Bridging the textbook gaps on how the central banks implement monetary policy

June 20, 2019

Kellie Bellrose of RBA explains the difference between how textbooks explains central banks implementing monetary policy vs how central banks actually implements it.

Though the article is for Reserve Bank of Australia but applies to most central banks.

The RBA’s implementation of monetary policy is an area of confusion for professional economists, commentators and educators alike, particularly in reference to how closely the actual process aligns with the standard textbook explanations. T

he two main gaps in typical textbook explanations relate to:

    1. The omission of the policy interest rate corridor. The corridor is key to how the RBA implements monetary policy, particularly a change in monetary policy, as it encourages banks to trade ES balances at the target cash rate.
    2. The use of open market operations. Textbooks often link OMOs with achieving a change in the cash rate when, in practice, the RBA uses OMOs to manage the supply of cash to keep the cash rate at its target.

In summary, the market automatically trades at the new cash rate target following a change to monetary policy. This is achieved by the policy interest rate corridor, which resets around the new cash rate target, and banks have no incentive to trade outside of this corridor. Given the automatic adjustment to the cash rate target, there is no need for additional OMOs. OMOs are instead used by the RBA to manage the supply of cash (liquidity) in the market on a daily basis as part of its liquidity management practices.

This information can be viewed at a glance in the accompanying table ‘The Reality of Monetary Policy Implementation’.

Nice bit.



The future of cash in New Zealand

June 20, 2019

Reserve Bak of NZ issued a report on future of cash in the country:

The future of cash1 in New Zealand is uncertain. The Reserve Bank of New Zealand (Reserve Bank) is in the middle of a multi-year programme to establish The Future of Cash — Te Moni Anamata. This programme has identified that, despite an increasing trend in the overall cash in circulation (CIC), New Zealand is becoming a society that uses little cash.

New Zealanders are using cash less and less for transactions. As the transactional demand for cash falls, the per transaction cost of providing cash infrastructure increases. Commercial operators have natural incentives to reduce their costs and reduction in cash demand and use could lead them to reduce their provision of cash infrastructure, or to stop accepting and issuing cash. Such decisions — driven by commercial considerations — would in turn further increase the per-transaction costs of providing cash and lead to further reductions in the cash network.

The benefits of having cash become greater and greater as more and more people use it. This so-called ‘network effect’ of cash, also declines as fewer people use it. For example, if fewer consumers, businesses, and banks dealt with cash, the ability for people to use cash for transactions in stores and between individuals would decline. If this occurred, some of the unique roles of cash could be lost. The legal tender status of cash does not oblige anyone to accept cash as a means of payment except for debt.

A contraction in the cash network without regard to the wider benefits of cash in society might significantly disadvantage people who rely on the unique role that cash plays in their lives. This would be considered a market failure2 to the extent that commercial operators did not fully incorporate the wider network benefits of cash. As a result, government action could be warranted following the completion of this review.

The Reserve Bank is the sole issuer of cash in New Zealand and is required to issue currency that meets the needs of the public.3 There is no agency responsible for over-seeing the usability of cash by the public or stability of the cash system in New Zealand. Therefore, the Reserve Bank is taking a leadership position to assess the future of cash.

This issues paper outlines our4 preliminary analysis of the role of cash in society and the trends in cash use and supply. It sets out the key issues to consider – both positive and negative – if less cash were being used in New Zealand accepted that:

    1. People who are financially or digitally excluded could be severely negatively affected. These include:
      1. People who are not banked or have limitations to accessing the banking system, such as people without identification and proof of address, people with convictions, people with disabilities, illegal immigrants and children.
      2. People who face barriers to digital inclusion, such as people with disabilities, senior citizens, people with low socio-economic status, people that live in rural communities with low internet service, migrants and refugees with English as a second language, Pasifika, and Māori.
    2. Tourists, people in some Pacific islands, and people who use cash for cultural customs might be negatively affected if they cannot use cash substitutes.
    3. All members of society would lose the freedom and autonomy that cash provides and the ability to use cash as a back-up form of payment, and might be more exposed to national and personal cyber threats.
    4. There would be limited or balanced effects for people’s ability to budget, New Zealand’s financial stability, and government revenue.
    5. Cash infrastructure is costly. Moving to a society with less cash could increase efficiency and reduce the overall transaction costs of payments.

The issues arising from a society with less cash have a broad reach. This issues paper invites your feedback on whether we have correctly identified the most important issues and whether there any other significant issues that should be taken into account. It also seeks initial views on the roles of government and Reserve Bank are regarding these main issues.

