Category Archives: Notes

Polish History

Frequent territorial change characterizes the eventful and troublesome history of Poland (video). This history is evident all over the place when walking the streets of Warsaw, for example in the historic city that was destroyed in 1944 and rebuilt afterwards, the memorials in its vicinity, or Stalin’s unloved gift to the Polish nation. The Poles value their new found freedom and are acutely aware of threats to it.

Real Interest Rates

James Hamilton, Ethan Harris, Jan Hatzius and Kenneth West have computed historical time series for real interest rates in several countries (paper, blog post). The authors argue that there is significant uncertainty surrounding the equilibrium real rate—but no strong evidence for “secular stagnation.” They also argue that the uncertainty calls for inertial monetary policy. The paper includes many figures, for instance on this page a figure about US and UK real rates.

Apostolos Doxiadis and Christos Papadimitriou’s “Logicomix”

“Logicomix: An Epic Search for Truth” (Wikipedia) is a nice graphic novel by Apostolos Doxiadis and Christos Papadimitriou about Bertrand Russell’s life and work. Whitehead, Frege, Poincaré, Hilbert, Wittgenstein, Gödel, von Neumann and many others as well as Greek tragedy make appearances.

Limits on Cash Withdrawals?

Andreas Valda reports in Der Bund about speculation that the Swiss National Bank (SNB) and/or commercial banks may limit cash withdrawals in response to negative CHF interest rates. According to the report, SNB press officer Walter Meier clarified the instruments at the SNB’s disposal as follows:

Die Nationalbank hat sich gemäss Gesetz bei der Ausgabe von Banknoten nach den Bedürfnissen des Zahlungsverkehrs zu richten; sie kann dafür Vorschriften über die Art und Weise, Ort und Zeit von Notenbezügen erlassen. … [Solche Vorschriften] würden gegenüber Bargeldbezügern bei der SNB gelten, also typischerweise Banken und sogenannte Bargeld-Verarbeiter.

Bleak Prospects for Greece

My colleague Harris Dellas argues in swissinfo.ch that it is too easy to blame a tax dodging elite for the Greek malaise; tax evasion is much more prevalent, not least because a large share of the population is self employed, and institutionally ingrained. He doubts that the current government is better equipped to address the problem than earlier ones. And he fears that Grexit could turn Greece into a failed state.

Also, an open letter (in Greek and German, PDF) by Greek academics (mostly living abroad I presume). They doubt that the current Greek government actually helps to restore the country’s dignity as intended.

Narrow Banking: History and Merits

George Pennacchi discusses narrow banking in an article in the Annual Review of Financial Economics. He concludes as follows:

During the nineteenth century, US banks were more narrow than they are today, and the narrowest (e.g., those under the Louisiana Banking Act of 1842) appeared resistant to panics. Common modern-banking practices, such as maturity transformation and explicit loan commitments, arose only after the creation of the Federal Reserve and the FDIC.

… There appears to be little or no benefits available from traditional banks that could not be obtained in a carefully designed narrow bank financial system. Most importantly, a narrow-banking system could have huge advantages in containing moral hazard and reducing the overall risk and required regulation of the financial system.

In contrast, the reaction by US regulators to the recent financial crisis was to expand the government’s safety net by raising deposit insurance limits and by giving more financial firms access to insured deposits. Expanding, rather than narrowing, the activities that are funded with insured deposits is justified if one believes that regulation can contain moral hazard when firms have many, complex risk-taking opportunities. Unfortunately, this belief appears dubious if one recognizes that regulators face political and information constraints.

In my view, there is a need for research that considers the optimal design of a financial system when a government regulator is limited in its ability to assess risk. … Research needs to better identify those financial services where government support would produce a net social benefit. Services such as maturity transformation and liquidity insurance may not deserve costly government guarantees. Finally, should further research support the general concept of narrow banking, there are still open questions regarding the specific features of these banks. In particular, how narrow should be these banks’ assets and should their liabilities should be deposits or equity shares (at fixed or floating NAVs) are questions that need better answers.

Capital Flows To and From Switzerland

In a Vox column, Pinar Yeşin argues that

abnormally low values of net flows were not necessarily driven by surges of private capital inflows. In fact, declined capital outflows that are less correlated with capital inflows appear to be the main factor. These findings suggest that the financial crisis generated a breaking point for capital flows to and from Switzerland.

