Using changes in auction maturity sectors to help identify the impact of QE on gilt yields
Ryan Banerjee, Sebastiano Daros, David Latto, Nick McLaren 20 August 2012
A central banker's toolkit these days must include a way of estimating the effect of quantitative easing purchases on government bond yields. With markets savvier than ever in anticipating quantitative easing purchases, estimating the effect has become more difficult. This column by four Bank of England economists introduces a novel empirical approach.
The policy decisions of several of the world’s largest central banks turn on a tricky empirical judgement – the effect of quantitative easing purchases on government bond yields. In the UK, the empirics have got much harder.
Central Banks, quantitative easing
The case for ‘deficit monetisation’ and greater cooperation between central banks and ministries of finance
Richard Wood 18 August 2012
Central banks are running out of conventional tools, and the effectiveness of unconventional ones like QE are being questioned. More radical solutions are being considered. This column sets out the case for monetisation of budget deficits.
The Financial Times editorial (12 April 2012, under the heading ‘Waiting for Growth’) pointed to the widespread disappointment with policies of ‘quantitative easing’ (QE). These policies have now been applied in the US, Japan, the UK, and in the Eurozone without substantial evidentiary success on an ongoing basis. G, manufacturing output, and exports are all weakening.
Central Banks, quantitative easing, monetisation of budget deficits
The (other) deleveraging: What economists need to know about the modern money creation process
Manmohan Singh, Peter Stella 02 July 2012
The world of credit creation has shifted over recent years. This column argues this shift is more profound than is commonly understood. It describes the private credit creation process, explains how the ‘money multiplier’ depends upon inter-bank trust, and discusses the implications for monetary policy.
One of the financial system’s chief roles is to provide credit for worthy investments. Some very deep changes are happening to this system – changes that surprisingly few people are aware of. This column presents a quick sketch of the modern credit creation and then discusses the deep changes are that are affecting it – what we call the ‘other deleveraging’.
monetary policy, Central Banks, money multiplier, Pledged collateral, re-pledging, private money creation
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. Surpluses and deficits are seen by politicians as a sign of national pride or shame. Hume criticised the mercantilist view but was optimistic that trading patterns would ultimately right themselves. In 1752 he wrote:
EU institutions International finance
Central Banks, balance of payments, David Hume
Central Bank reserve creation in the era of negative money multipliers
Manmohan Singh, Peter Stella 07 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. Virtually identical concerns within the Federal Reserve in late 1935 motivated large increases in reserve requirements during 1936 and 1937; actions widely regarded as contributing to the sharp 1937-8 recession (see Friedman and Schwartz 1963).
monetary policy, Central Banks, reserves, money multiplier
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:
Central Banks, reserves, Gold
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. Ideally, these voting records should help external observers better understand monetary policy, as argued by Geraats et al (2008) in the case of the ECB. In other words, they should be informative about future monetary policy.
Macroeconomic policy Monetary policy
monetary policy, transparency, Central Banks
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.
Global crisis Monetary policy
monetary policy, Central Banks, Great Depression, global crisis, 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:
International finance Macroeconomic policy
Central Banks, lender of last resort, financial regulation