The Reserve Bank will publish an analysis of the feedback received, as well as further research. A formal policy consultation may follow depending upon what emerges from feedback on this paper and further research and analysis.


Book Review: The Bank of England and the Government Debt (1928-1972) (Another way of looking at MMT?)

June 19, 2019

A new book by William Allen who worked for Bank of England from 1972 to 2004 on monetary policy formulation and financial market operations.

John Wood reviews the book:

 Central banks do more than conduct monetary policies aimed at price level and employment objectives. They also — and this was the Bank of England’s (the Bank’s) original and primary task for most of its history — raise money (issue/sell securities) for governments, and in the course of debt management support orderly and otherwise attractive markets for those securities, including gilt-edged bonds in the UK, or gilts, so called because their paper certificates had gilded edges. The purpose of this book “is to describe the [Bank’s] operations in the gilt-edged market” from 1928 to 1972, “and to suggest possible reasons why they were at times conducted in a way which most economists found quaint and incomprehensible” (p. xiii). The author worked for the Bank from 1972 to 2004 on monetary policy formulation and financial market operations, and his book endeavors with a good deal of success to connect these activities.

The market for gilts has largely been conducted by the brokers and jobbers (dealers/market-makers) of the London Stock Exchange since the eighteenth century. (UK bonds are also known as Treasury stock, and historically were among the main securities traded on the Stock Exchange.) Not being an Exchange member, the Bank dealt through a broker, the Government Broker, the senior partner of Mullens and Co. A primary goal, and the one emphasized in this book, was “to maintain the liquidity of the gilt market,” and in this connection act as market-maker of last resort. This role of central banks “has been discussed extensively in the context of the crisis of 2008-09,” but the present study shows that the Bank had long acted in this manner, and even, at times, as market-maker of first resort (pp. 2-3). “The term ‘market liquidity’ refers to the ease with which large amounts of an asset can be bought or sold; ease embraces both the amount of time it takes to complete the transaction, and how close the transaction price is to the price ruling in the market just before the transaction was undertaken” (p. 6).

The Bank’s financial activities depended on the monetary policies chosen by the government. In particular, its interventions were dictated by the government’s frequent preferences for interest rates that differed from market equilibria. The Bank acted pretty much as a price taker during the 1930s, when yields rose with recovery from the Great Depression, but was a substantial buyer during World War II as it supported interest-rate ceilings on government debt. From after the war to near the end of our period, the Bank (along with other central banks) was torn between the often contradictory goals of a fixed exchange rate and full employment, forcing devaluations of the pound from $4.20 to $2.80 during Labour’s “cheap money” policy in 1949 and to $2.40 in 1967, which was a delayed reaction to the Tories’ growth policies of the late 1950s and early 1960s. Among the unfortunate side effects of the misalignment of policies were foreign exchange controls and the suppression of private demands (including investment) by means of controls on consumer credit and bank lending.


This is another way of looking at MMT.

MMTers say the central bank works a lot with government than we are made to think.  Much of central bank policies are done while actively managing the government debt. The central banks not just buy the debt but also manage the yields. Pre-central bank era they did so based on government orders and post-independence era, do it by stealth. Infact legally too, central banks change their balance sheets by changing the composition of government bonds.

Thus, even if you disagree whatever MMTers have to offer you cannot deny this is how central banks actually work!

The fallout of overestimated Indian GDP: Scrap RBI’s monetary policy panel or give it a dual mandate?

June 19, 2019

All  kinds of things being written after Arvind Subaramaniam’s research paper was released which said India GDP growth rate is overstated by 2.5%.

From being labelled a scoot and shoot economist to being accused of intellectual treason! It is such a pity when you are given all the names for merely writing a paper! I mean one can disagree with the ideas but accusing someone of treason! Really? How bad is it going to get? Cannot believe that a leading financial daily actually agreed to publish such acerbic stuff. How low is it going to get?

Anyways, another piece questions the role of RBI’s MPC:

Read the rest of this entry »

The Overuse of Mathematics in Economics: View from an economics student

June 19, 2019

Luka Nikolic, Master’s student (Business and Economics) at the University of Ljubljana writes:

If you enrolled at university today, you would find economics modules filled with mathematics and statistics to explain economic phenomena. There would also be next to no philosophy, law, or history, all of which are much more important to understanding the way our world works and how it impacts the economy.

The reason is that since the end of the 19th century, there has been a push toward turning economics into a science—like physics or chemistry. Much of this has been done by quantifying phenomena and explaining it through graphs. It has been precisely since this shift that there has been such a poor track record of public policy, from fiscal to monetary.

