Researchers at the SF Federal Reserve Bank published a report today arguing that, in serious downturns (but not in normal times), the beleaguered Phillips curve proves useful. The Phillips curve, of course, shows an inverse relationship between employment and inflation – a concept which garnered increased scepticism, inside and outside the FOMC, over the past few decades as researchers struggled to find empirical evidence showing the link.
But, the researchers say, now that we’re in a deep recession, the Phillips curve is, again, useful. “Our findings suggest that the high level of the unemployment rate over the past year likely contributed to the substantial declines in the inflation rate, as the Phillips curve would predict,” the researchers wrote. Read more
Ben Bernanke, chariman of the Federal Reserve, joined the chorus of those calling for a closer look into the Fed’s actions in the AIG bail-out. In a letter to the Government Accountability Office, he today wrote,
“To afford the public the most complete possible understanding of our decisions and actions in this matter, and to provide a comprehensive response to questions that have been raised by members of Congress, the Federal Reserve would welcome a full review by GAO of all aspects of our involvement in the extension of credit to AIG.” Read more
Was I pretty much spot on earlier when I predicted Mervyn King would be far from complacent about inflation’s rise to 2.9 per cent in December, would blame one-off factors and the weak economy would keep inflation in check?
Judge for yourselves. But what I certainly got wrong was my prediction that he would say he was never complacent about rising prices. That passage was entirely missing from his speech. The following passage is the closest I have ever heard an official say, “now is the time for complacency”. Read more
Journalists tend to like big numbers, but small ones will do when there seems to be a trend. China and Taiwan are both ‘tightening’ policy, says Business World. Fair play on China: the central bank has again raised the yield on its one-year bills, compounding a number of tightening measures. But Taiwan? Taiwan has raised the overnight interbank lending rate by 0.8 of a basis point. (A basis point is 0.01 per cent.)
Update (January 20): Enquiry will be led by central bank governor and ‘wise’ man (or woman)
Ireland’s government will hold an enquiry this year into a banking crisis that left the country’s financial system in a “fragile” state, Finance Minister Brian Lenihan said. Read more
Canada’s central bank has maintained its overnight borrowing rate at 0.25 per cent, as expected, and reaffirmed its commitment to keep rates at this level until the middle of this year. Also unchanged are the bank rate, at 0.5 per cent, and the deposit rate at 0.25 per cent.
The Bank of Canada forecasts growth of 2.9 per cent in 2010 and 3.5 per cent in 2011, having contracted by an estimated 2.5 per cent in 2009. The previous growth forecast in October suggested a 2.4 per cent contraction in 2009, 3.0 per cent growth in 2010 and 3.3 per cent growth in 2011. Read more
Norway’s sovereign wealth fund has excluded 17 tobacco producers from its $450bn portfolio for ethical reasons, the government said today. “The divestment of shares in these companies has now been completed,” the finance ministry said.
The central bank-managed Government Pension Fund follows ethical guidelines set by the government and in the past has excluded companies that produce nuclear arms or cluster munitions, damage the environment or abuse human rights or workers’ rights. Read more
Iraq’s central bank governor, Sinan al-Shibibi, told Reuters rates are likely to fall below their current 7 per cent, depending on inflation. “Probably they are going to be lower than 7 percent. But of course this will depend on inflation vis-a-vis growth.” he said. “We’ll have to monitor very closely.” The central bank dropped its policy rate to 7 per cent from 9 per cent last June in line with a fall in inflation. The official interest rate in Iraq is more of a guide to bank rates than a direct monetary mechanism as the banking sector is small and capital markets are undeveloped (from Reuters). Other rates include 5.2 per cent on 6-month bills and 5 per cent on 7-day deposits.