J. W. Mason — “On money, debt, trust and central banking”

Some of the most interesting of that new work is from, and about, central banks. As an example, here is a remarkable speech by BIS economist Claudio Borio. I am not sure when I last saw such a high density of insight-per-word in a discussion of money and finance, let alone in a speech by a central banker. I could just say, Go read it. But instead I’m going to go through it section by section, explaining what I find interesting in it and how it connects up to a larger heterodox vision of money....

J. W. Mason's Blog
“On money, debt, trust and central banking”
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann — The costs of deflations: a historical perspective

Asset value deflation rather than goods price deflation is the problem that leads to debt deflation.

The costs of deflations: a historical perspective 24 pages
by Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann


BIS Quarterly Review, March 2015

Claudio Borio — The international monetary and financial system: its Achilles heel and what to do about it

Free download

This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the "excess financial elasticity" of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets - the "excess saving" and "excess demand for safe assets" views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.

BIS
The international monetary and financial system: its Achilles heel and what to do about it
by Claudio Borio
Working Papers No 456
September 2014

Claudio Borio and Piti Disyatat — The Interest-Rate Enigma

...interest rates are not determined by some invisible natural force; they are set by people. Central banks pin down the short end of the yield curve, while financial-market participants price longer-dated yields based on how they expect monetary policy to respond to future inflation and growth, taking into account associated risks. Observed real interest rates are measured by deducting expected inflation from these nominal rates. 

Thus, at any given point in time, interest rates reflect the interplay between the central bank’s reaction function and private-sector beliefs. By identifying the evolution of real interest rates with saving and investment fundamentals, the implicit assumption is that the central bank and financial markets can roughly track the evolution of the equilibrium real rate over time.

But this is by no means straightforward. For central banks, measuring the equilibrium interest rate – an abstract concept that cannot be observed – is a formidable challenge....

Moreover, central banks’ policy frameworks may be incomplete. By focusing largely on short-term inflation and output stabilization, monetary policy may not pay sufficient attention to financial developments. Given that the financial cycle is much more drawn out than the business cycle, typical policy horizons may not allow the authorities to account adequately for the impact of their decisions on future economic outcomes....

With financial-market participants as much in the dark as central banks, things can go badly wrong. And so they have....

Monetary policy cannot overcome structural impediments to growth. But the actions that central banks take today can affect real macroeconomic developments in the long term, primarily through their impact on the financial cycle.

Minsky.

Project Syndicate
The Interest-Rate Enigma
Claudio Borio, Head of the Monetary and Economic Department at the Bank for International Settlements, and Piti Disyatat, Director of Research at the Bank of Thailand

Merijn Knibbe — Central Banking in the Eurozone: moving away from ‘inflation targeting’

The system of Eurozone central banks has recently taken a large step away from traditional inflation targeting towards more active policies aimed at also guaranteeing financial stability. One can doubt the effectiveness of the new policies which, after all, are new. And unemployment is only mentioned in passing though the new policies implicitly admit that the post 2008 rise in Eurozone unemployment was not caused by rigid labour markets. But by a crisis. Despite this the new policies are a very welcome (though severly overdue) step ahead: they admit that too much credit is a dangerous thing, especially when it leads to asset price increases.

Real-World Economics Review Blog
Central Banking in the Eurozone: moving away from ‘inflation targeting’
Merijn Knibbe

Claudio Borio — Macroeconomics and the financial cycle: Hamlet without the Prince?

Since the early 1980s, the financial cycle has re-emerged as a major force driving the macroeconomy, but economic analysis has not caught up. This column argues that macroeconomics without the financial cycle is like Hamlet without the Prince. Economic analysis and policies – monetary, fiscal, and prudential – should be adjusted to fully account for the financial cycles, but here more analytic work is needed. The question of how we address the bust and balance-sheet recession that follow the boom deserves special attention.

VOX

Macroeconomics and the financial cycle: Hamlet without the Prince?
Claudio Borio | Deputy Head of the Monetary and Economic Department and Director of Research and Statistics, Bank for International Settlements

BIS finally getting with it? While encouraging, Borio's post reveals that while he has recognized the problem and begun to come to grips with it, he has not realized yet that it has been addressed and largely resolved. Someone please direct him over to Levy Institute.

The Economist — Claudio Borio on the financial cycle

Summary and positive assessment of “The financial cycle and macroeconomics: What have we learnt?”

The Economist | Free Exchange
Claudio Borio on the financial cycle
M.C.K.

Gunnar Tomasson — Mainstream monetary economics and a Fool's Errand

Interesting message to gang8 from Gunnar Tomasson, Mainstream monetary economics and a Fool's Errand, on Claudio Borio's recent BIS paper.

In correspondence with Samuelson, beginning in 1977, I made the point that it was LOGICALLY impossible to integrate what Tobin referred to as the "income" and "asset" sides of the economy.

Samuelson did not challenge the point, noting only that he was "confident" that "any who were expert [in such matters] would not agree that [I] had isolated a contradiction in [his] Foundations."

Later, when I put the very same point to Tobin, he did NOT address its merits but advised that he had "now" - after a quarter century of doing otherwise - come to "like the stock-flow-stock" approach to the subject matter.

That is to say, he had given up on PROVING what Samuelson had ASSUMED/HYPOTHESIZED.

Tobin did not explain WHY he had given up on his long-time quest, but referred me to his Nobel lecture delivered in 1981.

As noted by Claudio Borio, the models of mainstream economists do NOT include money - and there is a very good, but unspoken, reason why that is so:

INCOME FLOWS, measured in money, cannot in principle be placed in a unitary conceptual framework/model with ASSETS, measured in money.

Economists who seek to graft money onto their macroeconomic models are attempting the impossible - both Samuelson and Tobin KNEW that there was a problem with that.

One assumed the problem away - the other tackled it valiantly for a quarter century but changed tack without ever acknowledging (to the best of my knowledge) that it was a fool's errand.

There is also a link at the bottom to an interesting post in The Economist.

Bill Mitchell on a roll this week

I don't usually link to Bill Mitchell's billy blog, or NEP or Mosler Economics-The Center of the Universe, since I assume that those interested in MMT follow these. However, I do call attention to especially pertinent pieces having a wider scope that others may be interested in. Here are three links to Bill's recent posts that are of general interest.

Bill is located in Australia and his analysis is often related to what is going on the there. But the principles are universally applicable. So just skip over the local data if it is not interest to you.

Bill Mitchell — billy blog

What have mainstream macroeconomists learn’t? Short answer: nothing
(about the recent BIS paper of Claudio Borio)

The humanities is necessary but not sufficient for social transformation

Government budgets bear no relation to household budgets

Claudio Borio — The financial cycle and macroeconomics: What have we learnt?

Abstract

It is high time we rediscovered the role of the financial cycle in macroeconomics. In the environment that has prevailed for at least three decades now, it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies. This essay highlights the stylised empirical features of the financial cycle, conjectures as to what it may take to model it satisfactorily, and considers its policy implications. In the discussion of policy, the essay pays special attention to the bust phase, which is less well explored and raises much more controversial issues.

Bank of International Settlements
The financial cycle and macroeconomics: What have we learnt?
Claudio Borio