Should Everybody Have An Account At The Central Bank?

This will be my last posting before Christmas, and depending on what I get up to, possibly the last of 2023. This article is somewhat of a placeholder for my manuscript chapter. It is a group of related topics that I think belongs in there, but not ones that I spent much time looking at. I will revisit this text when I put the manuscript together.

Happy Holidays (and probably) Happy New Year!

In this article, I will breezily run through a few topics that are related to the idea of “everybody getting accounts at the central bank.” Many (but not all) of these proposals are being put forward as a means to fixing the problems with the private banking system that were exposed during recent financial crises, and/or proposals to del with the somewhat backward retail banking infrastructure of the United States of America (and perhaps a few other countries).

Should Central Banks Lend Unsecured To The Private Sector?

This article continues my sequence of articles on central banks as banks, which is projected to be a chapter in my banking manuscript. This article is relatively lightweight, but I wanted to break this issue out of another planned article.

What assets central banks should have on their balance sheet is controversial for some people, but for the post-World War II to 2008 Financial Crisis period, developed countries without currency pegs just held government bonds without raising questions from the bulk of economists. The Financial Crisis forced central banks to buy private sector assets, which re-opened this debate. This article looks at one type of private sector assets to be held — uncollateralised loans to the private sector.

The Central Bank And Government Finance

This article continues the sequence of articles on central banks as banks. This article was as brief as possible since it overlapped my book Understanding Government Finance (available for sale cheaply at online bookstores, and I emphasise that it would be an amazing Christmas present for friends and/or enemies (depending on what you think of my writing)). I might need to expand upon the less obvious points herein if this text does get into my book manuscript.

Central banking largely evolved the way it did due to the exigencies of wartime finance. The central government needs control over its financial operations in wartime, and any attempts to interfere by the private sector would be viewed as akin to sabotage. For a free-floating sovereign (and currency pegs are typically broken during major wars), the system guarantees that the financial flows will continue to flow.

Central Bank Balance Sheets

This article continues my series of articles on central banks as banks.

Central bank balance sheets (in the modern era, at least) are relatively simple. There is a split between banks with a currency peg and those without. After that, the key point to keep in mind that the minimum size of the central bank balance sheet is not under the control of the central bank — other actors create a minimal demand for their liabilities. The only freedom of action for central bankers is growing beyond the minimum, which they did not do before the days of Quantitative Easing (QE). The article finishes off with a discussion of consolidation.

This text overlaps material found in my book Understanding Government Finance.

Central Bank Banking Basics

This article continues the plan outlined in the previous article “Central Banks as Banks.” As I described therein, this is projected to become a chapter within my banking primer. I am not going to describe private banking — as that is the job of other chapters — but I will cover the issues of inter-bank transactions. This article is about fundamentals that we normally do not think about.

As the name suggests, central banks are at the centre of the banking system. The objective of a well-run banking system is that you do not have to worry about how it works. So long as everything under the hood is operating, you do not need to enquire how the money gets from one account to another. By not worrying about those details, we tend to only focus on the flashy bits of central banking (e.g., trying to hit an inflation target) instead of the banking system regulation part.

No, QE Is Not Costless

I ran across a couple lame attempts at blaming the U.S. Treasury for not extending the duration of issuance during the pandemic low in yields. This is entirely typical for market commentary — going after fiscal policymakers and ignoring the major culprit, which is the central bank. To the extent that the United States has put itself into an awkward macro stabilisation situation with respect to interest rate expenditures, it is the result of the brain trust at the Federal Reserve.

Jackson Hole Drive-By Comments

I did a short trip to Lake Placid New York last weekend, and largely missed out on the Jackson Hole central banker discussion. Although some specific speeches have been important for macro debates in the past, I generally view the conference importance as over-rated. Although having an idea what the consensus is discussing is useful, the forward-looking information is limited.

Inflation Or Nominal GDP Targeting? Whatever.

Nominal GDP targeting is the latest mainstream fad, which is allegedly going to improve central banking when compared to inflation targeting. In a certain sense, I have some sympathies. If a central bank could stabilise nominal GDP growth, it has abolished the business cycle. I am in favour of abolishing the business cycle. Doing so would not solve all economic woes, but it would be the most that can be hoped for from macroeconomic stabilisation policy. Unfortunately, there is no reason to believe that the central bank can wave a magical expectations wand and abolish the business cycle — despite the claims of some Market Monetarists.

Inflation Targeting In Practice

I have been running into the ongoing debates on nominal GDP targeting, and whether it is superior to inflation targeting. To look at this debate, I need to put my “conventional economist” hat on, as if one accepts the heterodox view that interest rate policy is ineffective, the entire debate is pointless (neither policy “works”). As will become apparent, I think the neoclassical models behind the debate are dubious. But if we accept that interest rates at least sort-of work the way that they are conventionally assumed to (e.g., rate hikes dampen growth and inflation), we can have a view on how a change in targets would work in practice.

Will The Fed Keep Reacting With A Lag To Lagging Data?

(I have broken Betteridge’s law of headlines — the answer to the question in the headline is “yes.”)

I would guess that this week’s Fed hike will be followed by a “pause,” but that pause may be just for one meeting. Although my bias is to assume that the weakness is partly equity market shenanigans, the banking system is having trouble digesting rate hikes. The Fed can afford to wait a meeting to see what happens.

