Archive for the ‘Speech / Interviews’ Category

Should the Bank of Japan issue a Digital Currency?

July 12, 2019

Masayoshi Amamiya, Deputy Governor of the Bank of Japan, in this speech says BoJ has no such plans. However, it is studying these ideas for two reasons:

Today, I have had the pleasure of sharing with you my understanding on retail payments in the digital age, focusing on the relationship between central bank money and private money.

Now, I would like to give you my own answer to the question I posed at the beginning: “Why are many central banks, including the Bank of Japan, committed to researching and studying into CBDCs even though they have no plan to issue them in the near future?” I have two reasons. First, since technological innovation evolves rapidly, the retail payments market structure could suddenly change dramatically, pushing us toward a cashless society.

In some cases, the need for CBDC issuance may suddenly increase. To be able to adapt to such a situation, central banks need to deepen their understanding on the latest developments in information technologies and their applicability to CBDC. Second, as I have discussed in the latter half of my speech, through research into CBDC — or through the CBDC lens — central banks examine more fundamental questions such as: “What are the required functions of money?”; “What ways do we have of improving the complementary relationship between central bank money and private money?”; or “What ways do we have of enhancing the functionality of private digital currency?” This process can offer clues for ways in which payment and settlement systems as a whole can be improved.

The Bank will continue to examine CBDC with these two aspects in mind. In this respect, allow me to introduce two of our recent initiatives. On the technological front, the Bank is continuing research into distributed ledger technology — DLT. Project Stella, a joint research project with the European Central Bank is part of these initiatives.5 This project has resulted in three reports so far, exploring, for example, the applicability of DLT to payments using central bank deposits — that is, wholesale CBDC.

On the legal front, the Bank’s Institute for Monetary and Economic Studies set up a study group on legal issues regarding CBDC in November 2018. It identifies potential legal issues that would arise if the Bank were to issue CBDC in response to rapid developments in technology and their possible interpretations. The report will be released in due course.

The Bank will continue to work to improve the efficiency and safety of payment and settlement systems. It will examine, from various perspectives, the desirable nature of these systems, including the issue of CBDC. And this brings me to the end of my speech.

Hmm..

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England and NZ: trying to be best in ODI cricket and central banking

July 12, 2019

Reflecting on my recent piece in Business Standard where I argued how England is trying to revive fortunes in One Day International Cricket and Central banking.

I wrote the piece when England was struggling to make it to semi-finals having lost to Pakistan, Australia and Sri Lanka. Somehow, England figured a way out and won the next matches against India and NZ to qualify for Semifinals.They also beat their arch rivals Australia in semis, in a manner Australia will always remember. It was as if firtunes had reversed as Aussies gave that kind of treatment to Englisy be it Test matches or ODIs. England were tested and proved critics wrong and showed their reign to top was not a fluke but years of preparation.

It is interesting that they will be playing the final against NZ which somehow puffed into semis and beat favorites India to enter the final. It has to be seen whether NZ which were favorites to win in 1992 and 2015 but lost both, win the cup without being favorites at all. They will take lot of inspiration from India’s own win against WI in 1983 final against all odds.

In the BS piece, I also argued how Bank of England is trying to regain its top position as well. For long, it was seen as a role model for central banks but stopped being one. Now it is trying to pick the tempo by ushering in several policy changes and innovations.

What is interesting is that Bank of England is also competing with its counterpart in NZ for becoming this “role model for other central banks” title. RBNZ was the first to start inflation targeting in 1989 and has pioneered quite a few things since 1989. I wrote about RBNZ here.

RBNZ no intends to become the best central bank. Its Governor Adrian Orr in a speech highlighted this statement of intent:

Over the recent period we have committed to our vision to be ‘a great team and the best central bank’, and we have embedded our new Monetary Policy Committee and policy mandate. In addition, we have reorganised our operating structure, and have been investing in our people, our stakeholder relationships home and abroad, our supervision capability and activities, our digital capability, and our payment systems and the future of cash.

Change is now business as usual for the Reserve Bank and I sincerely thank my colleagues for managing through this period of renewal. There is of course more change to come.

