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.

Germany’s export-led economy and the consequences for its banks

In the thread below, Benjamin Braun explains Germany’s political economy. More specifically, he and Richard Deeg studied the interaction between the financial and non financial corporate (NFC) sectors.

Let me try to summarize the argument.

The German NFC sector has high profits (1) and runs a trade surplus (2).

(1) enables companies to finance their own investments. They don’t need to borrow money from banks.

(2) leads to an inflow of reserves and deposits at banks. As a result, German banks lend to foreign entities.

This seems a sensible story.

However, I don’t agree with the conclusion:

First of all, I highly doubt any policymakers really want to help German banks. If that were the case, the monstrosity of publicly owned, unprofitable banks would have been cleaned up by now.

But even if German politicians cared, it’s not clear that stronger unions or higher wages would be more than a drop in a bucket.

A higher demand for credit would have an immediate positive impact on German banks. And there is a lot of room for growth.

Home ownership in Germany is low compared to non-German speaking countries, as you can see in this picture from Eurostat.

Stimulating home ownership would boost the demand for mortgages.

More investment by the government, as called for by industry and labor unions, would also increase the domestic supply of assets for banks if it’s funded by bonds instead of taxes.

If Angela Merkel wants some more advice, she can leave a comment 🙂