Hume on hold?
Michael Burda, 17 May 2012
The EZ crisis reveals critical flaws in the Eurozone’s design. This column argues that failing to abolish national central banks left the door open for national interests to interfere with the natural workings of the financial system and Hume’s adjustment mechanism. This flaw – and the omission of a European Banking Authority with real teeth – will come back to haunt Europe in the months and years to come.
The great Scottish philosopher and economist David Hume understood all too well how national boundaries and balance-of-payment statistics affect and even determine flows of international trade. Where national boundaries exist, customs offices and government bureaucracies assiduously monitor the flow of goods and assets between countries.
Topics: EU institutions, International finance
Tags: balance of payments, Central Banks, David Hume
Central Bank reserve creation in the era of negative money multipliers
Manmohan Singh, Peter Stella, 7 May 2012
Are central banks printing vast quantities of money? This column explains how money-multiplier economics (central banks create reserves that allow commercial banks to create money) no longer holds. Today, non-bank financial institutions play a pivotal role in money/liquidity creation, but hold no reserves. Their lending depends on “private reserves”, mainly highly liquid government securities. Creating more ‘public’ reserves by buying such ‘private’ reserves doesn’t trigger money creation – it just substitutes among reserve types. Open-market purchases only create money if they swap a monetary base for assets that are no longer accepted at full value as collateral in the market.
The phenomenal increase in bank reserves that has resulted from central bank responses to the current financial crisis has led to considerable anxiety regarding a potentially explosive and uncontrollable future increase in inflation.
Topics: Macroeconomic policy
Tags: Central Banks, monetary policy, money multiplier, reserves
Central banks and gold puzzles
Joshua Aizenman, Kenta Inoue, 19 March 2012
The patterns of gold holding remain a debatable topic at times when the relative price of gold has appreciated while the global economy has experienced recessionary effects. This column studies the curious patterns of gold holding and trading by central banks from 1979 to 2010. It suggests that a central bank’s gold position signals economic might, and gold retains the stature of a ‘safe haven’ asset at times of global turbulence.
On 7 August 2009, the European Central Bank released the following Joint Statement on Gold:
Topics: International finance
Tags: Central Banks, Gold, reserves
The role of central banks in financial stability: How has it changed?
Willem Buiter, 16 January 2012
The global crisis inaugurated a new era for central banks in the advanced economies, when their conventional role as interest rate-setters and lenders and market makers of last resort expanded. Central banks have become the custodians of stability for financial markets – a role for which they lack both democratic accountability and political legitimacy, argues Willem Buiter in DP8780. He decries the new “perverse division of labour” between central banks and fiscal authorities and appeals for a reassessment of this pathological arrangement.
Vox readers can download CEPR Discussion Paper 8780 for free here.
Journalists are entitled to free DP downloads on request; please contact firstname.lastname@example.org. To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.
Topics: EU institutions, Financial markets, Global crisis, Global economy, Institutions and economics, Macroeconomic policy, Monetary policy, Politics and economics
Tags: accountability, Central Banks, financial stability, global crisis, unorthodox monetary policy
Central banks’ voting records and future policy
Kateřina Šmídková, Jan Zapal, Roman Horváth, 13 November 2011
Does the publishing of voting records improve the transparency of monetary policy? This column argues voting records indeed contain informative power about future monetary policy but only if there is sufficient independence in voting across board members and if the signals about the optimal policy rate are noisy.
Monetary-policy transparency has several dimensions, such as volume, quality, and timeliness of disclosed information. Transparency-cautious central banks typically release the voting records from monetary-policy meetings together with the minutes.
Topics: Macroeconomic policy, Monetary policy
Tags: Central Banks, monetary policy, transparency
When markets freeze: Tobin’s q and QE
Marcus Miller, John Driffill, 27 September 2011
Just what on earth is going on in the global economy? Rather than get caught up in the hysteria, this column says the answers are best found by looking through the pages of history and dusting down some old textbooks.
The economies of the North Atlantic look in poor shape. But it could be worse. Central banks have been doing their best to save capitalism from its own self-fulfilling fears, using the policy of quantitative easing to take frozen assets onto their balance sheets until confidence returns. Why they are doing this – and why it matters – can best be seen in the light of history.
Topics: Global crisis, Monetary policy
Tags: Central Banks, global crisis, Great Depression, monetary policy, quantitative easing
Procyclical bank risk-taking and the lender of last resort
Mark Mink, 31 August 2011
While central bank liquidity support is used on a large scale to combat the instability of the banking sector, this column argues that the prospect of receiving such support might well have been one of the causes of the instability. In particular, it shows that the provision of liquidity support stimulates banks to engage in various forms of risk-taking, and to do so in a procyclical way.
Since the outbreak of the global financial crisis in 2007, and particularly since the bankruptcy of Lehman brothers in September 2008, central banks in their roles as lenders of last resort have provided large-scale liquidity support not only to individual banks, but also to the banking sector as a whole. As President Trichet of the European Central Bank explained in November 2009:
Topics: International finance, Macroeconomic policy
Tags: Central Banks, financial regulation, lender of last resort
A balance sheet view on TARGET – and why restrictions on TARGET would have hit Germany first
Clemens Jobst, 19 July 2011
The debate over TARGET balances and whether there is an ongoing stealth bailout in the Eurozone has attracted attention from top economists and journalists in the past month. This column argues that the reason why the arguments keep dragging on is the lack of a clear framework for the discussion, something this column aims to provide.
By now most readers of European financial newspapers and blogs will have come across Hans-Werner Sinn’s repeated assertions (see Sinn 2011a and 2011b on this site and his latest
Topics: EU policies, Europe's nations and regions, International finance
Tags: Bundesbank, Central Banks, ECB, Eurozone crisis, Germany, TARGET
Shell game: Zero-interest policies as hidden subsidies to bank
Axel Leijonhufvud, 25 January 2011
The shell game is a roadside con as old as civilisation. This column argues that the same swindle is being performed on a massive scale at the expense of the unsuspecting taxpayer. It says that, with their near zero interest rates, central banks are effectively subsidising the banking sector – with barely a pea passed on to the public.
The two pioneers of modern monetary economics – Irving Fisher and Knut Wicksell – were passionately concerned to find monetary arrangements that would insure against arbitrary redistributions of income and wealth. They saw such distributive effects as offenses against social justice and consequently as a threat to social and political stability.
Topics: Financial markets, Monetary policy
Tags: Central Banks, monetary policy, zero interest rates
Money market freezes and central banks
Max Bruche, Javier Suarez, 7 January 2011
During the global crisis central banks have undertaken unconventional measures that some commentators claim go beyond their mandate. This column focuses on central banks intervening in the money markets as a middle man. It argues that such actions can be welfare improving, but are unlikely to be fiscally neutral, thus raising questions about whether they should be left to a central bank.
During the peak of the crisis in autumn 2008, spreads in money markets rose sharply and volumes contracted, forcing many banks into difficulties with their standard liquidity management and refinancing strategies.
Topics: Global crisis, Monetary policy
Tags: Central Banks, monetary policy