Just over two weeks ago, the Prime Minister and the Minister of Finance made some important announcements about progress with the government’s review of our statutory framework for financial system regulation. They announced some in-principle decisions – including introducing a deposit insurance scheme – and set out further questions for a consultation, which is going on now.

So this is a good time discuss the future of the Reserve Bank, and how the changes under consideration might promote the prosperity and wellbeing of New Zealanders and contribute to a sustainable and productive economy. Those phrases, by the way, are not my own. They come from the Reserve Bank Act and express the overarching purpose of the Reserve Bank’s many functions.

Hmm..

Interesting how the competition between the two is in both the fields, cricket and central banking!

Sea change in global economic outlook

July 8, 2019

Mark Carney in this speech points how global economic outlook has gone through a sea change from optimistic to pessimistic.  He quotes from who other but Shakespeare:

A sea change is a profound transformation. The term was originally coined by Shakespeare in The Tempest,
of which there are five productions across Dorset this summer.These productions will mix tragedy and comedy in a play whose themes range from magic and creation to betrayal and revenge.

My focus is more limited and prosaic – but also more immediately relevant to your work. In recent months, there has been a sea change in financial markets driven by growing concerns over the global economic outlook. I will assess these global developments before turning to what they may mean for the UK’s economic prospects.

A good account of economic conditions…

When policymakers look at sky for clues: India’s “blue skies” vs World’s “no clear skies”..

July 5, 2019

The economic policymakers are increasingly looking up to the sky for guiding economic policy.

The Economic Survey for 2018-19 was all around the colour blue. The Survey points to Blue Sky thinking and even kept the colour of the survey as blue. The Preface explains:

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Differences in Europe’s banking union and capital market union

July 4, 2019

A superb speech by Poul M. Thomsen of IMF.

He points that in order to understand differences between building banking union and capital market union, we need to look at key differences between bank based and market based finance:

Before getting to our concrete proposals for how to promote CMU, I want to define the issues a bit better by reminding you about some basic differences between bank-based and market-based finance.

Remember that the core funding base of banks is risk-averse depositors while that of the capital markets is yield-seeking investors. Through a long and bitter experience with financial panics we have developed a system where one fundamental difference between banking and the capital markets is the special privileges that banks enjoy under the public financial safety net.

This safety net has multiple strands. Banks enjoy the right to retail deposit insurance, backstopped by the state but funded by the industry. In addition, they enjoy the right to draw liquidity from the central bank against eligible collateral, and the right to place excess liquidity at the central bank—the safest counterparty in the land. All of this makes banks safer, but can also create moral hazard, meaning an incentive to take risk when one knows one is protected from some or all of the downside.

There is more. When banks fail—and fail they still do—the government’s promise to stand behind their retail deposits creates a natural role for government in their wind-up: this is why we have state-directed bank resolution, as distinct from private corporate insolvency. And, both to offset the moral hazard effects and to contain the financial stability risks arising from the mixing of leverage and maturity transformation, banks are prudentially regulated and supervised with the explicit mandate of reducing their probability of failure.

Contrast this with a relatively pure form of capital market intermediary: the mutual fund. Where banks focus on taking deposits with a promise to return them on demand and at face value, mutual funds take equity with the prospect of higher returns but also a disclaimer on potential losses. In the mutual fund industry, savers are exposed directly to the end-users of their funds with no public backstop; official oversight is mainly focused on ensuring transparency and good conduct by fund managers, with no explicit mandate to limit losses, and is often of an ex post nature, with a heavy emphasis on enforcement, contrary to ex anteprudential oversight in banking. Risk-taking here is modulated primarily by market forces.

One more point. Banks lend based on relationships and proprietary information. Given the relatively level playing field among banks—they all benefit from the same safety net—information gathering forms the essence of competition in banking. You collect as much data as you can on your borrowers, you nurture your customer relations in the pursuit of repeat business, and you never share your data with others. And information, of course, costs money—when we borrow from banks we pay for a broad range of overheads.

Mutual funds, in contrast, invest at arm’s-length. Here, the name of the game is reliable, comparable, publicly available information. The fund buys a tradable security after its managers have skimmed the prospectus—a much less costly endeavor than gathering bespoke information—and they don’t know much that other fund managers don’t also know. Here, success depends on wise investment choices, proper valuation practices, and portfolio diversification. For the recipients of mutual fund investments—the issuers of debt and equity securities—the benefit lies in being able to access savings with less margin taken by the middleman, and thus a lower cost of funds.

