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Inspired by the 11 Tony awards won by the smash Broadway hit Hamilton, last month I wrote about Alexander Hamilton as the father of the US national debt and discussed the huge benefit the United States derives from having paid its debts promptly for more than two hundred years. Despite that post, no complementary tickets to Hamilton have arrived in my mailbox. And so this month, I will discuss Hamilton’s role as the founding father of American central banking.

The post Hamilton’s descendants appeared first on OUPblog.

Economists are better at history than forecasting. This explains why financial journalists sound remarkably intelligent explaining yesterday’s stock market activity and, well, less so when predicting tomorrow’s market movements. And why I concentrate on economic and financial history. Since 2015 is now in the history books, this is a good time to summarize a few main economic trends of the preceding year.

The post Economic trends of 2015 appeared first on OUPblog.

Seven years ago this month the federal funds rate—a key short-term interest rate set by the Federal Reserve—was lowered below 0.25%. It has remained there ever since.Lowering the fed funds rate to rock-bottom levels did not come as a surprise. The sub-prime mortgage crisis led to a severe economic contraction, the Great Recession, and Federal Reserve policy makers used low interest rates—among other tools—in an effort to revive the economy.

The post Birdwatching at the Federal Reserve appeared first on OUPblog.

t the conclusion of the mid-September meeting of the Federal Open Market Committee (FOMC), the Federal Reserve announced its decision to leave its target interest rate unchanged through the end of this month. Although some pundits had predicted that the Fed might use the occasion of August’s decline in the unemployment rate (to 5.1 percent from 5.3 percent in July), to begin its long-awaited monetary policy tightening, those forecasts left out one crucial fact.

The post Don’t panic: it’s October appeared first on OUPblog.

सोना सस्ता

इन दिनों दो खबरें एक साथ सुनने को मिल रही हैं पहली तो ये कि सोना हुआ सस्ता और दूसरी ये कि सब्जी हुई महंगी अब ऐसे मे ये श्रीमती जी अपने पति से क्या बतिया रही है जरा देखिए तो …

IBN Khabar

नई दिल्ली। विदेशों में बहुमूल्य धातुओं की कीमतों में मजबूती के रुख के बावजूद मौजूदा स्तर पर आभूषण विक्रेताओं और फुटकर विक्रेताओं की मांग घटने से राष्ट्रीय राजधानी दिल्ली के सर्राफा बाजार में आज सोने की कीमत 190 रुपए की गिरावट के साथ 25,300 रुपए प्रति 10 ग्राम रह गई। इस तरह दो दिन से जारी तेजी का सिलसिला थम गया।

औद्योगिक इकाइयों और सिक्का निर्माताओं के कमजोर उठान के कारण चांदी की कीमत भी 150 रुपए की गिरावट के साथ 34,050 रुपए प्रति किलोग्राम पर बंद हुई। सर्राफा व्यापारियों ने कहा कि मौजूदा स्तर पर आभूषण और फुटकर विक्रेताओं की मांग घटने के कारण मुख्यत: बहुमूल्य धातुओं की कीमतों में गिरावट आई, लेकिन वैश्विक बाजार में मामूली रूप से बेहतर रख ने गिरावट पर कुछ अंकुश लगा दिया।

निवेशकों को यह लगा कि फेडरल रिजर्व लंबे समय के लिए ब्याज दरों को कम रखेगा जिससे वैश्विक स्तर पर सिंगापुर में सोने का भाव 0.4 प्रतिशत की तेजी के साथ 1,097.99 डॉलर प्रति औंस हो गया। चांदी का भाव भी 0.6 प्रतिशत की तेजी के साथ 14.64 डॉलर प्रति औंस हो गया। राष्ट्रीय राजधानी दिल्ली में सोना 99.9 और 99.5 प्रतिशत शुद्धता की कीमत क्रमश: 190 .190 रुपए की गिरावट के साथ क्रमश: 25,300 रुपए और 25,150 रुपए प्रति 10 ग्राम पर बंद हुई।

पिछले दो सत्रों में सोना 440 रपये चढ़ा था। गिन्नी की कीमत भी 200 रुपए की गिरावट के साथ 22,200 रपये प्रति आठ ग्राम पर बंद हुई। सोने की ही तरह चांदी तैयार की कीमत 150 रुपए की गिरावट के साथ 34,050 रपये प्रति किलोग्राम पर बंद हुई। जबकि चांदी साप्ताहिक डिलीवरी के भाव 120 रुपए की गिरावट दर्शाते 33,765 रुपए प्रति किलोग्राम पर बंद हुए। चांदी सिक्कों के भाव 1,000 रुपए की गिरावट के साथ लिवाल 49,000 रुपए और बिकवाल 50,000 रुपए प्रति सैकड़ा पर बंद हुए। See more…

 IBN Khabar

नई दिल्ली। लगातार हो रही बारिश के चलते सब्जियों के दाम आसमान पर पहुंच गए हैं। लोगों की थाली से सब्जियां गायब होती जा रही हैं। व्यापारियों के मुताबिक प्याज, आलू, टमाटर और हरी सब्जियों की थोक कीमतों में 10 से 20 फीसदी तक का इजाफा हुआ है जबकि खुदरा बाजार में इन सब्जियों की कीमत 50 से डेढ़ सौ फीसदी तक बढ़ चुकी है।

