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

Federal_Reserve_System_Balance_Sheet-Swiss_version-September_2009

Condensing the Fed’s Balance Sheet is as Simple as This

Condensing the Fed Balance Sheet is as Simple as This

Restructuring the Fed Balance Sheet Expeditiously: A Sensible Contingency Plan

restructuring-the-federal-reserve-balance-sheet-expeditiously_a-sensible-contingency-plan

What is Helicopter Money?

What is Helicopter Money_August 2016

Helicopter Money without Helicopters and without Central Banks

Helicopter Money without Helicopters and without Central Banks_August 2016

Helicopter Drops without Money

Helicopter Drops without Money_August 2016

Helicopter Bonds

Helicopter Bonds_August 2016

On the Velocity of Bank Reserves

On the Velocity of Bank Reserves

Exiting Well v. December 31 2015

1 Exiting Well v_December 31_2015

Bank Reserves and Negative Real Deposit Rates

Bank Reserves and Negative Real Deposit Rates

The Fed has already raised rates twice this cycle

The Fed has already raised rates twice this cycle

Exiting Well v. September 15 2015

1 Exiting Well v_September 15_2015

On the Illusory Nature of Bank Reserve Liquidity

On the Illusory Nature of Bank Reserve Liquidity

FED EXIT MONITOR V2

The Fed Exit Monitor V2

ECB QE and the forthcoming implosion of the European Banking System

ECB QE and the impending implosion of the European Banking System

FED EXIT MONITOR V1

The Fed Exit Monitor V1

Experimenting with Exit Instruments

Experimenting with Exit Instruments

What the ECB has done

What the ECB has done

The Real Story behind Negative Rates

The Real Story behind Negative Rates

Printed Money

Printed Money

When should the Fed begin monetary policy tightening? AK v.2

When Should the Fed Begin Monetary Policy Tightening – v2 (1)

Should the Fed samba?

Should the Fed samba?

The Negative Rate Chrono-Synclastic Infundibula

The Negative Rate Chrono-Synclastic Infundibula

A Real Fiscal Plan

A Real Fiscal Plan

What the Federal Reserve can learn from the Bank of Israel

What the Federal Reserve Can Learn from the Bank of Israel

The Last Three Days of January 2014: Treasury Notes, Gold Certificates and the Federal Reserve

The Last Three Days of January 2014

Cutting the Money Supply

Cutting the Money Supply

Orchestrating the Exit

Orchestrating the Exit

Timing the Exit

Timing the Exit

Bank of Japan Theater: Is this Kabuki after Noh?

Bank of Japan Theater: Is this Kabuki after Noh?

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