Daily Archives: August 1, 2011

Claire Jones

Harvard professor and famed textbook writer Greg Mankiw on Sunday argued the Federal Reserve should adopt a price-level target.

A price-level target aims for a certain level of inflation over the course of an economic cycle. In contrast, an inflation target has policymakers focus on a fixed point in the future.

Advocates argue price-level targeting is superior because of its flexibility. It allows for higher inflation when demand is anaemic with a view to reducing inflation below target once the economy recovers. As the Harvard professor notes, this would enable the Fed to reap the benefits that higher expected inflation would have in lowering interest rates without having to argue for the “political non-starter” of targeting inflation of, say, 4 per cent. Read more

Claire Jones

Last week Bank of Japan governor Masaaki Shirakawa claimed that Europe’s sovereign crisis and the impasse over the debt ceiling could trigger a rise in government bond yields the world over.

However, Mr Shirakawa skipped over just how events in Europe and the US – which bond markets view very differently – could lead to soaring yields elsewhere.
The New York Federal Reserve to the rescue. In a note published on Monday on its Liberty Street Economics blog, Vivian Yue and Leslie Shen argue an unexpected rise of 1 per cent in long-term US bond yields can lead to a 0.14 per cent to 0.19 per cent rise in bond yields in Germany, Japan and the UK.

How so? Read more

Claire Jones

External MPC member David Miles said last week he was a lot more concerned about getting capital requirements right than liquidity buffers.

This is odd. Few would deny that banks needed more and better quality capital. But, as Andy Haldane, the Bank of England’s executive director for financial stability, said on Monday, liquidity droughts were perhaps the defining feature of the crisis during 2007 and 2008.

Maybe Mr Miles was reluctant to address what has become one of the most controversial aspects of the Basel III regulatory framework.

But not Mr Haldane. He has suggested haircuts on collateral as a means to avoid systemic liquidity crises.

 Read more

Ralph Atkins

Thursday’s European Central Bank council meeting might have a summer feel about it; many of its members have been away on holiday, or depart shortly (and an undisclosed number will give Frankfurt a break). Nor is any change in interest rates expected. Nevertheless, the 23-strong council has much to talk about. The main themes in summary are:

Greece: ECB policymakers were not happy with eurozone leaders’ decision earlier this month to push Greece into a technical default. By agreeing to let them go ahead, Mr Trichet compromised his previous tough line. But he will stress the concessions he won from governments – including a pledge of €35bn in collateral to allow Greek banks to continue using its liquidity facility.

Contagion: This is now the ECB’s fear, and official borrowing costs have already risen alarmingly for Spain and Italy, with rating agencies citing the risk to bondholders shown by Greece’s example. Read more

From the FT’s op-ed pages: Ralph Atkins on the ECB president’s final months.

Other eurozone policymakers have fled on holiday, hoping for respite from the region’s debt crisis. Jean-Claude Trichet, however, remains in Frankfurt this week, for August’s European Central Bank governing council meeting and press conference – a fixture since global financial turbulence erupted four years ago.

Still, the euro’s monetary guardian can take stock and draw lessons from recent events – not least for Italy’s Mario Draghi, who takes over as ECB president in three months. A first conclusion is that the crisis is far from resolved, and may have entered a more dangerous phase.

 Read more