देश में हो रही भारी बारिश से सब्जियों की फसल बर्बाद हो चुकी हैं जिसके चलते कीमतों में आग लगी हुई है। आलू 20 रुपए, प्याज 40 रुपए, टमाटर 53 रुपए प्रति किलो तक पहुंचा चुका है। वहीं भिंडी 40 रुपए, गोभी 98 रुपए, लौकी और बैंगन 70 रुपए जबकि खीरा 42 रुपए प्रति किलो बिक रहा है। Read more…

The post सोना सस्ता appeared first on Monica Gupta.

By Richard S. Grossman

As an early-stage graduate student in the 1980s, I took a summer off from academia to work at an investment bank. One of my most eye-opening experiences was discovering just how much effort Wall Street devoted to “Fed watching”, that is, trying to figure out the Federal Reserve’s monetary policy plans.

If you spend any time following the financial news today, you will not find that surprising. Economic growth, inflation, stock market returns, and exchange rates, among many other things, depend crucially on the course of monetary policy. Consequently, speculation about monetary policy frequently dominates the financial headlines.

Back in the 1980s, the life of a Fed watcher was more challenging: not only were the Fed’s future actions unknown, its current actions were also something of a mystery.

You read that right. Thirty years ago, not only did the Fed not tell you where monetary policy was going but, aside from vague statements, it did not say much about where it was either.

Given that many of the world’s central banks were established as private, profit-making institutions with little public responsibility, and even less public accountability, it is unremarkable that central bankers became accustomed to conducting their business behind closed doors. Montagu Norman, the governor of the Bank of England between 1920 and 1944 was famous for the measures he would take to avoid of the press. He adopted cloak and dagger methods, going so far as to travel under an assumed name, to avoid drawing unwanted attention to himself.

The Federal Reserve may well have learned a thing or two from Norman during its early years. The Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC), was created under the Banking Act of 1935. For the first three decades of its existence, it published brief summaries of its policy actions only in the Fed’s annual report. Thus, policy decisions might not become public for as long as a year after they were made.

Limited movements toward greater transparency began in the 1960s. By the mid-1960s, policy actions were published 90 days after the meetings in which they were taken; by the mid-1970s, the lag was reduced to approximately 45 days.

Since the mid-1990s, the increase in transparency at the Fed has accelerated. The lag time for the release of policy actions has been reduced to about three weeks. In addition, minutes of the discussions leading to policy actions are also released, giving Fed watchers additional insight into the reasoning behind the policy.

More recently, FOMC publicly announces its target for the Federal Funds rate, a key monetary policy tool, and explains its reasoning for the particular policy course chosen. Since 2007, the FOMC minutes include the numerical forecasts generated by the Federal Reserve’s staff economists. And, in a move that no doubt would have appalled Montagu Norman, since 2011 the Federal Reserve chair has held regular press conferences to explain its most recent policy actions.

The Fed is not alone in its move to become more transparent. The European Central Bank, in particular, has made transparency a stated goal of its monetary policy operations. The Bank of Japan and Bank of England have made similar noises, although exactly how far individual central banks can, or should, go in the direction of transparency is still very much debated.

Despite disagreements over how much transparency is desirable, it is clear that the steps taken by the Fed have been positive ones. Rather than making the public and financial professionals waste time trying to figure out what the central bank plans to do—which, back in the 1980s took a lot of time and effort and often led to incorrect guesses—the Fed just tells us. This make monetary policy more certain and, therefore, more effective.

Greater transparency also reduces uncertainty and the risk of violent market fluctuations based on incorrect expectations of what the Fed will do. Transparency makes Fed policy more credible and, at the same time, pressures the Fed to adhere to its stated policy. And when circumstances force the Fed to deviate from the stated policy or undertake extraordinary measures, as it has done in the wake of the financial crisis, it allows it to do so with a minimum of disruption to financial markets.

Montagu Norman is no doubt spinning in his grave. But increased transparency has made us all better off.

Richard S. Grossman is a Professor of Economics at Wesleyan University in Connecticut, USA and a visiting scholar at Harvard University’s Institute for Quantitative Social Science. His most recent book is WRONG: Nine Economic Policy Disasters and What We Can Learn from Them. His homepage is RichardSGrossman.com, he blogs at UnsettledAccount.com, and you can follow him on Twitter at @RSGrossman. You can also read his previous OUPblog posts.

The post Transparency at the Fed appeared first on OUPblog.

        

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By David Cobham

The standard arguments against monetary policy responding to asset prices are the claims that it is not feasible to identify asset price bubbles in real time, and that the use of interest rates to restrain asset prices would have big adverse effects on real economic activity. So what happened with central banks and house prices prior to the financial crisis of 2007-2008?

Looking in detail at what the Federal Reserve Board (Fed), the European Central Bank (ECB) and the Bank of England (BoE) thought and said about house prices from the beginning of the 2000s, it appears that the Fed was so convinced of the standard line (monetary policy should not respond to asset prices but just stand ready to mop up if a bubble bursts) that it did not allocate much time or resources to discussing what was happening.

