UK supply side problems haunt the MPC

From Gavyn Davies May 10, 2012

UK supply side problems haunt the MPC

For the first time in quite a while, the Monetary Policy Committee of the Bank of England has today made a knife-edge decision which genuinely might have gone either way. The outcome, which was to leave the total of quantitative easing unchanged at £325bn, tells us something about the inflation fighting credentials of the MPC, which have been widely questioned in the financial markets. And it also tells us something about the way in which other central banks, including the Fed, might react to similar, if less strained, economic circumstances in coming months.

The Bank of England has been on a mission in the past two years. That mission has been to participate, possibly a little too enthusiastically at times, in a plan to change the fiscal/monetary mix in the UK, and to support the Coalition’s plan to reduce the budget deficit on an accelerated timsescale. The MPC has therefore delivered the largest dose of monetary easing among the major economies, and has acquiesced to a prolonged period in which UK inflation has exceeded targets by very significant amounts. From my vantage point, while inflation and unemployment have both been far too high, there were few better policy options available at a time of enormous difficulty for both the Treasury and the Bank.

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From Economists' Forum May 8, 2012

Central banks should do much more

Roger E A Farmer, Distinguished Professor and Chair, UCLA Department of Economics

The US recovery has stalled, the UK has fallen back into recession and most of Europe is mired in a debt quagmire to which there appears to be no quick exit. It is against this background that Charles Evans, president of the Federal Reserve Bank of Chicago, has come out aggressively in favor of additional Fed actions.

But what can the Fed do to alleviate the unemployment problem? What should it do?

In a series a recent research paper¹(here), I have shown that there is stable connection between the stock market and the unemployment rate and I have argued²(here) that this connection is causal. The stock market crash of 2008 caused the Great Recession. If this relation is truly causal, then central banks can do a great deal to alleviate persistent unemployment.

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Tags: charles evans, Federal Reserve Bank of Chicago, Lehman Brothers, QE1
Posted in Central banks | Permalink

From FT Alphaville April 30, 2012

Kicking a central bank when it’s down

Japan eased… the yen appreciated. The Bank of Japan may be a bit sad. Is now really the time to rub salt into wounds by reminding the BoJ of the futility of its easing actions – at least where the yen is concerned?

Nomura’s Yujiro Goto certainly thinks so (click charts to enlarge):

Yup, the yen (particularly in 2012) cares about risk… not an almost fully priced in expansion of asset purchases, thank you very much.

Related link:
RoRo and the BoJ - FT Alphaville
Another repeat from the BoJ – FT Alphaville

Tags: Bank of Japan
Posted in Central banks | Permalink

From FT Alphaville April 25, 2012

RoRo and the BoJ

The Bank of Japan’s monetary policy decision on Friday has been powerfully talked up by analysts and officials alike, with the bank under real political pressure to satisfy market expectations and announce new easing measures that target inflation and growth.

The BoJ surprised markets on February 14 when it announced an increase in its asset-purchasing programme to Y65tn from Y55tn, and an explicit inflation target of 1 per cent. But at its last policy meeting on April 10 it decided not to implement additional monetary easing.

Now however, the bank’s officials seem desperate to talk down the yen while nearly everyone else appears content to believe they can do more than just talk.

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Bank of England: a rethink of the Groupthink

March 19, 2012 5:09 pm by Financial Times

By Norma Cohen, economics correspondent

In the months and years since the financial crisis began, the Bank of England has been notably reluctant to fall on its collective sword in connection with its oversight role, or even to murmur a modest “mea culpa” in connection with any aspect of it.

Bank of England. Image by Getty

The most it has done has been to insist that it did not have the tools necessary to actually stop excesses from happening even where it could spot them. At least, that has been its public stance.

But in private, economists at the Bank may have a more nuanced role about their discipline and more generally, about what needs to be done to prevent another financial crisis.

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Tags: financial crisis
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From Martin Wolf's Exchange December 28, 2011

What has the ECB done in the crisis? The role of TARGET balances

Mario Draghi, December 8, 2011. Image by Getty.

Will the European Central Bank save the eurozone? This is an extremely controversial question. What is clear, however, is that the central bank is the only entity with the capacity and the calling to do so. Without the euro, the ECB ceases to exist. That is true of no other eurozone institution. It gives it the incentive to act. It is also acting on a large scale.

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From Gavyn Davies November 10, 2011

Does the ECB really have a silver bullet?

In recent days, a chorus of investors has argued that only one institution, the ECB, now has the firepower needed to solve the eurozone’s debt crisis. That firepower consists of newly printed money, which is viewed as being almost limitless in scale.

If the ECB uses this resource to purchase Italian and Spanish sovereign debt, advocates claim there is no amount of market speculation which could overcome the resources of the central bank. That, after all, is what the Swiss National Bank has shown by threatening to intervene without limit to prevent the Swiss franc from appreciating. Why cannot the ECB use the same silver bullet to place a ceiling on Italian bond yields?

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From Gavyn Davies September 16, 2011

Central banks are back in the fray

By Gavyn Davies

Mervyn King. Image by Getty.

A few weeks ago, the big central banks were calmly embarking on their “exit” strategies from unconventional monetary accommodation. Then the global economy slowed but for a while inflation remained too high for the Fed or the ECB to consider further easing. Their hands were tied until inflation peaked. Recognising this, markets collapsed. But now that there are some tentative signs of inflation subsiding, the central banks are rediscovering their ammunition stores.

There are basically three types of action that they are considering. In order of orthodoxy, and stealing some of Mervyn King’s terminology, here is a taxonomy of possible measures:

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From FT.com September 15, 2011

Central banks ease lender funding crisis

The world’s main central banks have launched concerted action to tackle dollar funding problems in Europe, sending banks’ share prices sharply higher across the continent.

The European Central Bank, the Bank of England and Switzerland’s central bank said they would provide three-month loans to tide banks over until the end of the year. As well as the immediate relief offered to banks, the co-ordinated action amounted to a display of firepower, apparently further intended to boost investor confidence.

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From FT.com July 28, 2011

Five questions for the Fed and Treasury

This week, a cacophonous hubbub is overwhelming America’s airwaves. For with the debt ceiling deadline approaching, almost every pundit and politician worth their salt has been expressing views on what could – or should – happen next.

There is, however, one notable exception: the mighty Federal Reserve and Treasury. In recent weeks, senior officials at both institutions have warned in general terms about the risks of failing to raise the debt ceiling. They have also tried to reassure investors that this risk is small.

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