What many contemporary economists fail to realize is that economics is as much of a philosophical pursuit as a mathematical one, if not more so.

What follows is a short history of economics and why Maths despite being important only answers so much.


Italy’s Mafia Uses the Old Lira as Its Own Parallel Currency

June 19, 2019

As Italy plans fiscal money to subvent ECB and Euro, there is another interesting story from the country.

Italian Mafia still uses Old Lira notes!

Italy’s proposed mini T-Bills may be pie in the sky for now, but it appears the country already has another currency floating around — the old lira.

A senior police officer revealed this week that domestic criminal organizations are still using the pre-euro currency for illicit transactions. It’s not clear how the former notes are ultimately exchanged for euros, if at all, though he said officers are still uncovering them. The lira ceased to be legal tender at the end of February 2002.

“We still discover big amounts of liras,” Giuseppe Arbore, a deputy in the Guardia di Finanza, which investigates financial crimes, said at a parliamentary hearing on Thursday. “Italian liras still constitute parts of illicit transactions.’’

Arbore’s remarks prompted amazement among lawmakers of the Senate Finance Committee, where he was testifying on a government bill aimed at simplifying the tax system. When pressed to provide examples, he said he couldn’t elaborate, citing ongoing investigations.

“When a banknote is accepted by an organization internally, even if it is outside the law as a legal value, it can settle transactions,’’ he said. “We are obviously talking about illicit organizations.’’


Under current legislation, it’s not possible to convert lira, and the Bank of Italy years ago transferred the equivalent value of the currency still in circulation to the state, around 1.2 billion euros, according to the central bank’s website.

It’s not the first time that the mob and the former currency have been linked. In 2012, the central bank’s Financial Information Unit report said it worked with the Bureau of Anti-Mafia Investigation on “suspicious transaction reports’’ relating to lira-euro conversions.

Italy and its Mafia!

Though the bold bit is how anything becomes a currency and if backed by State becomes legal tender.

History of Australian equity market: 1917-79

June 19, 2019

Thomas Matthews of RBA in this paper:

This paper presents stylised facts about the historical Australian equity market, drawn from a new hand-collected unit record dataset on listed companies from 1917 to 1979. Among other things, I show that: i) dividends for the early 20th century were lower than previously believed; ii) the realised returns on equities has averaged about 4 percentage points above that on government bonds since 1917, somewhat lower than previous estimates; iii) the share of profits paid out as dividends increased substantially after the introduction of franking credits in the 1980s; iv) the current industry composition of the stock exchange is atypical relative to history, despite it being dominated by essentially the same companies for the past century; and v) price-to-earnings ratios are currently almost exactly at their very long-run average, in contrast with the experience of some other countries.

Good stuff!

Economic Lessons from heavy crowding at Mt. Everest

June 18, 2019

Jim O’Neill in this piece applies ecomomic lens to the heavy overcrowding seen at Mt Everest this year:

Beyond specific conditions such as the narrowness of the trail, Everest’s overcrowding problem is not so different from many other economic and social challenges that policymakers confront, namely an imbalance between supply and demand, and possibly poor regulation. One example, of special concern to me, is the , which is failing because the development of new drugs is not keeping pace with demand. But more closely related to Everest is the broader challenge of managing tourist hotspots. Around the world, more and more people have joined the middle class, and they (understandably) want to experience the best that the planet has to offer.

When it comes to Everest, part of the problem is a fixed supply. There are only so many paths up the mountain (though some daring alpinists, no doubt, prefer to blaze their own), but the number of tour groups has increased. Given this, it stands to reason that the price should be allowed to rise until the balance between supply and demand is restored.

Of course, Nepalese policymakers, eager for tourism revenue, would balk at this suggestion; and they would probably argue that the average visitor should not be turned away from such a massive natural attraction. But, in that case, they must introduce and enforce stricter safety and regulatory standards for the companies offering tours up the mountain (which will also put upward pressure on prices).

The same fixed-supply problem applies to all tourist hotspots. As I have noted previously, Switzerland would have to produce more beautiful mountains to have any hope of satisfying the burgeoning demand from Chinese tourists visiting the Alps. The same can be said of Petra, Jordan, or any other wonderful destination. In all of these cases, the rational economic solution is to allow the price to rise, or to introduce more stringent regulatory controls.

Facebook’s cryptocurrency Libra

June 18, 2019

FB’s crytpcurrency has been much talked about.

The whitepaper has just been released. This is the technical version, which requires know how of computing.