Poverty in Germany

A new report by the Paritätische Gesamtverband argues that income inequality in Germany is on the rise. The data source is a micro census.

Roughly 16% of the population are poor—living in a household with adjusted income of less than 60% of the median household income. For a family of four, the threshold income value amounts to 1873 Euros per month. The share of poor people among the unemployed is roughly 60%, among single parents roughly 40%, and among children roughly 20%. Only 15% of retirees are poor according to the above definition, but this share is rising rapidly. Differences between poverty quotas in more and less poor areas are rising.

Non-Neutral Helicopter Drops

In an August 2014 Economics article, Willem Buiter discussed the conditions for a Friedman-type helicopter drop of money to be effective.

First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Only then will base money be willingly held despite being dominated as a store of value … Second, fiat base money is irredeemable: it is view[ed] as an asset by the holder but not as a liability by the issuer. … Third, the price of money is positive.

Deflation … are therefore unnecessary. They are policy choices. This effectiveness result holds when the economy is away from the zero lower bound (ZLB), at the ZLB for a limited time period or at the ZLB forever.

The feature of irredeemable base money that is key … is that the acceptance of payment in base money by the government to a private agent constitutes a final settlement … It leaves the private agent without any further claim on the government, now or in the future. The helicopter money drop effectiveness issue is closely related to the question as to whether State-issued fiat money is net wealth for the private sector, despite being technically an ‘inside asset’ …

… because of its irredeemability, state-issued fiat money is indeed net wealth to the private sector … even after the intertemporal budget constraint of the State (which includes the Central Bank) has been consolidated with that of the household sector.

Forecasting Exchange Rates

In a Vox column, Michele Ca’Zorzi, Jakub Mućk and Michał Rubaszek argue that exploiting the “Rogoff’s consensus” helps beat the random walk forecast.

… a calibrated half-life PPP model beats overwhelmingly the random walk in relation to real exchange rate forecasting.

… if the speed of mean reversion is estimated, rather than calibrated, the model performs significantly worse than the random walk due to estimation error.

… the mean reverting nature of real exchange rates can be exploited to outperform the random walk in relation to nominal exchange rate forecasting. For both the case of the euro and the dollar we find that the nominal exchange rate has contributed to the mean reversion process of the real exchange rate rather than just followed a random walk.

Parallels between Argentina and Greece

On Project Syndicate, Raquel Fernández and Jonathan Portes offer four lessons from the Argentinian default in 2001 for Greece:

… if the economics are on your side, you can and should ignore politicians prophesying disaster. … a short period of political turmoil can cost surprisingly little compared to a long period of mindless pursuit of misconceived policies. But … Greece must acknowledge that its fundamental problems are of its own making. … Greece is unlikely to enjoy the breathing space provided by a commodity boom. If it is to place itself on the road to a sustainable recovery, it has no time to lose.

Another Estimate of the Haircut on Greek Debt to Come

In a Vox column, Thomas Philippon suggests a 3% rather than 4.5% primary surplus target on fairness grounds. His central points are:

Greece ran a reckless fiscal policy during the boom years, wasting much of the money that it received. There is no question that Greece needs a strong dose of fiscal consolidation. However, Greece’s debt should have been restructured much earlier. This restructuring was prevented by legitimate fears of contagion, and it is not fair to ask Greece to pay for that delay, which reflected a general lack of preparedness among Eurozone policymakers.

Philippon’s estimate is similar to another estimate by Paolo Manasse.

Swiss Leaks

The International Consortium of Investigative Journalists published a report that seems to suggest that HSBC’s Swiss branch violated Swiss laws; helped customers to hide assets; and assisted in money laundering activities. The report is based on information that Hervé Falciani, a former HSBC employee-turned-whistleblower, handed over to French authorities in 2008.

The small print (in the footer of the “Swiss Leaks” website) reads:

There are legitimate uses for Swiss bank accounts and trusts. We do not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Swiss Leaks interactive application have broken the law or otherwise acted improperly.

Additional reporting in The Guardian, FT, NZZ, Süddeutsche Zeitung.