In view of these basic differences between banking and the capital markets, it is not surprising that plans for banking union have focused on the creation of a centralized supervisor of systemically important banks—the Single Supervisory Mechanism; a centralized bank resolution framework—the Single Resolution Mechanism, backed by a central fund soon to be backstopped by the European Stability Mechanism; and a common European Deposit Insurance Scheme—EDIS.

Thus, the two different forms of finance requires different approaches to development and regulations:

In contrast, the general principles that I just sketched suggest that the primary focus of efforts to create a CMU should be more on ensuring greater transparency; reducing variability in investor protection regulations; and improving insolvency regimes, both to improve recovery values and to facilitate smooth market exit. One key theme here is to facilitate market discipline, which requires an approach that is distinct from explicitly seeking to reduce the likelihood of failure through intrusive prudential supervision.

Really useful to think about several things in finance….

Macroprudential policy through the lens of Sherlock Holmes

July 2, 2019

Jens Weidmann of Bundesbank says macropru policy is much like investigation of Sherlock Holmes:

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Canada enters 50th consecutive year with a Floating Exchange Rate…

July 1, 2019

Lawrence L. Schembri, Deputy Governor of Bank of Canada, in this speech speaks about merits of floating exchange rate.

Canada shifted to floating exchange rate in 1970 and has gained immensely from this strategy:

This is my second speech in our public engagement campaign called “Toward 2021.” We call it that because 2021 is the next renewal date for our five-year inflation-control agreement with the Government of Canada, first adopted in 1991. For the renewal, we’ve committed to a wide-ranging review of our monetary policy framework to ensure it best achieves our mandated goal of price stability and thereby promotes strong and sustainable output and employment growth for the benefit of all Canadians. The framework has two components: our 2 per cent inflation target and our flexible exchange rate.

The inflation target normally gets most of the attention, so the value of our floating dollar risks being overlooked at a time when the performance of flexible exchange rates is coming under greater scrutiny in international policy circles.

My purpose today is to review the evidence and make the case that Canada and many other open economies have been well-served by a market-determined flexible exchange rate. In particular, Canada’s experience with inflation targeting underpinned by a floating currency is an instructive example of the most durable monetary policy framework in the post-war period.1 The flexible exchange rate has helped our economy adjust to external shocks, primarily changes in commodity prices. Although our floating currency does not completely offset the impact of all of these shocks, it has complemented the Bank’s inflation target to help achieve low and stable inflation and keep our economy functioning well.

While we’re not going to alter the flexible exchange rate component of our monetary policy framework, it is incumbent on policy-makers to review even successful regimes regularly to ensure that they are serving the best interests of Canadians. To this end, it’s worthwhile to explore the four main benefits of our floating dollar:

    • It allows monetary policy independence to achieve domestic price stability.
    • It facilitates adjustment to external shocks, thereby buffering their impact on economic activity.
    • It contributes to policy clarity and effectiveness.
    • It promotes financial sector development.

We also examine recent criticisms of flexible exchange rates. Because exchange rates are market prices that trade daily, they are intrinsically volatile. This volatility increases the cost of making international transactions and poses risks that have to be managed, especially by exporters and importers. Nonetheless, we come down squarely on the side that the benefits of a flexible exchange rate for Canada far exceed any such costs.

Financial Gerontology: An emerging new sub-field in finance..

June 27, 2019

Haruhiko Kuroda, Governor, Bank of Japan in this speech talks about Financial inclusion in aging society:

As we get older, we all become physically weaker. Declining mobility means we can no longer take it for granted that we can easily visit bank branches. Deteriorating eyesight and hearing ability may impair our capacity to fill out a form or understand a face-to-face explanation. Declining cognitive ability may create difficulty in making financial decisions. Moreover, there is the risk that senior citizens will become victims of financial crime. In 2018, among all recorded cases of so-called special fraud in Japan — such as telephone-based identity deception — 78 percent of the victims were aged 65 and over.

