Ongoing Research

This section covers monetary policy implementation and its implications for the “exit strategy”.

It also covers higher level monetary policy topics such as strategy and targets, monetary policy and financial stability and what we may be missing by not considering collateral in monetary policy.

The ongoing paper in this section has the working title “The Base Money Muddle” and discusses why there is no reason to believe excess bank reserves will lead to uncontrollable credit expansion or inflation and why, consequently, the challenges confronting the exit strategy must be carefully analyzed.

The Base Money Muddle

This section covers how emerging market countries coping with large capital inflows may restructure sovereign balance sheets to their advantage with the primary motive being to deepen their domestic local currency debt markets.

It also touches on how crisis interventions have led to the use of advanced country central bank balance sheets in ways that heretofore had been mainly confined to developing and emerging markets.

Sweden’s National Debt Office to lend Central Bank SEK 100 billion

Colombia’s central bank accelerates dollar purchases

The current financial crisis has led to a very interesting pushing of the boundaries of advanced country fiscal and monetary policies and raised important questions about the desirability of central bank independence. Central banks have been undertaking fiscal policies and sovereign treasuries, monetary policies. While in some countries the demarcation lines between central banks and treasuries have been well maintained, in others the two institutions have undertaken virtually identical policy measures simultaneously even though they are subject to very different governance structures.

Ongoing work in this area has the working title “Believing in Monetary Madness” and discusses an overlooked element in the US Treasury’s management of monetary policy during the Roosevelt administration. This element allowed the Federal Reserve to retain its nominal independence to voice dissent while suspending its actual monetary powers thus enabling the US to credibly commit to Roosevelt’s inflationary “monetary madness”.

Believing in Monetary Madness

Accounting policies are human constructs with much more discretion than is commonly understood. This section of the blog discusses both central bank and fiscal accounting issues as well as their interaction. Central bank accounting is idiosyncratic, so it is impossible at a glance to compare profit and loss statements and balance sheets across countries. Our personal experience has led to the compilation of a treasury of situations where neither central bank nor fiscal accounts were what they seemed. During the current crisis advanced countries have faced situations and temptations that have led to accounting “innovations”. Not surprisingly, though, a number of the techniques being employed now, such as that of the Federal Reserve’s decision to create an asset entry on the balance sheet to prevent the possibility of showing negative equity, have precedents in less illustrious central banks.

The first new post in this section discusses how the UK handled the crisis-related intervention known as the Special Liquidity Scheme or SLS.

Would you trust the Central Bank to borrow Treasury securities for monetary policy purposes?

Central bank balance sheets can actually be fascinating reading. As discussed in the All Accounting is Fiction part of this blog, figuring out the real financial state of a central bank can be part detective novel, part comedy, and part science fiction. The first part to get straight is that “capital” means virtually nothing. A corollary to this is that capital being greater than zero has virtually no economic importance. This is talked about in one of the archived papers, “Do central banks need capital?” an IMF working paper from 1997. But the best place to start on this topic is either the BIS working paper “Minimising Monetary Policy” or the revised version of the 2009 IMF Working Paper “The Federal Reserve System Balance Sheet: What Happened and Why it Matters”. It is revised from the WP version but still dates from 2009. I figure I have another year to update it before the exit strategy gets into focus. But keep an eye here. Maybe it will be a summer 2013 project.

The Federal Reserve System Balance Sheet – What has Happened and Why it Matters


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