For those who have followed the scrap between Raghuram Rajan, governor of the Reserve Bank of India, and his counterparts at the European Central Bank and the Federal Reserve on the ill-effects of Fed tapering, Benoît Cœuré’s thoughtful speech today is worth a read.
In Mr Rajan’s view, the way the Fed conducts its monetary policy is irresponsible. The US central bank acts merely on the basis of national interest, with scant regard for the ramifications of mass dollar printing in a world where the dollar remains the dominant reserve currency.
These attacks have usually been parried with remarks that central banks such as the Fed (and, given its role as issuer of the only other real reserve currency, the ECB) have little choice but to act within the national interest given the scope of their mandates. From Mr Coeure’s boss Mario Draghi earlier this year:
Draghi: Mr Rajan is really an excellent economist. What one would have to demonstrate to speak of selfishness is the following. One would have to show that monetary policy actions within the United States, the ECB and so on were decided for reasons other than for the sake of the mandate and that, as a result, they were harmful to other countries. As I said, the priority for all of us is compliance with our mandate, which for us is maintaining price stability and for the Federal Reserve Board is the dual mandate.
Mr Cœuré’s speech is interesting as, while he does not go so far as to side with Mr Rajan, he is not so intellectually dishonest as to say that all is fine with the pre-crisis orthodoxy. In short, this said that if everyone just sticks to their inflation targeting mandate and flexible exchange rates everything will be just great. Read more
The FT reported this morning that China will overtake the US as the world’s largest economy this year. This is a historic moment since the US has been the global economic powerhouse since about 1872. As Jamil Anderlini, the FT’s Beijing bureau chief explains, the news is an important geopolitical moment. Everyone has known the moment was coming (the IMF’s projections suggested 2019) but the report from the International Comparison Programme came as a shock, saying the Chinese economy was already 87 per cent of the US size in 2011. The figures are based on new estimates of Purchasing Power Parity (PPP) and inevitably raise a lot of questions. I will attempt to answer them here.
1. I’ve never heard of the International Comparison Programme. What is it?
The ICP is a loose coalition of the world’s leading statistical agencies, hosted by the World Bank in Washington. Eurostat and the Organisation for Economic Cooperation and Development produce the data for advanced countries and a series of regional offices, usually national statistical agencies, provide the equivalent data for the rest of the world. In total 199 countries are covered. The results are therefore much more comprehensive than any other comparable study. Read more
Next week’s policy meeting at the Bank of Japan is expected to be much like the 14 others since the dawn of “quantitative and qualitative easing” (QQE) last April: plenty of upbeat talk about recovery, but no change to the scale or the pace of easing.
And some think the inaction will extend a lot longer. Expectations of another shot of stimulus – “QQE2” – have been shifting back all year. According to the latest Nikkei survey, almost one-tenth of market participants now expect no further action at all. Here are four reasons why: Read more
With the eurozone facing the threat of a prolonged period of “low-flation”, the European Central Bank has been urged to stretch its monetary policy toolkit further and deploy more unconventional measures. One widely flagged option would be to cut the interest rate that banks receive for parking their money with the central bank to below its current zero level. Frankfurt would then replicate an experiment first tried by Denmark’s central bank, which in 2012 cut its deposit rate to -0.20 per cent.
As of Thursday, however, Denmark is no longer a valid comparison. The Danish National Bank has announced that, with effect from Friday, it will raise its deposit rate by 15 basis points to 0.05 per cent (it had already increased it to -0.10 per cent in January). Meanwhile, the central bankers in Copenhagen left the lending and the discount rate unchanged at 0.2 and 0 per cent respectively. Read more
Undergraduate economics teaching has taken a (deserved) bashing since the crisis from some high-profile names in academia and officialdom. And, most importantly, the students themselves.
Among those leading the reform effort is an impressive group at the University of Manchester, the Post-Crash Economics Society. Today it has published a manifesto that is well worth a read for anyone with the slightest interest in why the discipline failed so spectacularly to spot the financial crisis.
The manifesto is all the more important as the group’s attempts to install an optional course on alternative theories on financial crises on the undergraduate syllabus were rejected earlier this month. The bashing, it appears, has not been bruising enough to trigger root-and-branch reform of the way economics is taught. Read more
Despite politicians of all hue stressing the importance of business lending in rebalancing the economy, net lending to UK businesses has now been falling for nearly seven years, according to the Bank of England’s latest Trends in Lending report.
For consumers the picture is very different: mortgage lending is on the up, as is unsecured lending (such as credit cards).
But before assuming this means a consumer debt-fuelled recovery is underway, it is worth taking a look at how low levels are by historical standards – and signs business lending maybe starting to return.
More than five years after the start of the great QE experiment, agreement about what the asset buying scheme achieved is still thin on the ground. A new Bank of England paper from external MPC member Martin Weale released today tries to put a figure to how much QE boosted national output and inflation in the UK and the US. Its results are as follows:
“At the median, an asset purchase shock that results in an announcement worth 1% of nominal GDP, leads a rise of about .36% (.18%) of real GDP and .38% (.3%) in CPI in the US (UK). These findings are encouraging, because they suggest that asset purchases can be effective in stabilising output and prices” Read more
The UK’s labour market figures have sparked a lot of excitement – and a certain amount of confusion – on the hot topic of real wage growth. Here are six charts that explain what has happened and what it means.
The UK has spent years fretting about its dismal productivity performance in the wake of the financial crisis, but it’s no closer to figuring out what has gone wrong or what (if anything) should be done about it.
Perhaps it should look further afield. The UK is not the only place with a “productivity puzzle” on its hands: New Zealand is scratching its head too. For a developed country with seemingly supportive policies on tax, regulation and education, New Zealand’s workers are surprisingly unproductive, and they don’t seem to be improving very quickly either. Read more
By Roman Olearchyk and Lindsay Whipp
Ukraine’s economy and Kiev’s financial position were deteriorating rapidly even before the political crisis gripped the country last year. But as the interim government grapples with Russia’s annexation of Crimea, spreading separatist unrest in the east and gas bills that will almost double, Kiev is slipping closer towards financial breaking point. The government is awaiting a multibillion dollar loan International Monetary Fund and on Monday night the central bank raised key interest rates as it embarks on reform of the way it conducts its monetary policy. Read more