Category Archives: Notes

ECB Bond Purchases: Fiscal or Monetary Policy?

In an NBER working paper, Arvind Krishnamurthy, Stefan Nagel, and Annette Vissing-Jorgensen analyze which components of bond yields were affected by the European Central Bank’s government bond purchasing programs.

Given the institutional restrictions on monetary policy in the Euro area, the ECB had to carefully argue why it intervened in the first place. (To many, the case was obvious; the ECB intervention amounted to quasi-fiscal policy. But an intervention with this objective would not be covered by the rules of the Euro area.) It gave two reasons for the SMP, OMT, and LTRO:

The ECB has publicly stated that these policies reduce redenomination risk, i.e., the risk that the Eurozone might break up and countries redenominate domestic debt into new domestic currencies, and financial market “dysfunctionality,” i.e., segmentation- and illiquidity-induced pricing anomalies.

The authors decompose bond yields into five components: an expectations hypothesis component; a euro-rate term premium; a default risk premium; a redenomination risk premium; and a component due to sovereign bond market segmentation. To identify the non-observable, country-specific components (reflecting default risk, redenomination risk, and sovereign bond market segmentation), the authors use information from asset prices that are differentially exposed to these components.

Specifically, they use the fact that

foreign-law sovereign bonds denominated in US dollars cannot be redenominated through domestic law changes … and redenomination into a new currency should affect all securities issued in a given country under the country’s local law equally.

The authors find that

the default risk premium and sovereign bond segmentation effect appear to have been the dominant channels through which the SMP and the OMT affected sovereign bond yields of Italy and Spain. Redenomination risk may have been present at times and it may have been a third policy channel for the SMP and OMT in the case of Spain and Portugal, but not for Italy. … default risk accounts for 30% of the fall in yields across SMP and OMT for Italy. Segmentation accounts for the other 70%. For Spain, the numbers are 42% (default risk), 15% (redenomination risk) and 43% (segmentation). For Portugal, the numbers are 40% (default risk), 24% (redenomination risk) and 36% (segmentation). For the LTROs, we find that their effect on Spanish bond yields worked almost entirely via the sovereign segmentation channel. We show that the more substantial impact of the LTROs on Spanish sovereign yields than on Italian and Portuguese sovereign yields is consistent with Spanish banks purchasing a larger fraction of outstanding sovereign debt in the months following the introduction of the LTROs.

Cost Pressure Flattens Bank Hierarchies

In the NZZ, Daniel Imwinkelried reports about the effect of cost pressure on the organizational structure of banks: fewer layers of control.

So bestand das Schweizer Privatkundengeschäft der Credit Suisse (CS) bis vor kurzem aus drei Ebenen, nämlich zehn Regionen, den Marktgebieten und den Teams. Die mittlere Stufe wurde abgeschafft, die ehemaligen Chefs mussten die Bank verlassen oder erhielten eine neue Aufgabe. Im Schweizer Privatkundengeschäft der CS kamen einst im Durchschnitt auf einen Vorgesetzten 4,2 Mitarbeiter; nun strebt die Bank ein Verhältnis von 1 zu 7 an. Damit ziele man auf eine schlagkräftigere Führung, sagte jüngst Serge Fehr, der Leiter des Privatkundenbereichs, an einem Anlass.



At an MIT book launch in Zurich, David Shrier and Alex Pentland advertized a new book co-edited by them, “New Solutions for Cybersecurity.” Some takeaways from the event:

  • The really dangerous cyber attacks are yet to come.
  • All major governments are directly or indirectly involved.
  • A promising strategy of minimizing risks relies on (i) continuous encryption; (ii) no central storage of data but case by case requests for data; and (iii) log queries to manage/monitor access.
  • The European General Data Protection Regulation is helpful.
  • Cybersecurity is big business.

Price Effects of Purchases of Greek Sovereign Debt by the ECB

In a CEPR discussion paper, Christoph Trebesch and Jeromin Zettelmeyer argue that

ECB bond buying had a large impact on the price of short and medium maturity bonds … However, the effects were limited to those sovereign bonds actually bought. We find little evidence for positive effects on market quality, or spillovers to close substitute bonds, CDS markets, or corporate bonds.

