Archive for February 9th, 2023

Three centuries of UK business cycles: what lessons for today?

February 9, 2023

Stephen Broadberry, Jagjit Chadha, Jason Lennard, Ryland Thomas document three centuries of business cycle in UK (full paper is here):

Evidence from 300 years of peaks and troughs in UK economic activity reveals that while the frequency of recessions has declined to a historical low, the duration and amplitude have not. A recession may result from a variety of causes, with a typical cost to the economy of 4% of initial GDP.

What does this mean for recent recession:

Where does the prospective recession of 2022-23 stand in comparison with the historical average? The GDP projections in the November 2022 Monetary Policy Report were produced under two conditioning assumptions for monetary policy: one based on an assumption of a constant Bank Rate of 3%; and another based on a path where Bank Rate rose in line with the then elevated levels of market expectations.

The 2022-23 recession implied by the projection under market expectations was initially shallower but more protracted than the historical mean of the past three centuries. But it is quite similar to some of the recessions observed over the past 100 years, reflecting the increased persistence of recessions from the 20th century onwards (Figure 3). In particular, the 2022-23 recession looks similar in scale to the recession of the early 1990s over the first two years, but then similar to the protracted recoveries from the Great Depression and the global financial crisis.

The protracted recovery in the Bank of England projection is based on an assumption that potential supply growth remains weak relative to the trend growth rates enjoyed between the end of the Second World War and the global financial crisis.

The weakness of growth and productivity in the aftermath of the recessions since 2007/08 is a key policy issue (Chadha and Samiri, 2022). Perhaps those recessions have led to more scarring or ‘hysteresis’ effects on both the level and rate of economic growth. That would imply that acting to prevent recessions is a key part of avoiding weak longer-run growth in living standards.

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

The Bitcoin–Macro Disconnect

February 9, 2023

Gianluca Benigno and Carlo Rosa in this NY Fed article says Bitcoin prices are disconnected from macro news:

Is macroeconomic news driving Bitcoin? In this paper, we conduct a systematic analysis of the impact of macroeconomic and monetary policy news on Bitcoin’s  price. We model Bitcoin as an asset with no intrinsic value for which its current price depends on the discounted value of its future price. In our empirical analysis, we find that Bitcoin is unresponsive to both monetary and macroeconomic news. In particular, the result that Bitcoin does not react to monetary news is puzzling as it casts some doubts on the role of discount rates in pricing Bitcoin. Given the short sample used in the analysis, however, more evidence is needed to assess the disconnect between Bitcoin and macroeconomic fundamentals.

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

75 years of Nationalisation of RBI

February 9, 2023

The RBI Governor Mr Shaktikanta Das in this monetary policy statement mentioned that year 2023 marks 75 years of RBI Nationalisation:

As I set out the first monetary policy statement of the new year, I am reminded of the historical significance of 2023 for the Reserve Bank of India. From being a Joint Stock Company, the Reserve Bank was brought into public ownership on January 1, 1949.1 Thus, 2023 marks the 75th year of public ownership of the Reserve Bank and its emergence as a national institution. This is an opportune moment to briefly reflect upon the evolution of monetary policy over this period. In the two decades after independence, the Reserve Bank’s role was to support the credit needs of the economy under the five-year plans.

The following two decades were characterised by bank nationalisation in 1969, oil shocks, monetisation of large budget deficits and sharp rise in money supply and inflation. Monetary targeting was adopted in the mid-1980s to contain growth in money supply and curb inflation pressures. Since the early 1990s, the Reserve Bank focused on market reforms and institution building.

A multiple indicator approach was adopted in April 1998 under which a host of indicators were monitored for policy making. In the aftermath of the global financial crisis and the taper tantrum, as inflationary conditions worsened in India, flexible inflation targeting (FIT) was formally adopted in June 2016 to provide a credible nominal anchor for monetary policy. As we know, the primary objective of monetary policy under the FIT framework is to maintain price stability while keeping in mind the objective of growth.

The RBI History Volume I discusses the case of RBI nationalisation:

On January 1, 1949, that is to say, 13 years and 9 months after its establishment, the Bank was transformed into a State-owned institution, in terms of the Reserve Bank (Transfer to Public Ownership) Act, 1948 -a landmark in the Bank’s history.

The nationalisation of the Bank was in line with the general trend towards nationalisation of central banks abroad, which had set in three to four years before the outbreak of the Second World War, and which gathered momentum after the war ended. In Denmark and New Zealand, the central banks were converted into wholly State-owned institutions in 1936; the same development occurred in Canada in 1938. After the end of the war, among the older central banks to be nationalised were the Bank of France (January 1946), the Bank of England (March 1946) and the Bank of the Netherlands (August 1948).

Outside Europe, mention may be made of the nationalisation, in March 1946, of the central bank of the Argentine Republic set up in 1935 to four years before the outbreak of the Second World War, and which gathered momentum after the war ended. In Denmark and New Zealand, the central banks were converted into wholly State-owned institutions in 1936; the same development occurred in Canada in 1938. After the end of the war, among the older central banks to be nationalised were the Bank of France (January 1946), the Bank of England (March 1946) and the Bank of the Netherlands (August 1948).Outside Europe, mention may be made of the nationalisation, in March 1946, of the central bank of the Argentine Republic set up in 1935. 

The chapter has lots of details on how nationalisaiton came about…

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

What can central banks do to help save our planet?

February 9, 2023

Klaas Knot, President , De Nederlandsche Bank (Central bank of Netherlands) in this speech:

what could and can a central bank, wat can we do, to help save our planet?

Definitely not everything. We are not elected politicians. We are not in the driving seat, but definitely part of the team. A part of the team in three different ways, in three different roles.

As a supervisor and regulator, as a long-term economic adviser and as a leader by example.

To start with the obvious: as a supervisor and regulator we have a responsibility to address macro- and microprudential risks and thereby contribute to financial stability.

In this capacity we can help guide financial institutions to identify, recognise and mitigate risks, and – should risks materialise – prevent them from having serious consequences.

To give a few examples: we have developed a climate stress testing framework for transition risks, which we will expand this year to include a focus on physical risks.

Also late last year, DNB published a guide with good practices to control climate- and environment-related risks. This guide was particularly aimed at insurers and pension funds and in line with the ECB’s 2020 guide aimed at banks. It seeks to provide financial institutions with constructive good practices to help with their risk management. In the near future, we aim to integrate climate- and environment-related risks into our ‘regular’ periodic supervision.

Our role as a long-term economic adviser is – of course – based on accumulated knowledge, on data and facts: we are central bankers, not philosophers. Before we tackle a problem we have to understand it, and in order to understand it, we have to quantify it. So we accumulate essential data to monitor developments in order to take effective decisions.

….

And that takes us to our third role: a leader by example.

As an organisation we can and must set an example, we must make our own sustainable choices. For instance in our payment systems, in our monetary operations and of course in our own investments as a central bank.

That is our responsibility as a central bank. That is why I am proud that DNB was the first central bank to sign the Principles for Responsible Investment in 2019.

This marked the start of our journey towards the integration of responsible investment in our own-account portfolios.

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

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