Housing booms are wasteful — and the subsequent busts are deeply destructive. Worse, they have become bigger and more frequent since the 1970s. An important new paper from Oscar Jorda, Moritz Schularick, and Alan Taylor places the blame on structural changes in the financial sector that exacerbate the impact of excessively loose monetary policy.
This is a continuation of earlier research on the drivers of credit booms and their impact on GDP using data from more than a dozen rich countries going back to 1870, which we covered in detail here. For those who don’t want to reread that post, the two important takeaways are, first, that the growth rate in private borrowing during an economic expansion predicts the severity of the subsequent downturn even when there is no financial crisis: Read more
CreditSights points out today that changes in gross ECB liquidity provided to the euro area’s banking sector closely track changes in 10 year Bund yields:
Back in April, Paul Krugman wrote that Swedish post-crisis central banking has been “sadomonetarism in action.” (They had the audacity to modestly raise short-term interest rates in 2010-2011.) The criticism may lead to additional parliamentary oversight of the Riksbank.
So we recommend you read an important new speech from deputy governor Per Jansson that dispels many of the myths surrounding Swedish monetary policy. He makes two basic arguments: Read more
Policy should not respond to changes in asset prices, except insofar as they signal changes in expected inflation.
–Monetary Policy and Asset Price Volatility, by Ben Bernanke and Mark Gertler (1999)
That thesis became conventional wisdom in the years leading up to the recent financial crisis. Central bankers came to think it would be presumptuous for them to act as if they knew more than the collective wisdom of the markets. Even if they could spot trouble in advance, the consensus was that there was no way to temper excesses in the financial system without tanking the economy in the process. Better to stick to the (seemingly) simpler task of inflation targeting. Read more
When governor Haruhiko Kuroda stood up in April 2013 to set out a bold new regime of monetary easing at the Bank of Japan, the executive summary seemed obvious: it’s all about the number two.
In vowing to double the monetary base by doubling the maturity of the bonds it buys, the BoJ said it would hit an inflation target of about 2 per cent “at the earliest possible time, with a time horizon of about two years.”
The bank then produced targets for base money and its own balance-sheet holdings for the end of the 2013 and the 2014 calendar years (click to enlarge): Read more
Here’s an interesting little side note from Joseph Abate at Barclays’ Global Rates team last week on the subject of rising demand for paper money:
Despite the attention the bitcoin and other electronic payments attract, the demand for old-fashioned paper money is surprisingly robust. Paper money is growing at a 7% annual rate, reflecting non-US demand and the $100 bill’s role as a store of value.
• Growth in currency demand has cooled since early 2012, yet it remains considerably faster than nominal consumption.
• Much of the demand for US currency results from its use as a stable store of value, which is reflected in high per capita holdings and its use abroad.
• Super-low rates on highly liquid assets such as money funds and checking account balances have meant that the opportunity cost of holding currency is low.
• Currency growth will determine how quickly the Fed’s balance sheet normalizes after it stops buying assets and re-investing maturing securities. We expect the precautionary demand and the higher opportunity costs to slow annual growth to 3% or less.