An interesting new NBER working paper by Vasco Curdia of the New York Fed and Michael Woodford of Columbia University will likely feature on Ben Bernanke’s reading list as he ponders both the options for further Fed easing (should it be necessary) and the Fed’s eventual exit strategy from easy policy. Mr Woodford is one of the world’s top monetary economists and a former colleague of Mr Bernanke at Princeton.
Here is part of the abstract:
We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.
To attempt to paraphrase these conclusions:
- Quantitative easing – e.g. buying Treasuries to increase bank reserves with no commitment to keep them high in the future – doesn’t work.
With worries about the huge US budget deficit running rampant in Washington – just look at Friday’s midsession budget review by the White House, which forecast deficits in excess of $1,400bn this year and next - fiscal policy options are clearly limited for Congress and the administration.
And so the attention of policymakers and politicians is quickly turning to longer-term tax policy issues, like the looming expiration of some $3,000bn of tax cuts enacted by President George W. Bush in 2001 and 2003, as I explain in today’s paper.
Last week, the big story was that Kent Conrad, the Democratic chairman of the Senate budget committee, broke with the administration’s official line that the tax cuts should only be extended for Americans earning up to $250,000, and allowed to expire for the wealthy.
Israel’s central bank will raise August’s key interest rate 25bp to 1.75 per cent. The raise, not yet shown on the chart which is accurate to today, will be the fifth 25bp increase since the bank started raising in 2009.
Rising inflation expectations are motivating the move:
The European Central Bank is becoming masterly at making a virtue out of its modesty. Its latest boasting is about how little it has been spending on buying eurozone government bonds. Figures just released showed the ECB bought bonds worth only €176m last week – the lowest weekly amount since the programme started in early May. In the first week, it had bought €16.5bn.
ECB policymakers have hinted that the programme would be scaled back significantly. But the message from the ECB’s governing council is that this is a sign of strength, not weakness. Athanasios Orphanides, central bank governor of Cyprus, told a press conference in Nicosia that eurozone government bond spreads would ease as confidence in its economy and banking system returned. “I personally feel happy that the programme didn’t have to be activated to the same degree as earlier,” he said.
As a strategy, such chastity could, arguably, prove as effective in rebuilding financial market optimism as doing the opposite: that is, buying on a large scale and trumpeting its activism, which might have been the instinct of other central banks. Certainly, it fits with the emphasis Jean-Claude Trichet, ECB president, has recently placed on the ECB acting as an anchor of stability.
The value of a Big Mac is everyhere equal: that’s the premiss of this index from the Economist. Using the burger price as an identity allows us to compare the relative value of countries’ currencies.
Norway comes out most overvalued versus the dollar; Argentina the least. In dollar terms, a Norwegian Big Mac is a meaty $7.20, almost double the American value ($3.73) and nearly four times the Argentinian price ($1.78).
Central banks in the east Asia Pacific region are planning closer co-operation managing their liquidity requirements, as each bank’s ability to provide liquidity “may be limited”. Some banks lack confidence that their liquidity management procedures could cope with renewed stress in the money markets. This from a study presented at last week’s EMEAP meeting, which ended on Friday.
That some of the 11 central banks lack confidence in their liquidity management is implied in the study’s executive summary: