Monetary

“A US monetary policy shock has effects on output and inflation in other countries that are of the same order of magnitude as its effects on the US.” This is one of two startling conclusions from an ECB research paper out today.

The second finding is that monetary policy and exchange rate shocks are intrinsically short-term: 

Chris Giles

Yesterday, the Office for Budget Responsibility made it clear that it did not think fiscal tightening would tip the British economy over the edge, partly because “it would be normal to expect some monetary policy response to additional fiscal tightenin.” Some on the MPC think otherwise. Andrew Sentance, an external MPC member, voted to raise interest rates by a quarter of a percentage point. His reason, published in the minutes this morning was as follows:

“For one member, developments over the past month were consistent with a pattern which had been developing over the past year. Inflation had proved resilient in the aftermath of the recession, casting doubt on the future dampening impact of spare capacity on inflation. Demand had recovered at home and abroad, and the average growth of the main measures of UK nominal demand in recent quarters had been above typical pre-recession rates. Despite current uncertainties, for this member, it was appropriate to begin to withdraw gradually some of the exceptional monetary stimulus provided by the easing in policy in late 2008 and 2009.”

If this view gains ground on the Committee, the idea that monetary policy will offset fiscal tightening – if it can – disappears. So far, it seems Mr Sentance does not have much support for his views. 

Robin Harding

In essence, the Bank of Japan has done nothing and said nothing after its monthly meeting today. Policy remains on hold and pretty much the only change in language is to note the effect of higher oil prices on deflation (it’s a bit less severe).

Of more interest are the new forecasts of the policy board:

Policy board members make point estimates, the highest and lowest are excluded, and the numbers given are the range and median of what is left. 

Robin Harding

The Bank of Japan’s first monetary policy meeting of the year starts today and concludes tomorrow, Tuesday 26th, when we’ll hear about any change in policy.

With ample evidence that deflation is taking hold again, a majority of economists are looking for further ‘broadly defined quantitative easing’ from the BoJ, although not necessarily at the current meeting. Political pressure for some kind of action is also mounting.

Officials at the BoJ, however, appear to be: (a) skeptical about how much quantitative easing can do to halt deflation; and (b) reluctant to be seen to finance the fiscal deficit through the obvious step of buying more government bonds. 

Mure Dickie

With deflation entrenched and the yen’s rise against the dollar worrying exporters, speculation swirled that the BoJ was about to announce a return to “quantitative easing” or at least an increase in its government bond-buying programme. So when all the policy board offered was a sideshow offer of cheap three-month loans to commercial banks, the sense of anti-climax was palpable. 

Ralph Atkins

The headline news from today’s Bundesbank financial stability review is about the €90bn in further write-downs it expects from German banks. But there are some insights on Bundesbank thinking on monetary policy as well – although Axel Weber, Bundesbank president, was not at the press conference to elaborate.

In particular, the Bundesbank favours an eventual return to “variable rate tenders” in liquidity-providing operations, in which the European Central Bank determines the amount of liquidity injected into the bank system. Since the collapse of Lehman Brothers it has, instead, been matching banks’ bids in full at a fixed interest rate. 

Mure Dickie

Ryuzo Miyao, a 45-year-old professor at Kobe University, is seen as being broadly in tune with such tenets of current BoJ policy. 

Krishna Guha

Krishna Guha of the Financial Times discusses the hawks and doves of the FOMC 

Krishna Guha

What do you do if you are an emerging market facing massive capital inflows that risk inflating the next round of bubbles? Brazil’s decision to impose a 2 per cent tax on short-term flows has been widely criticised and with good reason. Companies and investors will structure transactions that bypass the tax. The 2 per cent surcharge is anyway small relative, for instance, to the volatility in Brazil’s Real and may not provide much of a deterrence to a perceived one-way bet.

The problem is that while I think the inflow tax will not work, I struggle to see what the alternatives are. One way to prevent a domestic asset price bubble is to allow the currency to rise sharply, making domestic assets more expensive to foreigners and creating two-way currency risk in future. But this is very hard to do when other big emerging market exporters such as China are keeping their exchange rates pegged to the dollar. 

Money Supply, a Financial Times blog, rounds up the news for Monday, October 19