QE/QT And Deposits

Things seem to be calming down in financial markets, which could be interpreted in one of two ways. The benign interpretation is that a few weak banks failed, but the rest of the financial system is in decent shape. The paranoid interpretation is that crises occur in stages, with pauses between the key failures. So far, I lean towards the benign interpretation — there are some areas of weakness, but not a lot of visible credit failures in the real economy. Things will deteriorate as the cycle ages, but such is the fate of capitalist finance.

I just wanted to comment on bank deposits, which has been attracting some attention. My initial reaction is that we should expect some reversal in deposit growth as the Fed reverses its balance sheet growth. However, the figure above was not exactly what I expected.

Yield Curve Control Sustainability

Megan Greene recently wrote [the] “Bank of Japan Needs the Courage to Change Course” at the Financial Times. I would summarise the piece as a fairly conventional analysis discussing the apparent “need” to end yield curve control (YCC). The statements at the end raised the eyebrows of an MMT proponent that forwarded the link to me. For example:

To minimise disorder, the BoJ should be clear about its reaction function and move slowly but deliberately by first further widening the YCC band or targeting a shorter duration. Ultimately, it must [emphasis mine] announce that it is abandoning YCC entirely and will instead aim to minimise rapid changes in debt prices, such as those seen in the UK government bond market in September.

Paper On Türkiye

I was passed a link to the paper “Exchange Rate and Inflation under Weak Monetary Policy: Turkey Verifes Theory” by Gürkaynak, Refet S. and Kısacıkoğlu, Burçin and Lee, Sang Seok. (They used Turkey, and not the apparently preferred Türkiye.) It was claimed by a well known blowhard economist to tell us something about MMT — but to be clear, that was an assertion by someone who makes a living by being wrong about macroeconomics, and not the authors of the paper. Although it has some relevance to some debates about MMT, it is a stretch to say that is telling us much that is useful.

Reasons For Scepticism About Nominal GDP Targeting

There has been an ongoing push for a switch to nominal GDP targeting by Market Monetarists and some mainstream allies. Although I agree that being able to hit a nominal GDP target would be attractive, it would also be attractive to have a yacht. There are a few fundamental issues with nominal GDP targeting. The first is that the target is going to be harder to hit than an inflation target. The second is that it is unclear how much of an advantage the change would have in practice — as opposed to in neoclassical models. Finally, it looks like a much harder proposition to convince voters that a nominal GDP target makes more sense than an inflation target.

The Incentives For Inflation "Targeting"

Now that the furore about Modern Monetary Theory (MMT) has died down (other than the continuous pathetic strawman attacks), I am seeing a downtick in economic theory arguments that I find interesting. People are arguing about the details of fiscal policy and what is happening with inflation, which end up either being political or datamining time series.

One theoretical topic that comes up is the idea of nominal GDP targeting. I have doubts about nominal GDP targeting, the main one being that it is difficult to dislodge something like an inflation target (I am not concerned with the details of the policy framework). In this article, I explain the political attractions of inflation targeting before turning to nominal GDP targeting.

Bank Of Canada Goes Just Plain Nuts

OK, the title might be too dramatic, but the hike of 100 basis points on Wednesday was somewhat out of the ordinary. Since I am not interested in selling any particular forecast, my interest here is the angle: what does this mean? Unfortunately, the answer to that is not entirely clear. The Bank of Canada (BoC) seems to have fallen in with the crowd that argues that rate hikes ought to be done in one massive hit, and then we wait to see what happens.

Fed Panics

The Fed revisited some old financial records by hiking by 75 basis points today. This is a signal that they have thrown out whatever remains of the models that suggested that inflation is transitory, and they are hiking until something breaks.

From a central banker’s perspective, this is the optimal strategy. Central banks are part of The Establishment, and inflation is an anathema to The Establishment. No central banker ever got fired for causing a recession.

Hike Until Something Breaks

Although neoclassical macroeconomic theory does its utmost to obfuscate matters, monetary policy in practice is straightforward: central bankers react with a lag to economic data, and if they are panicked about inflation, they hike rates until something breaks. Although that description is more flippant than how conventional economists would describe the situation, it probably represents a consensus view. However, there is a hidden complexity: do things “break” because of rate hikes, or do they break on their own?

Fed Flattens The Curve

I have been taking it easy for the past week, courtesy of dealing with a mild COVID-19 case. (It largely felt like a cold. However, some symptoms persist, and so I prefer to rest and let them clear.) During my down time, the Treasury market (along with other govvie markets) have been crushed. Fed policymakers have signalled that they want to ramp up the pace of hikes — which surprised me.

On Central Banking, Monetary Policy And Inflation (Guest Post)

Brian: This is a guest post by Professor Louis-Philippe Rochon of Laurentian University, who was looking for a venue to publish this piece. I have seen his presentations at some Post-Keynesian conferences, and I am happy to pass this article along.

Fact: inflation around the world is on the rise.

And as predicted, so are the calls on central banks to quickly intervene in an attempt to wrestle inflation back to some agreed-upon target level. Indeed, there exist among mainstream economists a quasi-unanimity that this is the proper policy route to follow: several increases in the rate of interest should eventually have an impact on those interest-sensitive components of aggregate demand to finally slow down economic activity in the hope that inflation will somehow float back to its target of, say, two per cent, at a minimal cost to society as a whole.