A multiple equilibria view of the crisis would probably suggest otherwise.

SNB Rejects Vollgeld and Questions ‘Reserves for All’

In the NZZ, Peter Fischer reports that SNB president Thomas Jordan rejects the Vollgeld initiative and stops short of endorsing the ‘reserves for all’ proposal.

… wehrt sich die Nationalbank auch gegen Vorschläge aus akademischen Kreisen, die von der Nationalbank fordern, nicht mehr nur Banken, sondern auch direkt den Schweizer Bürgern elektronisches Zentralbankgeld zur Verfügung zu stellen. Am einfachsten ginge dies, wenn jedermann bei der SNB ein Konto halten könnte. Jordan warnt davor, dass in einem solchen Fall die bewährte Arbeitsteilung zwischen Privatsektor und Zentralbank zur Disposition stünde. Die Fähigkeit der Banken, Kredite zu vergeben und Fristentransformation zu betreiben, würde eingeschränkt. Das Finanzsystem würde als Ganzes nicht sicherer, sondern unter Umständen sogar stärker destabilisiert, wenn es allen Anlegern möglich wäre, nach Belieben plötzlich in Sichtguthaben bei der Zentralbank zu flüchten. Zudem müsste die SNB etwa bei der Überprüfung der Kunden und ihrer Gelder neu Funktionen übernehmen, die sie bei den Banken besser aufgehoben sieht.

Allerdings konzediert auch Jordan, dass sich die technologischen Möglichkeiten im Bereich des digitalen Geldes rasant weiterentwickeln. Das hat das Potenzial, Zahlungssysteme und die Art, wie die Zentralbank ihre Geldpolitik betreiben kann, zu verändern. Jordan hielt in seiner Rede dazu lediglich fest, die SNB verfolge die Entwicklungen aufmerksam. Noch sind Kryptowährungen zu wenig verbreitet, um aus Sicht der Nationalbank ein ernsthaftes Problem darzustellen. Der E-Franken muss warten.

It is correct that ‘reserves for all’ could increase the elasticity of demand for reserves; if unchecked, this could also increase the risk of bank runs. But the central bank would not have to interact with the general public. And the fact that monetary reform would change the banking business is no decisive argument against such a change.

For my columns on the topic, select the ‘reserves for all’ tag.

Oligopolistic Anonymity

On Alphaville, Kadhim Shubber reports that just a few marketplaces handle the vast majority of illicit drugs-vs.-bitcoin trades.

In short, the illicit bitcoin ecosystem is centered around a small number of services that could be subject to scrutiny, regulation and co-option by law enforcement.

It’s a wild west, but luckily for the police all the bad guys are hanging out at a single saloon.

Doing Business, and Politics

The World Bank’s Doing Business project claims to provide

objective measures of business regulations and their enforcement across 190 economies and selected cities at the subnational and regional level.

In the Wall Street Journal, Josh Zumbrun and Ian Talley report that the ranking must be revised.

Over time, World Bank staff put a heavy thumb on the scales of its report by repeatedly changing the methodology that was used to calculate the country rankings, Mr. Romer said.

The focus of the World Bank’s corrections will be changes that had the effect of sharply penalizing the ranking of Chile under the most recent term of Chile’s outgoing president, Michelle Bachelet.

Paul Romer, the World Bank’s chief economist, apologized.

Update (Jan 16): On his blog, Paul Romer tries to clarify.


In the FT, Leslie Hook reports that activist investors want Apple

to address concerns over smartphone addiction and the mental health effects of phone use among children.

They refer to psychologist Jean Twenge according to whom teenagers today (“the iGen”)

… are more vulnerable than Millennials were: Rates of teen depression and suicide have skyrocketed since 2011. It’s not an exaggeration to describe iGen as being on the brink of the worst mental-health crisis in decades. Much of this deterioration can be traced to their phones. …

12th-graders in 2015 were going out less often than eighth-graders did as recently as 2009. …

Teens who spend more time than average on screen activities are more likely to be unhappy, and those who spend more time than average on nonscreen activities are more likely to be happy. There’s not a single exception. All screen activities are linked to less happiness, and all nonscreen activities are linked to more happiness.

