to guarantee all citizens access to central bank money. A CBDC would help to preserve the trust in the financial system that stems in part from being able to exchange assets for legal tender. The second argument relates to the efficiency gains, reduced intermediation costs and resilience that would potentially result from the “tokenisation” of a central bank currency, especially in settlement and post-trade activities (which is also one of the objectives of JP Morgan’s JPM Coin project). The third and final reason – and the most important one for political authorities, including in France and Europe – is that creating a CBDC would give us a powerful lever with which to assert our sovereignty in the face of private-sector initiatives such as Libra. This is also one of the concerns highlighted by the People’s Bank of China with its Digital Currency Electronic Payment (DCEP) project.

In this context, what form should our CBDC take? Public expectations on this differ significantly from those of financial institutions. As a result, in the long term, two different uses of the CBDC could exist side by side: one for payments between financial sector players (a so-called “wholesale” currency) that uses blockchain technology and all its possibilities, notably smart contracts; and another for the general public (a so-called “retail” currency) that is simpler and better suited to retail transactions. In this respect, financial institutions are much more digitally mature than private individuals as they already access central bank currency digitally via the bank accounts they hold with the central bank. In addition, following on from the questions raised by the Governor of the Bank of England, Mark Carney, on the idea of creating an international digital currency in response to the dominance of the US dollar, I think there would be some advantage in moving rapidly to issue at least a wholesale CBDC, as we would be the first such issuer in the world and would thus reap the benefits of having a benchmark CBDC.

2/ The issuance of a CBDC can generate significant positive externalities by increasing the productivity of the financial sector and by extension the economy, and by shoring up confidence in the currency and in the financial system. But, in parallel, it is vital that we examine the potentially negative externalities that a CBDC could generate for liquidity, profitability and bank intermediation. In particular, we need to look very closely at the risks linked to large-scale and/or sudden conversions of bank deposits into central bank money.

3/ The third aspect is the modalities that could be used to circulate the CBDC, especially the “retail” version, about which we need to be particularly vigilant. I’m thinking about the issue of its legal tender status – which is not indispensable but probable; the conditions under which it can be held – in the form of accounts rather than tokens; and last, whether non-residents will have access to it, which would certainly help to raise its international status. Moreover, thanks to their proven expertise in payment instruments, know-your customer requirements and transaction monitoring, financial intermediaries will be able to play a front-line surveillance role in the distribution of the CBDC. In parallel, we will also need to launch a reflection to define the conditions under which the CBDC could circulate anonymously “from person to person”. Limits could be set for the size of anonymous transactions, such as those already applicable in France for e-money and cash payments.


Contemplations of an interest-rate dove and inflation hawk

December 6, 2019

Interesting title of an interesting speech by Per Jansson, DG of Riksbank.

He says he is a combination of inflation hawk and interest rate dove!


Risks and benefits of modern financial technology: Lessons from a 17th century stablecoin

December 3, 2019

Nice speech by Klaas Knot of Netherlands central bank.

He points how Bank of Amsterdam was doing similar things as today’s proposals for stablecoin:


Economics as a profession: from science to practice

December 3, 2019

Benoît Cœuré of ECB in this speech:

It is a true pleasure to be back here at the Paris School of Economics (PSE).

You are now on the home stretch. I well remember how I felt during my own final year: excited, anxious and curious all at once.

Over the next few months, you will need to take serious, life-changing decisions. The data suggest there is about a two-in-three chance that you will pursue further studies.

For many, a master’s degree is a natural step towards a PhD. And a PhD is essentially a promise of employment. In the United States, for example, the unemployment rate for PhD economists is about 0.8%, the lowest among all sciences.[1] Not a bad place to start from.

But a PhD is not about financial optimisation. Estimates for the United Kingdom suggest that British men with a master’s degree earn 23% more than those who could have gone to university but chose not to.[2] The earnings premium for a PhD, which often takes three to five times as long, is just 26%. For some subjects, the premium for a PhD even vanishes entirely.

So first piece of advice: your PhD should be fuelled by your passion and your love for research rather than by hopes of earning more money.

Money was clearly not the reason for me to join the labour market in 1992 when I graduated from PSE with a Master in Analysis and Policy in Economics.

My first appointment took me to the National Institute of Statistics and Economic Studies, or INSEE, before I moved on to the French Treasury and then, in 2012, to the European Central Bank (ECB).

The path that I chose to explore is just one of many that are open to you. The good news is that the solid training you receive here at PSE makes it your choice.

The world of economics is incredibly broad. I will leave it to the participants of the two roundtables this evening to make a convincing case for their respective institutions, although I would not be surprised if many of you take the lead from the English author G.K. Chesterton who said, “I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite”.

