Central bank mandates

In their paper Against amnesia: re-imagining central banking, Benjamin Braun and Leah Downey describe the elite consensus on central banking as a ‘holy trinity’. This holy trinity consists of (1) an independent central bank that (2) sets the short term interest rate to (3) achieve stable prices1.

The fact that quantitative easing (QE) is still often called unconventional monetary policy speaks volumes for how deeply the holy trinity is ingrained in the minds of the community. However, more and more people are questioning this model of central banking2.

Central bankers are almost begging politicians to spend more. A formal framework for fiscal and monetary coordination would do away with the fiction3 of central bank independence.

There’s an explosion of ideas for new instruments, from yield curve control to canceling debt to green TLTROs.

While almost nobody wants to ditch price stability, central bankers are taking on extra responsabilities based on local sensitivities. European central bankers (both at the ECB and the Bank of England) are making their institutions climate friendly. The Federal Reserve has had a dual mandate of price stability and full employment for a long time. The Reserve Bank of New Zealand will take house prices into account.

Although central banking post-holy trinity will have its own challenges, I, for one, welcome our central bank overlords.

Quantitative Easing Q&A

Who sold their bonds to the ECB?

Mainly non-resident investors, although there are national differences, as this graph by Marcello Minenna shows:

What did companies do with the money from the ECB?

Corporates used the attracted funds mostly to increase dividends, according to research by Karamfil Todorov.

Did QE ease financial conditions?

Yes. Karamfil Todorov found that the ECB’s Corporate Sector Purchase Programme (CSPP) “increased prices and liquidity of bonds eligible to be purchased substantially”1.

Can we trust central bank research on the effect of QE?

Central bank researchers face strong incentives to be positive on QE. Brian Fabo, Martina Jančoková, Elisabeth Kempf and Ľuboš Pástor found that “central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes.”

Green finance

Asset managers, bankers, central bankers1… Everybody in finance is talking about climate change and sustainability.


But what do green investments mean in practice?

A report by Common Wealth found that some climate-themed funds invest in oil & gas companies such as ExxonMobil. More broadly, the largest holdings of climate funds were Big Tech and finance. Adrienne Buller, the author of the study, writes “what do these ostensibly climate-focused funds really contribute to combatting the climate crisis, reducing emissions or driving a rapid transition to low carbon economic activities? There is nothing in the specific labelling or remit of these funds that would require them to invest in the green economy, in financial instruments design to drive the transition of business models to lower carbon activities, or other similar investments.” (emphasis mine)

Source: Common Wealth

There are plenty of metrics by which providers assess climate risk. Given different methodologies and the complexity of estimating climate risk, there is some divergence in the metrics. However, Chiara Colesanti Senni and Julia Anna Bingler do find that “metrics tend to converge for companies that are most and least exposed to climate risk”.

Data and tools for monitoring climate change and financial assets:

Organizations promoting green finance:

Organizations advocating broader economic change, including green finance:

Chinese financial statistics

Financial Market Reports, includes outstanding bonds

Aggregate assets and liabilities of Financial Institutions (banks, insurers, securities institutions)

Monetary Policy Reports, includes breakdown of loans and deposits by borrower (households, enterprises and public entities, non-banking financial institutions, overseas), lending volumes according to size of banks, Aggregate funding to the real economy according to loans, bonds, other funding; balance of payments, foreign exchange reserves

Monetary Policy Instruments, including Open Market Operations (short term reverse repo), Required Reserves (required reserve ratios), Interest Rates, Lending Facilities

Interest rates and exchange rates


How can the European Central Bank (ECB) support a sustainable recovery? In a report for Positive Money Europe and Sustainable Finance Lab, Jens van ‘t Klooster and Rens van Tilburg propose that the ECB starts a Green TLTRO program.

Green TLTRO is a refinancing program for commercial banks. Banks can fund their green loans with longer term (several years) deposits from the European Central Bank (ECB). Green loans are bank loans that comply with the EU’s Green Taxonomy.

The figure below shows the balance sheet of a commercial bank with conventional (left) and green (right) TLTRO. Under TLTRO-III, the ECB funds 50% of a bank’s eligible assets. Under green TLTRO, the ECB funding is only available for green bank loans.

The interest rate on the Green TLTRO is determined by the volume of green bank loans. More green loans result in a lower interest rate on the funding from the ECB. With negative interest rates, banks have to pay back less to the ECB than they borrowed. This provides a strong incentive to banks to increase their lending to green projects, and to pass on the low rates to borrowers.

Is Green TLTRO a pie in the sky proposal? Only if you’re not keeping up with the times.

TLTROs are a well-established monetary policy tool. The ECB is currently doing TLTRO-III.

In a recent speech, ECB Executive Board Member Isabel Schnabel pointed out that climate change is a market failure. She said that collective action, including by the ECB, should correct this market failure and accelerate the transition towards a carbon-neutral economy.

Asked about the Green TLTRO report by MEP Bas Eickhout, ECB President Lagarde said that “climate change has to be part and parcel of our strategy review. Not because it is a secondary objective, but because of its impact on price stability, because of its significant impact on risk assessment and risk management. And the Green TLTRO, as you called it, is a matter that is of interest and that we will look at.”

What volume of green loans should the ECB target during the first 3 years? How low should the interest rate on Green TLTRO be? Should the eligible bank assets include loans to households for house purchases, a category that is currently exluded from TLTRO?

In a webinar on 12 October 2020, Jens van ‘t Klooster discusses the Green TLTRO proposal with Isabel Vansteenkiste (ECB) and Frederik Ducrozet (Pictet).

Update 2020/10/18: this is the video

Full disclosure: I have done consulting work for this report.

Thinking past the sale of your financial panacea

There are plenty of financial proposals for dealing with the corona crisis.

More government debt! Eurobonds! Helicopter money! Eliminate sovereign debt held by the ECB! Create a European investment fund!

One thing that greatly annoys me is that people don’t go into the details.

So if you want to convince me of your financial panacea, show me what it means in practice. Who are the winners and losers? What are the consequences of your plan for households, companies, banks, government finances, inflation, employment?

Make me think past the sale, and I might buy your proposal!

The economics of the coronavirus on Twitter

Larry Summers is a VSCO girl. On central banks, fiscal stimulus, and why you should read Eric Lonergan

In case you’re not familiar with teen culture, VSCO girl is a fashion trend.

Surely, the Very Serious People who think about central banks are not susceptible to such fads, right?

I regret to inform you that the Very Serious economists and central bankers are just as prone to trends as teens on TikTok.

Continue reading “Larry Summers is a VSCO girl. On central banks, fiscal stimulus, and why you should read Eric Lonergan”