Financial inclusion is therefore an extremely important social agenda in an aging society, as it ensures that senior citizens — who may have difficulty in visiting banks or making financial transactions due to age-related decline — can continue to use financial services with confidence and benefit as much as possible from these services.

In the field of what is known as “financial gerontology,” there has been discussion about ways to make the adult guardianship system more effective in order to protect the rights of senior citizens with cognitive decline. The use of innovative digital technologies has also been considered. For example, using biometric technology for identity verification and mobile payments will enable senior citizens to have secured access to financial services without actually visiting bank premises. Moreover, the use of speech recognition technology will enable financial transactions to be made without the need for physical writing or keyboard skills. Advances in technology may create increasingly comprehensive financial services that are better tailored to the needs of the individual senior citizen.

These new financial services for senior citizens can also be a great business opportunity for financial institutions. On the other hand, as technology advances, the risk of technology abuse will increase, and vigilance is therefore essential to maintain security.

Hmm..

Though, in India we hear the opposite. How these technologies have made it difficult for aged people to access their own deposited money.

As societies age across the world, financial gerontology is going to be an important are of study.

 

Non-performing loans in the euro area: How they were halved?

June 26, 2019

Nice speech by Andrea Enria, Chair of the Supervisory Board of the ECB:

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Twenty Years of the ECB’s monetary policy: Trial by Fire

June 26, 2019

Mario Draghi of ECB summarises the twenty years of monetary policy of ECB:

The euro was introduced twenty years ago in order to insulate the Single Market from exchange-rate crises and competitive devaluations that would threaten the sustainability of open markets. It was also a political project that, relying on the success of the Single Market, would lead to the greater integration of its Member States.

On both counts, the vision of our forefathers has scored relatively well. Imagine where the Single Market would be today, after the global financial crisis and rising protectionism, had all countries in Europe been free to adjust their exchange rates. Instead, our economies integrated, converged and coped with the most severe challenge since the Great Depression.

That leads me to four observations.

First, the integration of our economies and with it the convergence of our Member States has also greatly increased. Misalignments of real effective exchange rates between euro area countries are about a half those between advanced economies with flexible exchange-rates or countries linked by pegged exchange rates and they have fallen by around 20% in the second decade of EMU relative to the first.[20]

Second, the dispersion of growth rates across euro area countries, having fallen considerably since 1999, is since 2014 comparable to the dispersion across US states.

Third, this has been driven in large part by the deepening of European value chains, with EMU countries now significantly more integrated with each other than the United States or China are with the rest of the world.[21] Most EMU countries export more with each other than with the US, China or Russia. Fourth, employment in the euro area has reached record highs and in all euro area countries but one stands above its 1999 level.

But the remaining institutional weaknesses of our monetary union cannot be ignored at the cost of seriously damaging what has been achieved. Logic would suggest that the more integrated our economies become, the faster should be the completion of banking union and capital markets union, and the faster the transition from a rules-based system for fiscal policies to an institution-based fiscal capacity.

The journey towards greater integration that our citizens and firms started twenty years ago has been long, far from finished, and with broad but uneven success. But overall, it has strengthened the conviction of our peoples that it is only through more Europe that the implications of this integration can be managed. For some, that trust may lie in a genuine faith in our common destiny, for others it comes from the appreciation of the greater prosperity so far achieved, for yet others that trust may be forced by the increased and unavoidable closeness of our countries. Be that as it may, that trust it is now the bedrock upon which our leaders can and will build the next steps of our EMU.

Whatever the criticisms, EU polity continues to move ahead with the integration. People had questioned Euro right at inception and believed it would break down soon, but that has not happened.

Mixed reactions over Facebook’s Libra project..

June 21, 2019

Mixed reactions to the FB’s Libra project.

Mark Carney, Governor of Bank of England gives a cautious welcome:

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Daniel Defoe, Cooperative Banks and challenges facing German economy..

June 10, 2019

Another fascinating speech by Jens Weidmann of Bundesbank.

He points how Defoe once wrote about need to have savings/cooperative banks in England. But they took shape in Germany:

Three hundred years ago, a book was published that has since gone down in history as one of the most printed publications of all time.[1] It tells the tale of the son of a Bremen merchant who went by the name of Kreutznaer. This young man embarks on a sea voyage, is enslaved, then escapes, then procures a plantation in Brazil, and finally becomes stranded on a desert island. You will all know the protagonist by the name of Robinson Crusoe.