The last observation does not hold in the cross section, however; more “social” teenagers spend more time with friends both online and offline.

Inequality in the United States

… meanwhile, inequality in the US remains more of an issue.

On Alphaville, Kadhim Shubber summarizes a DB Global Markets Research study on US inequality:

  • More than 30% of US households have zero or negative non-home wealth.
  • Wealth is increasingly concentrated among the old, and among the wealthy.

Observers paint the picture of an increasingly dysfunctional society.

And they point to the relevance of inequality for political polarization and accountability.

Inequality in Switzerland

In a paper, Reto Föllmi and Isabel Martínez document trends in income and wealth inequality in Switzerland over the last 100 years.

Daniel Hug reports in the NZZaS (figures below taken from NZZaS).

Data (World Wealth and Income Database, based on tax records).

Some findings:

  • Income inequality has been rather stable and is modest …
  • … although social mobility as reflected in educational attainment is low.
  • Income inequality at the very top has increased.
  • The top 1% of income recipients earn at least CHF 300 000 annually (net income before tax), the top 0.01% at least CHF 4 million.
  • Wealth is distributed much more unequally. The top 1% own roughly 40%, slightly more than in the United States and twice as much as in France and the UK.
  • The wealth distribution is more equal if retirement savings in the second and third pillar are accounted for. PAYG funded pensions (first pillar) also contribute towards reducing inequality after taxes and transfers, much more so than taxes.

Swiss Perfectionism

In Der Bund, Adrian Sulc comments on the Swiss National Bank’s perfectionism.

Keine andere Schweizer Organisation kommuniziert so professionell wie die SNB, keine andere Organisation kann so gut dichthalten.

Perfectionism is costly.

Der Personalbestand ist in den letzten fünf Jahren um 18 Prozent auf 795 Vollzeitstellen gestiegen. … Die durchschnittlichen Lohnkosten pro Mitarbeiter betragen mittlerweile 155 000 Franken pro Jahr. Dies weil gemäss Nationalbank fast ausschliesslich Spezialisten aus Wirtschaft und IT eingestellt wurden.

Blockchain Based Equity Settlement in Australia

In the FT, Jamie Smyth reports that the Australian Securities Exchange plans to introduce a blockchain based equity clearing and settlement system.

ASX will operate the system on a secure private network with known participants. The participants must comply with regulation, according to the ASX, which said its system had nothing to do with blockchain technology deployed by cryptocurrencies such as bitcoin.

Cash Demand

On VoxEU, Clemens Jobst and Helmut Stix argue that

… cash balances for transactions comprise only a modest share of overall cash demand (a rough estimate of 15% might be a good guess across richer economies). … changes in currency in circulation are dominated by motives like hoarding. While transaction demand is reasonably well researched … still too little is known about non-transaction demand in general, and recent increases in particular.

Forecasting In Finance

It’s the time of the year when financial advisors feel obliged to produce forecasts for the coming year. This is often a waste of time, for the writers and the readers.

In the Wall Street Journal, James Mackintosh writes that

[f]orecasting is difficult, but this year showed exactly how pointless it can be: Markets performed opposite of virtually all predictions.

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Laptops in Class Hinder Learning

In the New York Times, Susan Dynarski argues that students learn less when they use laptops, tablets and the like during lectures.

… a growing body of evidence shows that over all, college students learn less when they use computers or tablets during lectures. They also tend to earn worse grades. The research is unequivocal: Laptops distract from learning, both for users and for those around them. It’s not much of a leap to expect that electronics also undermine learning in high school classrooms or that they hurt productivity in meetings in all kinds of workplaces.

She points to studies arguing that “laptop note takers’ tendency to transcribe lectures verbatim rather than processing information and reframing it in their own words is detrimental to learning” and “multitasking on a laptop poses a significant distraction to both users and fellow students.”

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