Issing: Memorandum on the ECB’s Monetary Policy

We thank Otmar Issing for sending a recent “Memorandum on the ECB’s Monetary Policy” in response to CFS distributions. To be sure, the broad content of the message was covered in the financial press. However, meaningful nuances and details are only apparent with a full read. Hence, it may be of interest to CFS friends.

Signed by:
Hervé Hannoun, Former First Deputy Governor, Banque de France, Paris
Otmar Issing, Former Member of the ECB-Executive Board, Würzburg
Klaus Liebscher, Former Governor Oesterreichische Nationalbank, Vienna
Helmut Schlesinger, Former President Deutsche Bundesbank, Oberursel
Jürgen Stark, Former Member of the ECB-Executive Board, Frankfurt
Nout Wellink, Former Governor De Nederlandsche Bank, Amsterdam

Judgement shared by:
Jacques de Larosière, Former Governor Banque de France, Paris
Christian Noyer, Former Governor Banque deFrance, Paris

The full memorandum is available at
www.CenterforFinancialStability.org/research/Memorand.pdf

Wishing you the best into the Holiday Season and New Year!

Hormats and Istel on Inequality and Low Rates

CFS is delighted to share Robert Hormats and Yves-Andre Istel’s personal views on “Inequality Perils from Lower Rates.” They contend that:

  • Low interest rate policies have become increasingly ineffective in fostering equitable growth.
  • Negative effects of ultra‐low rates have been underestimated and are greater than generally thought, especially in increasing inequality.
  • Therefore, a new mix of monetary/fiscal policies with a long-term structural focus is called for.

Yves and Bob have been thoughtful and engaged with CFS. Robert Hormats is the former Undersecretary of State for Economic Growth, Energy, and the Environment. Yves‐Andre Istel is a Senior Advisor to Rothschild & Co.

The full report is available at
www.CenterforFinancialStability.org/research/Hormats_Istel_121619.pdf

From China / Monetary Policy Paradigm Shifts

I had the pleasure of presenting “Monetary Policy Paradigm Shifts” as well as delivering conference summary remarks at a discussion hosted by the Shanghai Development Research Foundation (SDRF). The conference hosts beautifully structured the inquiry regarding monetary policy across three areas. Corresponding conclusions follow:

– “Modern Monetary Theory (MMT)” is neither modern nor monetary. It is theory. CFS has avoided discussing this topic; however, threads seem to be drifting into mainstream thinking. MMT has already been tried and performed poorly. Our assessment rests on studies and empirical evidence including Gail Makinen’s “Studies in Hyperinflation & Stabilization” published by CFS in 2014.

– “Fundamental changes in theory and policy today” are a function of three policy miscalculations since 2002. Monetary mistakes in the past have paved the way for more experiments and the surfacing of ideas such as MMT.

– “The effect on global markets and economies” is to skew incentives for savers and investors, distort market signals, and limit growth.

Although tricky, a slow and careful restoration of normalcy is essential. It is today’s critical constrained maximization problem.

View the remarks at www.centerforfinancialstability.org/research/ShanghaiDRF_111819.pdf

de Larosière on the Monetary Policy Challenge

We are delighted to share Jacques de Larosière’s latest thinking on “The Monetary Policy Challenge.” Jacques thoughtfully evaluates the 2% inflation target so prevalent in advanced economy central banks today. His assessment is based on careful examination of structural determinants of inflation as well as distortions arising from equilibrium inflation consistently falling short of its target.

He chronicles unintended consequences from excessively accommodative monetary policy – which stretch from a weakening of the banking system, deterioration of pension institutions to the proliferation of zombie companies.

“Who could reasonably believe that lowering already so low rates would strengthen growth?”

He notes that it “is not too late to act” and offers concrete solutions.

The full report is available at www.CenterforFinancialStability.org/research/de_Larosiere_MPC_112519.pdf

Jacques de Larosière is the Chairman of the Strategic Committee of the French Treasury and Advisor to BNP Paribas. He previously served as the President of the European Bank for Reconstruction and Development (EBRD), Governor of the Banque de France, and Managing Director of the International Monetary Fund (IMF).

Hanke delivers John Ise Distinguished Lecture w/ Barnett interview…

CFS Special Counselor and Johns Hopkins professor Steve Hanke delivers the John Ise Distinguished Lecture at the University of Kansas – moderated by CFS Director of Advances in Monetary and Financial Measurement and KU Oswald Distinguished Professor of Macroeconomics.