This story by the British writer Daniel Defoe immediately became a resounding success. Indeed, just one year after the original edition was published, as many as four German translations were already on the market, and Defoe lost no time in penning two sequels.

You might not be aware that Daniel Defoe had another bright idea that was also very well received, though it didn’t occur to him until quite some time later. Even as far back as 1697, he was recommending that “that all persons in the time of their health and youth, while they are able to work and spare it, should lay up some small part of their gettings as a deposit in safe hands … to relieve them if by age or accident they come to be disabled”. If an institution were created for this purpose in every county in England, he wrote, poverty might easily be suppressed by helping people to help themselves.

However, the kind of savings institution which Daniel Defoe had in mind was first established not in England, but in Hamburg. It was here, in the year 1778, that the “Ersparungsclasse der Allgemeinen Versorgungsanstalt” was established – the world’s very first savings bank. So you could say that holding the German Savings Banks Conference here in Hamburg is a kind of homecoming. And if we look a little closer at the philosophy behind the savings banks, we can see a key aspect of the social market economy: the idea of “prosperity for all”. Having unfettered access to markets – in this case, to banking services – promotes this idea, and it is integral to Germany’s economic model.

Nice bit. Indian cooperative movement which started in 1904 (and many other countries) took insights from German savings banks.

He then speaks about challenges facing German economy: High current account surplus, China effect and so on…

 

Israel Turns 70: Does it Need a Rebrand?

June 6, 2019

Israel turned 70 on May-2018.

HBSWK interviews Prof Elei Ofek who has written a case on Israel as a brand:

Brian Kenny: “Therefore, I believe that a wondrous generation of Jews will spring into existence. The Jews who wished for a state will have it. We shall live at last free freemen on our own soil and die peacefully in our own homes.”

This prescient view of the future was written by Austro-Hungarian journalist and activist Theodor Herzl in February of 1896. 52 years later, his vision became a reality when the state of Israel declared its independence on the South Eastern shore of the Mediterranean Sea in the heart of the ancient holy lands. Their claim was immediately rejected by the Arab leaders, sparking decades of tension and conflict between Israel and its neighbors that continues even today, but if you look beyond the headlines, you can see a different side of Israel. You see a country rich in diversity, a place steeped in history, yet on the cutting edge of innovation and science and technology, a thriving hub of entrepreneurship, arts and culture. Simply put, you see the essence of what Theodor Herzl described so long ago.

Unfortunately, that’s not a version of Israel most people see. Today we’ll hear from Professor Elie Ofek about his case entitled, Israel at 70. Is it Possible to (re)brand a Country? I’m your host, Brian Kenny, and you’re listening to Cold Call, part of the HBR Presents network.

Elie Ofek’s research focuses on new-product strategies and technology driven business environments, as well as in consumer-oriented companies in general. He’s the coauthor of the book, Innovation Equity: Assessing and Managing the Monetary Value of New Products and Services. Elie thanks for joining me today.

Elie Ofek: Oh, it’s my pleasure. Thanks for having me

Brian Kenny: What led you to write the case?

Elie Ofek: You framed the birth of Israel from the vision of Theodor Herzl. Since that founding, the country was celebrating its 70th birthday in 2018. That was a big milestone. There was some buzz around that milestone that was reached the 70th birthday, and as I was talking to people or hearing from people reflect on that, I was hearing different views, different opinions, different perceptions of Israel, namely from Israelis versus non-Israelis … and it got me thinking, how do these perceptions form? And has there ever been a conscious effort to brand the country? I really dug into that and that’s what led me to work on this case… Getting into branding of Israel also opened up this door for me to understand the topic of place branding. By place you can think of either a city, a region or a country, and in fact, you see that there are multiple stakeholders always involved in the branding of a place and that became evident when I was working on Israel rebranding effort in particular.

Brian Kenny: If you think about the science of branding or the practice of branding, it’s always about the promise that you’re making to your stakeholders. That’s relatively easy to do with a product or a service. You can articulate what the promise is. What are we going to give you? What are we delivering to you? A little harder, I guess, when you’re talking about a country filled with people who are all independent thinkers and have their own perceptions of the place.

