Central Banking

The network of global finance

In a recent speech, Andy Haldane argues that over the past decades, the global financial system has turned into a closely integrated network, and that we should think about it in these terms. The conclusion:

“The international monetary and financial system has undergone a mini-revolution in the space of a generation as a result of financial globalisation. It has become a genuine system. This has altered fundamentally the risk-return opportunity set facing international policymakers: larger-than-ever opportunities, but also greater-than-ever threats.

Dealing with these risks calls for turning the current “non-system” into one with an identifiable architecture. Measures to improve the monitoring and management of private capital flows and to augment and strengthen official sector financing facilities are important milestones towards this long-term objective.”

Yellen on fiscal stimulus near the ZLB

“What lessons can we draw from this experience? The first is that governments need to address long-term challenges and significantly improve their structural fiscal balances during good times so they have more fiscal space to provide stimulus when times turn bad. When poor economic conditions drive policy interest rates close to the zero lower bound, fiscal stimulus may be more effective than usual in boosting aggregate demand because it will not have the usual effect of raising real interest rates, thereby crowding out private demand.” 2

The two sources in the footnote are: Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo (2011), "When Is the Government Spending Multiplier Large?" Journal of Political Economy, vol. 119 (February), pp. 78-121; and J.Bradford Delong and Lawrence H. Summers (2012), "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Spring, pp. 233-97.

Full speech here:

The true lesson of King Midas

I wanna save this link to an old Slate article by Paul Krugman on the gold standard for future reference. I haven’t come across a piece that lays out the basic arguments better in less space. So this is a useful reference to have, in general because the discussion never seems to come to an and, and in particular now, when it is taking place in Switzerland. Below the introductory paragraph, as an example for cool writing:

“The legend of King Midas has been generally misunderstood. Most people think the curse that turned everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the perils of avarice. But Midas’ true sin was his failure to understand monetary economics.”

The dog and the frisbee

I am working on the research proposal for my PhD applications, and while going through the literature on financial crises and stumbling upon Andrew Haldane’s “The dog and the frisbee” speech, I realized that I never actually posted about it, or even saved the link. There is still much I want to read tonight, so I won’t write about the speech. Suffice to say that it is easily the best speech on the subject (as well as the best speech by any central banker on any subject) I have ever seen. But I have saved the link now, and thus have at least one post about the speech, which I feel is required simply for completeness on any blog about the subject.

Wren-Lewis explains helicopter money

A very handy go-to reference. It goes all the way to point 12.

“1. Helicopter money is a form of fiscal stimulus. The original Friedman thought experiment involved the central bank distributing money by helicopter, but the real world counterpart to that is a tax cut of some form.”

“2. What makes helicopter money different from a conventional tax cut is that helicopter money is paid for by the central bank printing money, rather than the government issuing debt.”

Eichengreen on monetary policy and its complications

Barry Eichengreen in the FT:

“Making monetary policy has always been a complicated craft. Whenever there was an effort to reduce the art of central banking to a simple formula, be it an exchange rate target under the gold standard or an inflation target more recently, other problems – such as threats to financial stability – have had an awkward tendency to intrude. They will undoubtedly do so again.”

Blanchard on dark corners

Olivier Blanchard doesn’t exactly say *where* the dark corners are, but argues – quite correctly in my view – that the main objective of macro policy should be to stay away from them. The piece is a concise overview of how developments within the economic profession (read rational expectations) and in the economy itself (read Great Moderation) have corroborated to the macro policy world view prior to the 2008 crisis, and how the crisis has changed the view.

The piece is worth reading in full. A nice passage is on financial regulation: “The reality of financial regulation is that new rules open new avenues for regulatory arbitrage, as institutions find loopholes in regulations. That in turn forces authorities to institute new regulations in an ongoing cat-and-mouse game (between a very adroit mouse and a less nimble cat).”

Deflation in the great recession

I have had a couple previous posts on this. But as the topic keeps resurfacing, I want to use this post as a central storage for all the relevant material.

  • Krugman, Missing Deflation
  • Hobjin & Daly, Wage Adjustment and Full Employment in a Low Inflation Environment. Abstract: The response of wages during the recent recession and ongoing recovery has been fairly modest. This paper will consider recent wage behavior using macro and, if possible, micro-level data, putting it in an historical context. What are the reasons for the slow wage adjustment? Is downward nominal wage rigidity playing an important role? How much weight should policymakers place on wage changes under current circumstances when assessing how far the economy is from attaining full employment? Does the signal quality decline with the target rate of inflation? What have we learned about wage inflexibility from the recent episode, and should any such lessons affect our views of the most appropriate value for the inflation target?
  • IMF WEO April 2013, The Dog That Didn’t Bark.
    Abstract: This chapter finds that inflation expectations have remained strongly anchored to inflation targets during the Great Recession and the sluggish recovery. Long-term inflation expectations in advanced economies remain close to targets despite wide variation in actual inflation rates. Even in Japan, expectations remain close to the 1 percent target announced in February 2012 despite a prolonged period of deflation. Furthermore, coincident with greater central bank credibility, this anchoring is found to have increased over time.
  • The Economist, Free Exchange Blog; The mystery of stable prices.
  • The Economist, Free Exchange Column; The death of inflation.