Hanke and Barnett explored monetary systems throughout the world, tariffs and their effects on trade deficits, abolishing time zones and changing the calendar, plus “everything under the sun.”  View video

Aliber’s “Reflections on Bretton Woods”

Robert Z. Aliber offers his “Reflections on Bretton Woods.” Bob is professor emeritus of International Economics and Finance at the University of Chicago, co-author of Manias, Panics, and Crashes: A History of Financial Crises, and a good friend of CFS.

Bob covers much ground. Topics include:

  • The White Mountains, Cog Railroad, and Mount Washington Hotel.
  • Bretton Woods Conferences.
  • How the Founders of Bretton Woods might view the last 75 years.
  • Trade and Tariffs.
  • The IMF.

The full report is available at http://www.CenterforFinancialStability.org/research/Reflections_on_Bretton_Woods_101719.pdf.

Response to WSJ Comments…”What’s Money?”

Thank you for your interest in my letter highlighting how determinants of inflation can be better understood.  To clarify, two types of money exist ‘state money’ produced by the Fed and ‘bank money’ created by the private sector.  Bank money drives growth. Today, bank money includes the service value of traditional commercial bank products such as deposits as well as shadow banking services such as commercial paper, money market funds, and repurchase agreements. In fact, what constitutes money may change over time as new financial products are introduced.

So, it is essential that the Fed, economists, and market participants measure and monitor both state and bank money.  CFS Divisia accomplishes this feat by identifying assets that serve as money.  Importantly, not all of these monetary assets provide equal amounts of service as money to the economy.

Bill Barnett uses the example of measuring the service value of transportation.  Would a pair of roller skates and a locomotive provide equal value to the economy?  No.  So, CFS Divisia derives weights that vary over time.

For the theory, history and math behind CFS Divisia, please see Bill’s book Getting It Wronghttp://www.centerforfinancialstability.org/getting_wrong.php

For a practical application of CFS Divisia see http://centerforfinancialstability.org/research/why_cfs_divisia_071316.pdf

WSJ: What’s Money?

The Wall Street Journal weekend edition printed my letter highlighting how determinants of inflation can be better understood.

CFS Divisia money growth warned about rising inflation and clearly explained why it was low coincident with QE.

To be clear, CFS Divisia money monitors the output of the financial system and its role in the monetary transmission mechanism.  It is an essential barometer of the economy, whether one is a market practitioner, Keynesian, or monetarist.

Read the full letter – It May Make the World Go Round, but What’s Money

New! Hyperinflation Book by CFS…

Despite the recent slip in inflation, many ponder a future of unexpectedly higher or more volatile inflation in the wake of extraordinary monetary measures over the last six years. While the Center for Financial Stability (CFS) is clearly NOT anticipating a return to runaway inflation, analysis of hyperinflation reveals lessons worth active study for public officials, investors, and the interested public.

CFS is delighted to release “Studies in Hyperinflation & Stabilization” by Professor Gail Makinen with a foreward by Thomas J. Sargent, co-recipient of the 2011 Nobel Prize in Economics.

Hyperinflation imposes heavy economic costs and undermines political and social stability – especially in emerging and frontier markets. Similarly, study of the evolution and stabilization of hyperinflation offers lessons to strengthen monetary and financial stability in advanced economies (For specific lessons)

Despite fears over the last few years regarding a surprise increase of inflation, CFS has warned against these concerns – based on the results of our Divisia monetary and financial data developed under the leadership of Professor William A. Barnett.

Best wishes into the holiday season and 2015.

Lawrence Goodman

Is Inflation Targeting Still Relevant?

In his paper titled “Inflation Targeting: A Monetary Police Regime Whose Time Has Come and Gone,” David Beckworth calls on the Fed to advance beyond inflation targeting.

ABSTRACT

Inflation targeting emerged in the early 1990s and soon became the dominant monetary-policy regime. It provided a much-needed nominal anchor that had been missing since the collapse of the Bretton Woods system. Its arrival coincided with a rise in macroeconomic stability for numerous countries, and this led many observers to conclude that it is the best way to do monetary policy. Some studies show, however, that inflation targeting got lucky. It is a monetary regime that has a hard time dealing with large supply shocks, and its arrival occurred during a period when they were small. Since this time, supply shocks have become larger, and inflation targeting has struggled to cope with them. Moreover, the recent crisis suggests it has also a tough time dealing with large demand shocks, and it may even contribute to financial instability. Inflation targeting, therefore, is not a robust monetary-policy regime, and it needs to be replaced.

ABOUT DAVID BECKWORTH

David Beckworth is a former international economist at the US Department of
the Treasury and the author of Boom and Bust Banking: The Causes and Cures of the Great Recession. His research focuses on monetary policy. Currently he is an assistant professor at Western Kentucky University.

Read the paper at http://mercatus.org/sites/default/files/Beckworth-Inflation-Targeting.pdf.