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Photo by Samuel Zeller on Unsplash

Evidence from Eurozone says “No” (or not yet)

In a recent research, four European Central Bank economists found that negative interest rate policy in the eurozone can encourage banks to increase lending and encourage corporation to increase investments.

That is, contrary to what macroeconomics models usually predict, interest rate policy can still has stimulative effect even the zero lower bound is reached.

Altavilla, Carlo, Lorenzo Burlon, Mariassunta Giannetti, and Sarah Holton. “Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms.” , June 2019. June 2019.

Mainstream Economics believes that once the zero lower bound is reached, further rate cuts will not have much effects as the negative rate won’t be channeled to the customers. When interest rate on deposit drop below zero, customers will withdraw all the money and keep it as cash to avoid the “tax” negative rate imposed. …


HKMA’s often neglected control on the Aggregate Balance

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Hong Kong’s Monetary Authority (HKMA) maintains a linked exchange rate system between the Hong Kong Dollar (HKD) and the US Dollar (USD). I assume you know this already.

Using the so-called currency board, the HKMA actively participates in the exchange market to buy HKD. Whenever the exchange rate falls below 7.85 HKD per 1 USD, the weak-side Convertibility Undertaking. Whenever the exchange rate rises above 7.85 HKD for 1 USD, the strong-side Convertibility Undertaking, HKMA sells HK in the market. So HKMA is tasked to maintain that the HKD/USD exchange rate sits between 7.75 to 7.85 …


Eurozone’s Recession

The latest Purchasing Manager Index (PMI) for the two largest economies, Germany and France, is showing a clear sign of looming recession.

The Composite PMI for France falls to 48.7 in March, below the 50 mark that separates expansion from contraction. It is a 1.7 point decrease compared to the February reading of 50.4, and well below the 50.7 forecast by analysts in the Reuters poll.

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While Germany’s Composite PMI is still above 50 in March with a reading of 51.5, the Manufacturing PMI dropped to 44.7 and reach a 79 month low. The drop from 47.6 …


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The most important question for the 30th Jan Fed meeting balance sheet policy, because it is also most underrated by the market.

Let’s read the minutes of December Fed meeting again, specifically this passage:


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Photo by Michael on Unsplash

The effect is shown differently on nominal and real GDP.

According to this Wells Fargo’s report, as Real GDP attempts to solely measure changes in output, the real labor costs, which are measured by hours worked, is what it reflects. Thus, when hours worked decline, so does output.

On the other hand, the nominal federal component of GDP is unchanged, as a result of accrued back-pay. This is reflected mechanically in the GDP accounts as a rise in the federal price deflator. This has happened before in the Q4–2013 shutdown, as shown by the red circle in the graph below.


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According to the data shown in the Congressional Budget Office‘s latest The Budget and Economic Outlook: From 2019 to 2029, there are $15.8 trillion US federal debt held by the public at the end of 2018.

The CBO estimate that the federal government is projected to borrow another $13.0 trillion from the end of 2018 through 2029, boosting debt held by the public to almost $29 trillion, or 93 percent of GDP, by the end of 2029.


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Photo by Kayle Kaupanger on Unsplash

In a recent study “Bank Equity and Banking Crises” by Matthew Baron (of Cornell University), Emil Verner (MIT Sloan), and Wei Xiong (Princeton University), the three economists developed a comprehensive database of bank equity prices and banking crises with a full-sample of 46 countries from 1870–2016. They try to understand the dynamic between bank equity decline and banking crises.

Utilizing their newly built database, the researchers find that a large-scale decline in market value of bank equity is an effective predictor of persistently lower subsequent output. They classified a bank equity crash as a 30% decline in real return in a year. Their estimation, as shown below by the blue line, suggests that a decline in bank equity of at least 30% predicts 2.5% …


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Photo by Breno Assis on Unsplash

This is a recent research by Byron Tsang of Virginia Tech and Xiaojin Sun of University of Texas at El Paso. The focus of the research is to find out if there is any “predictable” pattern following housing “bubbles”.

To answer this question, the two examine the house prices of 50 states (plus the District of Columbia) as well as 402 metropolitan statistical areas in the U.S. over the past 40 years. …


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Fed’s pre-2008 Corridor System

Before 2008 the interest rate policy system is a so-called “corridor system”, where the discount rate served as the corridor ceiling and the zero lower bound (ZLB) was the floor.

In this system, the demand curve of the bank reserve market is downward sloping with respect to the interbank interest rate. …

About

Cloud Y | EconReporter

Independent Journalist, writes about Global Economy and Economics. Editor of EconReporter.

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