Fiscal Money Can Make or Break the Euro

June 18, 2019

As European central bank controls all monetary operations, the constrained European governments are trying to figure ways to create money on their own.

Italian government is planning to issue short-term treasury bills or mini-BOTs which has led concerns over creation of parallel currency and give government avenues to spend.

Yanis Varoufakis, former FInance Minister of Greece in this piece explains how in his tenure he had proposed a variant of this proposal. But it was aimed at saving the Euro:

My idea was to establish a tax-backed digital payment system to create fiscal space in eurozone countries that needed it, like Greece and Italy. The Italian plan, by contrast, would use a parallel payment system to break up the eurozone.

Under my proposal, each tax file number, belonging to individuals or firms, would be automatically provided with a Treasury Account (TA) and a PIN number with which to transfer funds from one TA to another, or back to the state.

One way TAs would be credited was by paying arrears into them. Taxpayers owed money by the state could opt for part or all of those arrears to be paid into their TA immediately, instead of waiting for months to be paid normally. That way, multiple arrears could be eliminated at once, thus liberating liquidity across the economy.

For example, suppose Company A is owed €1 million ($1.1 million) by the state, while owing €30,000 to an employee and another €500,000 to Company B. Suppose also that the employee and Company B owe, respectively, €10,000 and €200,000 in taxes to the state. If the €1 million is credited by the state to Company A’s TA, and Company A pays the employee and Company B via the system, the latter will be able to settle their tax arrears. At least €740,000 in arrears will have been eliminated in one fell swoop.

Individuals or firms could also acquire TA credits by purchasing them directly, via web-banking, from the state. The state would make it worth their while by offering buyers significant tax discounts (a €1 credit purchased today could extinguish taxes of, say, €1.10 a year from now). In essence, a new dis-intermediated (middlemen-free) public debt market would emerge, allowing the state to borrow small, medium, and large sums from the private sector in exchange for tax discounts.


Indeed, if my parallel, euro-denominated system had been operational in June 2015, when the European Central Bank closed down Greece’s banks to blackmail its people and government into accepting the third bailout loan, two outcomes would have been possible. First, transactions would have shifted massively from the banking system to our TA-based public payment system, thus reducing substantially the ECB’s leverage. Second, it would be common knowledge that, at the push of a button, the government could convert the new euro-denominated payment system into a new currency.

In our case, the idea was to keep Greece viably within the eurozone by using the additional bargaining power afforded by the parallel payment system to negotiate the deep debt restructuring needed to revive economic growth and ensure long-term fiscal sustainability. As long as our creditors saw that our redenomination costs were lowered, while our demands for debt restructuring were sensible, they would think twice before threatening us with Grexit. Joint action by the ECB and my ministry would allow the parallel system to be portrayed as a new pillar of the euro, thus quashing any financial panic. By ending the popular association of the euro with permanent stagnation, the parallel system would be the single currency’s friend.

What about Italy?

This brings us to Italy. There are two technical differences between the system I designed and Italy’s planned mini-Treasury bills (or mini-BOTs). First, mini-BOTs will be printed on paper, something I opposed, to avoid a grey market. Our total supply of digital credits would have been managed by a distributed ledger, to ensure full transparency and prevent the inflationary overproduction of credits. Second, the mini-BOTs will be interest-free, perpetual bonds, without future tax discounts.

But the real difference between the Italian scheme and mine remains political. The parallel payment system I proposed was designed to use the reality of lower eurozone exit costs to create new fiscal space and help civilize the monetary union in the process. Italy’s system is the first step toward a parallel currency by which to bring about the eurozone’s end.

European politics around moneys is never boring.


100 years of first transatlantic flight..

June 14, 2019

Amazing to note this. Central Bank of Ireland has issued a coin commemorating the 100 years of first transatlantic flight.

As per wikipedia:

British aviators John Alcock and Arthur Brown made the first non-stop transatlantic flight in June 1919.[1] They flew a modified First World War Vickers Vimy[2] bomber from St. John’s, Newfoundland, to Clifden, Connemara, County Galway, Ireland.

The flight started on 14 June fom Canada and landed in Ireland on 15 June in 16 hours. has a piece on the anniversary.

Ironically, the flight was completed as we were nearing end of WW-I. Shows the complexity of human mind which is capable of both disasters and achievements.

From Harvard vs Hard work economists to scoot and shoot economists..

June 14, 2019

Lots of discussion ever since Arvind Subramaniam released his controversial paper. This was expected and am sure the former CEA weighed it before releasing.