But I wouldn’t be here tonight if I hadn’t planned to use this opportunity to make at least some publicity for the public sector.


25 years of independence of Central banks of Mexico and Spain

November 29, 2019

Central Bank Independence seems to be a great deal in Latin American countries. There is a reason why Central bank of Mexico organised a seminar to reflect on the 25 years of its independence.

Pablo Hernández de Cos, Governor of Central Bank of Spain gives a speech at the seminar:

The Banco de España was granted institutional independence in July 1994. So this year, as is also the case for the Banco de México, marks the 25th anniversary of our Law of Autonomy. The independence of the Banco de España came about as part of the European economic integration process. Following the requirements laid down in the Maastricht Treaty, central banks in the European Union were meant to pursue the primary objective of price stability and be vested with a large degree of independence, both political and operational. Participation in the monetary union also entailed a change in the relationship
between Treasury and central bank so as to incorporate the prohibition of monetary financing of government deficits.

Central bank independence was granted with a large degree of legal protection and, as a matter of fact, no country in the European Union can change it at its own discretion. Of course, the independence of the central bank does not mean arbitrariness, as it is well counterbalanced by high transparency and accountability requirements and practices. 

Granting independence to the Banco de España some years before the introduction of the euro as a common currency reflected Spain’s strong ambition to become a founding member of the European Economic and Monetary Union. It was also the result of a firm political conviction as to the benefits of price stability and the advisability of delegating the pursuit of this goal to an independent central bank. Price stability requires a medium-term orientation and the independence of the monetary authority creates credibility by helping to keep inflation expectations anchored while avoiding time inconsistency problems.1 These reasons were particularly compelling for the Spanish economy in light of the previous experience of relatively high inflation.



Central bankers as explorers/navigators such as Vasco Da Gama, Columbus…

November 29, 2019

Klaas Knot of Dutch Central Bank in this speech:

We are drawing closer to the end of the year in which the ECB has been celebrating its twentieth anniversary. Typically, this type of event leads one to look back and reflect on the lessons learnt over time. And to evaluate how the lessons learnt can be taken on board in future endeavors. Indeed, the year has seen many conferences and papers dedicated to the tale of the ECB’s first two decades. For European central bankers, the second of these two decades has been particularly challenging.

In the last decade, the ECB has been navigating uncharted waters with unconventional monetary policy, just like Magellan, Sir Francis Drake and Columbus. We were not without compass, nor without a clearly set course. But nevertheless, the waters we navigated were new to us. No maps were available. And, again like those famous explorers, we were vigilant, alert and prudent. Now that we seem to have reached a harbor of some sort, and a new captain is aboard, we should consider charting the unchartered. We should draw maps of the coasts we discovered. We should mark where the sea monsters live. We should be the cartographers of unconventional monetary policy.


Not sure many would agree to this comparison!

How Neoliberal Thinkers Spawned Monsters They Never Imagined

November 28, 2019

Interesting interview of Wendy Brown who has written a book on the topic:

Lynn Parramore: To many people, neoliberalism is about economic agendas. But your book explores what you describe as the moral aspect of the neoliberal project. Why is this significant?

Wendy Brown: Most critical engagement with neoliberalism focuses on economic policy – deregulation, privatization, regressive taxation, union busting and the extreme inequality and instability these generate. However, there is another aspect to neoliberalism, apparent both in its intellectual foundations and its actual roll-out, that mirrors these moves in the sphere of traditional morality. All the early schools of neoliberalism (Chicago, Austrian, Freiburg, Virginia) affirmed markets and the importance of states supporting without intervening in them.

But they also all affirmed the importance of traditional morality (centered in the patriarchal family and private property) and the importance of states supporting without intervening in it. They all supported expanding its reach from the private into the civic sphere and rolling back social justice previsions that conflict with it. Neoliberalism thus aims to de-regulate the social sphere in a way that parallels the de-regulation of markets.

Concretely this means challenging, in the name of freedom, not only regulatory and redistributive economic policy but policies aimed at gender, sexual and racial equality. It means legitimating assertions of personal freedom against equality mandates (and when corporations are identified as persons, they too are empowered to assert such freedom). Because neoliberalism has everywhere carried this moral project in addition to its economic one, and because it has everywhere opposed freedom to state imposed social justice or social protection of the vulnerable, the meaning of liberalism has been fundamentally altered in the past four decades.

That’s how it is possible to be simultaneously libertarian, ethnonationalist and patriarchal today: The right’s contemporary attack on “social justice warriors” is straight out of Hayek.

All human constructs have serious limitations…

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