The BoE, on the other hand, while equally committed to that orthodoxy, felt the need to argue it out, at least up till 2005, and a number of speeches by Steve Nickell and others explained why they believed that the rises in house prices were a response to changes in the fundamentals (notably, the much lower levels of inflation and interest rates from the mid-1990s) and were therefore not a cause for concern. But after 2005 the BoE seems to have lost interest in the issue even to that extent.

Bank of England headquarters, London

Since the crisis the Fed and the BoE have produced analyses suggesting that monetary policy bore almost no responsibility for the house price rises, on the one hand, and that using interest rates to restrain them would have caused sharp downward pressures on income and employment, on the other. The trouble with these analyses is that they consider only the effect of interest rates being a little higher before the crisis, with everything else equal. But of course the advocates of ‘leaning against the wind’ (the minority view which has favoured using interest rates to head off large asset price booms) have always emphasised that the existence of such a policy needs to be known in advance, so that it feeds into the public’s expectations of asset prices and helps to stabilise them. The absence of any such expectations effect in these analyses means that they are wide open to the Lucas Critique, and their results cannot be taken as an argument against leaning against the wind in this case.

What this all amounts to is our conclusion that the failure to adequately monitor developments in the housing markets means that the central banks of the United States and the United Kingdom, in particular, cannot reasonably claim to have done all they could have done to mitigate the house price movements that were crucial to the incidence and depth of the financial crisis.

The main outcome of the crisis for the operations and strategy of monetary policy so far has been the creation of instruments and arrangements for ‘macro-prudential’ policies, which will indeed offer central banks some additional ways of addressing problems in asset markets. However, central banks need to take some responsibility for the debacle of 2007-2008 and its effects. And they need to find some way in the future to incorporate an element of leaning against the wind into their inflation targeting strategies, in case macro-prudential policies turn out to be inadequate.

It is not beyond the wit of man or woman to establish a central bank remit which has a primary focus on price stability but allows the central bank to react to other developments in extreme situations, as long as it makes clear publicly that this is what it is doing, and why, and for how long it expects to be doing it.

Such a revised remit would and should incorporate useful expectations-stabilising effects for asset markets. The transparency and accountability involved would also help to shore up the independence of the central banks (particularly the BoE) at a time when there is so much pressure on them from the political authorities to ensure economic recovery.

David Cobham is Professor of Economics at Heriot Watt University in Edinburgh. He is guest editor of Oxford Economic Papers April 2013 special issue on ‘Monetary policy before, during and after the crisis’, and co-editor of Oxford Review of Economic Policy spring 2013 issue on ‘The economic record of the 1997-2010 Labour government’.

Oxford Journals has published a special issue on the topic of Monetary Policy, with free papers until the end of March 2014.

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Image credit: Bank of England, Threadneedle Street, London. By Eluveitie. CC-BY-SA-3.0 via Wikimedia Commons

The post Monetary policy, asset prices, and inflation targeting appeared first on OUPblog.

        

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By Edward Zelinsky

Public pension plans should not invest in private equity deals. These deals lack both transparency and the discipline of market forces. Private equity investments allow elected officials to assume unrealistically high rates of return for public pension plans and to make correspondingly low contributions to such plans. This is a recipe for inadequately funded pensions, an outcome good for neither public employees nor taxpayers.

Ben Bernanke. Source: United States Federal Reserve.

In this low return environment, public defined benefit pension plans generally assume that they can earn annual investment returns in the vicinity of 8%. Such aggressive return assumptions allow governors and legislators to authorize smaller tax-financed contributions to such public pensions on the theory that anticipated investment gains will fund the retirement benefits promised to public employees.

A primary defense of this practice is that plans’ assumptions should reflect long-term experience. From this vantage, the current low interest rate environment is an historic anomaly. For the long run, the argument goes, public pension plans will earn higher returns.

Whatever the theoretical merits of this approach, it is troubling in practice, an invitation to push into the future the problem of inadequately funded public pension plans. That problem exists today and needs to be confronted today, as the Baby Boomer cohort retires in unprecedented numbers and places corresponding demands on public and private retirement plans.

A second defense of high assumed rates of return is that public pension plans can earn aggressive gains through so-called “alternative” investments such as private equity partnerships. Publicity about Mitt Romney’s IRA has focused attention on the often lucrative results obtained by at least some private equity investors. Many public pension plans have effectively become addicted to private equity deals and their promises of outsized investment returns.

It is, however, doubtful that these promised returns are generally obtained by the private equity industry or that such returns are obtained on the scale sought by public pension plans. Private equity is, by definition, private. Much of the good news we hear about this industry comes from the industry itself. Since there are no active markets for these investments, investors in private equity deals are ultimately dependent upon valuations by the sponsors of these deals.

In a recent paper, Professor K.J. Martijn Cremers of the Yale School of Management concluded that private equity investors have in the last 10 years done no better than investors in the stock market. Others, such as Professor Steven Kaplan of th