Archive for December 15th, 2020

Buried in the Vaults of Central Banks: Monetary Gold Hoarding and the Slide into the Great Depression

December 15, 2020

Sören Karau of Bundesbank in this research paper:

The origins of the Great Depression from 1929-33 are controversial to this day. Among economic historians, a widely-held view is that monetary forces played an important role in causing the depression. On the other hand, the macroeconometric literature has by and large found little evidence of the importance of monetary disturbances as a main cause. However, existing macroeconomic work does not incorporate essential insights from the narrative literature. This raises the question whether the conclusions drawn using formal macroeconometric methods change when taking into account in particularthe workings of the international gold standard more explicitly.

I identify monetary policy shocks in a structural macroeconometric framework and assess their role in causing the initial downturn in prices and production from 1929-31. In deliberate contrast to existing work on the depression, I take an international perspective that builds upon an appreciation of the gold standard system operating at the time. 

First, I employ a hand-collected monthly data set that covers a large share of the interwar world economy. Second, derived from a theoretical monetary framework, I model monetary disturbances as shocks to central bank gold demand as measured by the world gold reserve ratio. This is preferable not only on theoretical grounds to, say, interest rate measures of individual countries. It also allows me to employ narrative information to sharpen structural shock identification based on sign restrictions. I do so by imposing a single narrative sign restriction that captures a key shift in US and French monetary policy in 1928.

Shocks to monetary gold demand are key in explaining the initial slide into the depression. Whereas the second phase of the collapse in output in 1931 seems to be linked to factors other than central bank policy, monetary shocks are shown to account for the overwhelming initial fall in production and prices. These findings are robust along a number of dimensions.

 

Posted in Academic research & research papers, Central Banks / Monetary Policy | Leave a Comment »

The fox and the hedgehog: preparing in a world of high risk and high uncertainty

December 15, 2020

Charlotte Gerken of Bank of England in this useful speech again quotes from the animal world:

Good morning. Thank you to Insurance ERM for inviting me to speak at your conference. When I told a colleague I had been asked to give a talk on responses to risk, he told me: “the fox knows many things; the hedgehog knows one important thing.”

I was curious to learn more: this idea came from a fragment of text by an Ancient Greek poet Archilochus of Paros; it inspired Isaiah Berlin’s 1953 essay on Tolstoy’s view of history; and has been used in Jim Collins’s book From Good to Great. What it boils down to is a way of thinking, one that guides how you prepare for and respond to risk: the fox looking at every eventuality; the hedgehog’s one big idea being to curl into a ball and wait for the peril to pass. I’m left with the image of the fox hopping about and getting ever more frustrated as it schemes how to get at the hedgehog.

Today I will take a look at some of the tactical steps we have taken around the financial markets and macro-economic impact of Covid-19 on insurers. And go on to more strategic responses to this and other structural changes, focussing on developments in stress testing and scenario analysis.

There have been times this year when it’s been hard to resist the temptation to react to unfolding events with the hedgehog’s one big idea. Unfortunately, there have been few places where curling up in a ball would not have left you in the path of a massive juggernaut.

Deploying our fox brain we have learned many things and responded tactically to the varying ways the financial markets, macro-economic, and business operational impacts from Covid-19 are affecting us.

…

In finance, the ‘Greeks’ have become synonymous with the inner workings of models for pricing derivatives – a fox-like activity if ever there was one. But thanks to that off the cuff remark by a colleague, I have learned that at least one Greek has much more to tell us about ways of thinking about risk. The detailed, fox-like analysis of individual risks and threats and how to respond to them is essential. And it is just as important to step back and ask ourselves, does all that industry add up to an effective defence against what the world could throw at us? Neither the fox nor the hedgehog has a monopoly on wisdom: as we look forward to 2021, the PRA is determined to learn from these and no doubt from other more exotic creatures.

 

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance, Speech / Interviews | Leave a Comment »

The Response by Central Banks in Advanced Economies to COVID-19

December 15, 2020

In an earlier post, I had pointed to a paper which summarised the policies of 4 central banks during the 2020 crisis.

Christian Vallence and Peter Wallis of RBA in this piece broaden the scope and include policies of other central banks:

Central banks in advanced economies have employed a wide range of tools to support their economies and financial systems during the COVID-19 pandemic. Some measures have involved scaling up standard central bank tools or reactivating facilities introduced during the global financial crisis. Other measures are new innovations. The speed at which these tools were deployed and scale of their usage has been unprecedented. These measures have helped to restore functioning of financial markets, lower interest rates, and support the flow of credit to borrowers.

 

 

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

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