This one by Sanjeev Ahluwalia is really hard-hitting. Earlier the foreign based economists were criticised as Harvard vs Hard-work. He adds another term for them: scoot and shoot economists. It means they change their location conveniently while writing their opinion. He also says such scooting and shooting will lead to government not taking interest in lateral entry recruitment.

Why Adam Smith ideas mean different things for different people

June 14, 2019

Nice piece by Glory M Liu, a postdoctoral research fellow at the Political Theory Project at Brown University. She is currently working on a book project titled ‘Inventing the Invisible Hand: Adam Smith in American Thought and Politics, 1776-Present’.

Liu argues how Smith leads to fight between people:

People like to fight over Adam Smith. To some, the Scottish philosopher is the patron saint of capitalism who wrote that great bible of economics, The Wealth of Nations (1776). Its doctrine, his followers claim, is that unfettered markets lead to economic growth, making everyone better off. In Smith’s now-iconic phrase, it’s the ‘invisible hand’ of the market, not the heavy hand of government, that provides us with freedom, security and prosperity. 

To others, such as the Nobel prizewinning economist Joseph Stiglitz, Smith is the embodiment of a ‘neoliberal fantasy’ that needs to be put to rest, or at least revised. They question whether economic growth should be the most important goal, point to the problems of inequality, and argue that Smith’s system would not have enabled massive accumulations of wealth in the first place. Whatever your political leanings, one thing is clear: Smith speaks on both sides of a longstanding debate about the fundamental values of modern market-oriented society.

But these arguments over Smith’s ideas and identity are not new. His complicated reputation today is the consequence of a long history of fighting to claim his intellectual authority.


Scholars keep inventing, reinventing and cherrypick Smith:

Indeed, it is easy to forget that Smith – who he was, is, and what he stands for – has been invented and reinvented by different people, writing and arguing in different times, for different purposes. It can be tempting to dismiss some past interpretations and uses of Smith as quaint, superficial, misleading or wrong.

But they also reveal something about how and why we read him. Smith’s value has always been political, and it’s often politicised. But much of that value stems from assumptions about the neutrality and objectivity of the science he invented when, in fact, those assumptions are ones that his later readers projected onto him. Smith was a scientist, no doubt, but his ‘science of man’ (in David Hume’s phrasing) was not value-free. At the same time, we should be wary of reading his science through the lens of a single normative value – whether that is freedom, equality, growth or something else.

Adam Smith’s works remain vital because our need to identify and understand the values of a market society, to take advantage of its unique powers and temper its worst impulses, is as important as at any time in the previous two centuries. Economic ideas carry immense power. They have changed the world as much as armies and navies. The extraordinary breadth and sophistication of Smith’s thought reminds us that economic thinking can not – and should not – be separated from moral and political decisions. 

Perhaps one of the most important lines written on Smith’s works…

Financial revolution in Republican China: 1900-1937 (rare case of finance being freed from State)

June 14, 2019

Nice research by Prof Debin Ma of LSE:

Read the rest of this entry »

12 Quotes from Leo Tolstoy on Truth, Violence, and Government

June 14, 2019

Nice compilation by Jon Miltimore:

Read the rest of this entry »

30 years of Banca d’Italia (Central Bank of Italy) in Japan

June 14, 2019

Apart from analysing commercial banks opening branches in foreign countries, it is also interesting to see central banks opening branches in foreign countries. Central banks open branches in foreign countries for exchanging views and liaisoning.

Bank of Italy opened its branch in Japan in 1989. They reflect on the 30 years of completion.

BoJ Governor Kuroda gives a speech and Ignazio Visco, Governor of the Bank of Italy, shares his view.



Undermining central bank independence: Case of Austria

June 13, 2019

Small European countries is where the action is. This blog has pointed cases of how governments are trying to undermine central bank independence in Cyprus, Slovenia and now Austria.

In Austria, the Government wants to take the bank supervision powers away from the central bank to Financial Market Authority:

Read the rest of this entry »

100 years of Treaty of Versailles: Lessons for today?

June 13, 2019

The treaty was signed on June 29, 2019 and ended World War – 1.

Barry Eichengreen in this piece says the treaty led to inward orientation, a strategy which backfired eventually.

Read the rest of this entry »

The Boom in Benjamins: What makes the US$100 bill so popular?

June 12, 2019

Melinda Weir of IMF points how the USD 100 bills remain highly popular.

Read the rest of this entry »

What are the important lessons from Islam’s inward turn centuries ago?

June 12, 2019

Mustafa Akyol discusses the question..

%d bloggers like this: