Daily Archives: February 12, 2010

Simone Baribeau

The St Louis Fed today published a fascinating paper on how FOMC members’ motives may play a role in their inflation forecasting.

The paper found, strangely, that by removing FOMC members’ three highest and lowest inflation predictions, the midpoint of the range of price estimates was more accurate than the midpoint of all FOMC members predictions. 

Simone Baribeau

Panama was one step closer on Friday to receiving a coveted investment grade rating on its sovereign bonds. Moody’s, one of the three main ratings agencies, put the Central American country’s key ratings on review for an upgrade. The group currently rates Panama’s Ba1 foreign currency government bond rating at one notch below investment grade.

The move follows a similar action by Standard & Poor’s, which upgraded its BB+ outlook on Panama from stable to positive in November. 

Should the state buy up your pensions and invest them in roads and railways?

The idea is that a US sovereign wealth* fund would dip into public and private pension savings and invest the money in much-needed infrastructure. If it worked, the economy would benefit, infrastructure would benefit, pensions would receive a healthy return and savings would be made for the next generation. 

Traders are gossiping about a ban on sovereign credit default swap trading, to avoid a Lehman-like collapse. Quite how such a ban would work is mystifying:

I’m hearing and being asked from a few sources that the CDS markets in the sovereign (Greece, Dubai etc.) nations are going to “banned” from trading to avoid a BSC or LEH like collapse. I personally have no idea if there is any truth to the story but it seems to be just going around in the last half hour. Obviously Greece is on the forefront of traders’ minds. 

The Swiss franc has dropped 0.2 per cent amid speculation that the central bank sold the currency for the second time today. The central bank refused to comment. It is thought the francs bought euro.

The Swiss franc has been appreciating significantly against the euro. New central bank governor Philip Hildebrand has a stated policy of intervention where necessary to prevent ‘excessive appreciation’ of the franc, which has risen by 0.9 per cent against the euro since the start of the year. 

Just how much additional growth does a stimulus package buy you? (1.65 x stimulus) – 2.1, apparently, where stimulus is a percentage of GDP. (Example – a stimulus measuring 3 per cent of GDP should produce growth that is 2.85 per cent above expectations.)

Policymakers would hope that spending relatively more stimulus would bear some fruit. And so it appears from the Economic Report of the President.

Chart found on p.105. Please note the power of stimulus to explain above-forecast growth is quite low (R² = 0.31), and the data is taken at a very specific snapshot – November forecasts and Q2 results. Results for Q3 results were not statistically significant.

There is a twist, however. Middle-of-the-road stimulus spenders did not receive expected levels of benefit – and they include the US, UK and Canada, well below trendline in the scatterplot. It seems fortune favours the brave.

And country-by-country figures: 

Latvia’s outlook has been raised to stable from negative by ratings agency Standard & Poors, just a day after the outlook on neighbour Estonia was similarly raised.

The reason – as for Estonia – is “successful fiscal consolidation”. Rating were affirmed – B for short- and BB for long-term debt. (This is below Estonia’s short- and long-term rating of A-.) 

Should central banks persist with inflation-targeting? “The crisis has given fresh impetus to the ‘new environment hypothesis’ that pure inflation targeting is inadvisable and that the mandate of central banks should extend beyond just price stability,” Dr Duvvuri Subbarao said today.

The Indian central bank governor argues that price stability does not ensure financial stability. In fact, he says, there is a trade-off between the two, and “the more successful a central bank is with price stability, the more likely it is to imperil financial stability.” 

Ralph Atkins

European countries looking to join the eurozone face tougher scrutiny as a result of the crisis over Greece’s public finances. This is one of the strongest lines from an interview Jürgen Stark, European Central Bank executive board member, has given to Germany’s Spiegel magazine (here’s the English version). “When accepting new members into the euro zone, we have to pay closer attention when it comes to the dates and sustainability of the convergence,” Mr Stark said.

His comments will add to jitters in Estonia, which hopes to join the eurozone next year. On paper, the Estonia is likely to meet the entry criteria, but the worry is that it might yet be excluded on the grounds that its economy has not sufficiently aligned with those already in.