Elie Ofek: Very well put. When you have that level of pluralistic thinking and diverse thinking of the particular place from the actual people that are there, you will get a lot of opinions about what is the best promise to make or what are the best associations, meanings, thought provocations that we want people to have when they hear the name Israel or when they think about this country.

Branding regions/countries is all the more difficult….

 

What is behind the recent global slowdown?

May 30, 2019

Hyun Song Shin, Economic Adviser and Head of Research of the BIS in this speech tries to answer the question. He says the main reason is deep interconnections between trade and finance. With financial sector continuing to bleed, this has affected trade and global growth:

Financing of working capital to sustain manufacturing and trade shines a light on the role of the banking sector. Banks are crucial for the provision of trade financing, and a strong banking sector augments the firms’ own financial resources to meet working capital needs.

Yet the banking sector has been stuck in low gear since the GFC. While post-crisis reforms have increased the resilience of banks by enhancing their loss-absorbing capacity, banks’ lending growth has been disappointingly weak. Above all, the book equity of the banking sector, which serves as the foundation for banks’ lending, has stalled.

Graph 6 shows that book equity growth has slowed drastically since the GFC, reflecting in part the low profitability of the banking sector, as well as continued dividend payouts and share buybacks. As book equity is the foundation for the lending by banks, the slow pace of book equity growth has gone hand in hand with stagnant lending growth.10The sharp break in trend in equity and asset growth since the GFC is a graphic illustration of how, even a full decade after the crisis, the banking sector has not recovered from it. This is not just a story about Europe. The group of 75 large banks depicted in Graph 6 are drawn from around the world.

The weakness of the banking sector shines a light on the unintended side effects of a prolonged period of monetary accommodation that has weighed on bank profitability through negative interest rates and compressed long-term rates. It is commonplace to say that monetary policy is overburdened in the current economic environment, not least from the BIS. But this is a point that is especially relevant for the impact of monetary policy on GVCs and manufacturing activity. Bank lending and corporate balance sheet strength are key to the financial backing underpinning GVCs. While low interest rates in advanced economies have helped bolster consumption and support strong employment growth, the impact on bank lending that bears more directly on GVCs has been arguably less effective. Nor can we say that the impact of monetary policy on corporate leverage has been unambiguously positive. Companies have taken advantage of low long-term interest rates to borrow long-term through capital markets, and have used the proceeds in financial transactions, either in acquisitions or to buy back their own shares. Real investment unrelated to property is more closely tied to the health of the manufacturing sector and has been subdued. More recently, leveraged loans issued by less creditworthy firms have been receiving increasing attention from policymakers as a potential source of financial stress for firms.

Once the growth of manufacturing and trade through more intensive use of GVCs has run its course, relying excessively on manufacturing and goods trade may be setting the global economy up for disappointment. The experience of 2017 serves as a useful lesson. During 2017, manufacturing and trade grew strongly on the back of accommodative credit conditions and a weaker dollar. However, as we have been seeing in more recent months, some of the expansion of activity was vulnerable to a reversal of credit conditions.

These considerations bring us to the importance of the composition of demand and the role of fiscal policy. When the appropriate opportunities for long-term public investment arise, fiscal stimulus – through such investment projects taking advantage of low long-term interest rates – may be one way to reorient the economy towards domestic activity. The important point here is that such a reorientation would aid the rebalancing of the composition of demand as well as its overall size. The issue of fiscal space and long-run sustainability of public debt will then need to be addressed. These issues are beyond the scope of my presentation today, but I am sure they will figure in the discussions at this forum. I look forward to a lively debate.

Hmm..

Should Central bank issue digital currencies? A perspective from Central Bank of Lithuania

May 29, 2019

Nice speech by Mr Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

He discusses the concept of CBDC and points how it is different from physical currency, bank reserves and bitcoin:

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Why do central bankers buy and collect art?

May 21, 2019

Jens Weidmann of Bundesbank in this speech:

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

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

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

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

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

Well, central banks also have the money!

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

May 15, 2019

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

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

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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.

Hmm..

 

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.


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