Monetary policy

Do emerging market prudential policies lessen the spillover effects of US monetary policy?

Published by Anonymous (not verified) on Mon, 06/01/2020 - 8:00pm in

Andra Coman and Simon Lloyd

Prudential policies have grown in popularity as a tool for addressing financial stability risks since the 2007-09 global financial crisis. Yet their effects are still debated, with sanguine and more pessimistic viewpoints. In a recent Bank of England Staff Working Paper, we assess the extent to which emerging market (EM) prudential policies can partially insulate their domestic economies against the spillovers from US monetary policy. Using a database of prudential policies implemented by EMs since 2000, our estimates indicate that each additional prudential policy tightening can dampen the decline in total credit following a US monetary policy tightening by around 20%. This suggests that domestic prudential policies allow EMs to insulate themselves somewhat from global shocks.

Reflecting the ‘global financial cycle’, financial conditions in EMs tend to be particularly sensitive to US monetary policy and advanced economy financial markets more generally. Even policymakers in advanced economies have recently become more concerned about potential ‘spillbacks’ from EMs. Higher US interest rates tend to be associated with lower lending in EMs, creating challenges for policymakers in EMs, who have to balance internal objectives against external positions. This raises questions around the appropriate mix of policy tools—including prudential policies and capital flow measures—that policymakers can draw upon. Our research speaks directly to this, assessing the role of EM prudential policies in the face of spillovers from US monetary policy.

Prudential policies in the face of foreign shocks

Over the last two decades, a variety of prudential policies have been pursued in EMs. Banks have been asked to hold additional capital against specific exposures. Limits have been placed on loan-to-value ratios for mortgage lending. Financial institutions have increased their reserves, in domestic and foreign currency, in order to fulfil liabilities. Although many of these policies are likely to have direct effects on the lending decisions of the financial sector within a country, they may also have altered how banks and, as a result, EM macroeconomic outcomes respond to foreign shocks and associated capital flows. For instance, a bank holding more reserves or issuing mortgage loans with lower loan-to-value (LTV) ratios may be better placed to handle a downturn in house prices due to higher global interest rates and, in turn, may reduce its lending to domestic households by less than a bank with fewer reserves or higher LTV ratio loans.

Can EM prudential policies lessen US monetary policy spillovers?

Using data on the prudential policy actions of the 29 EMs between 2000 and 2017, we estimate how the spillovers from tighter US monetary policy vary with an EM’s prudential policy setting. Our empirical setup controls for a range of other factors that could influence the magnitude of spillovers from US monetary policy—including the degree of capital flow restrictiveness.

Before assessing the interaction between US monetary policy and EM prudential policy, we first document that tighter US monetary policy is associated with tighter financial conditions in EMs. The black line in Figure 1 demonstrates this, plotting the average response of EM total credit following an illustrative +1pp tightening of US monetary policy over a two-year period. Following the change, the average fall in total credit for EMs is around 7% after 12 to 18 months, substantially larger than the average response of total credit in advanced economies (red line).

Figure 1: US monetary policy spillovers to total credit for emerging markets and advanced economies

Note: Black line denotes the average spillover from a 1pp US monetary policy tightening to an emerging market (EM). The grey shaded area around it denotes the 90% confidence interval. The solid red line plots the average spillover from a 1pp US monetary policy tightening to other advanced economies (AE). The red dashed lines denote the 90% confidence band. Data spans 29 EMs and 34 AEs (excl. US) from 2000:Q1-2018:Q2. See Staff Working Paper for more details.

Turning to the interactions, we use information on a range of prudential policy instruments to assess the role of the overall prudential policy setting. We cumulate prudential policy actions over a two-year period, prior to a change in US monetary policy. The prudential policy variable therefore takes positive and discrete values if, on net, prudential policy was tightened over a given two-year period. As a result,our empirical model can tell us whether tighter prudential policy, activated in advance of the US monetary policy tightening, can reduce the spillovers to total credit.

The results are shown in Figure 2, where the blue line plots the average spillover of a +1pp US monetary policy tightening to a country with no prudential policy actions in place and the green line documents the spillover for an illustrative country that tighten prudential policy in the two years before a US monetary policy tightening. While the average decline in total credit is around 7% for an EM with no prudential policy actions, the spillover to a country with a single prudential policy tightening is around 5.6% after 18-months. This implies that each additional prudential policy tightening can reduce the spillover to EM total credit by 1.4pp, equivalent to 20% of the 7% average decline for a country with no prudential policy actions in place.

Figure 2: US monetary policy spillovers to total credit for different levels of aggregate prudential policy in recipient EMs

Note: Blue line denotes the average spillovers from a 1pp US monetary policy tightening shock to an EM with no prudential policy actions in place. The green line denotes the comparable spillover estimate for an EM with one prudential policy tightening action in place. See Staff Working Paper for more details.

Importantly, our findings control for both the level of a country’s capital flow restrictiveness, and its interaction with spillovers from monetary policy. This implies that the, predominantly domestically-focused, prudential policies in our analysis can provide some offset to the spillovers from US monetary policy independently from controls on cross-border capital flows.

Which policies most strongly interact with US monetary policy spillovers?

In addition to summarising the overall setting of prudential policy in an EM, the dataset provides granular detail on five categories of prudential policies: (i) LTV ratio limits, (ii) reserve requirements, (iii) capital buffers, (iv) interbank exposure limits, and (v) concentration ratio limits. Using this categorisation, we assess the interaction of US monetary policy with specific EM prudential policies, asking which are most effective.

Within our framework we find that LTV ratio limits and reserve requirements significantly interact with US monetary policy spillovers to EMs, suggesting that these policies act to dampen global cyclical fluctuations associated with US monetary policy. We do not find evidence of a significant interaction for capital requirements, interbank exposure limits and concentration ratio caps — the latter two of which were used to a limited extent by EMs in our sample.

These findings chime with a widely cited distinction of prudential policy instruments based on their ability to influence cyclical variations versus increase financial system resilience. Although the mapping from specific instruments to these two classifications is not direct, some have suggested that LTV ratio limits and reserve requirements typically fall into the former category—dampening the cycle—while the latter three are more often linked to financial system resilience. Our results provide support for this distinction, suggesting that policies that dampen the cycle are also more effective at offsetting foreign shocks.


Overall, our results indicate that EMs with more developed prudential policy frameworks do appear to be better equipped to deal with moves in US interest rates, even when accounting for other policies available to them (such as restrictions on capital flows). EMs with tighter prudential policies tend to face smaller reductions in lending to households following an increase in US interest rates. Although the effects of prudential policies in EMs are more wide ranging than our study captures, our results identify an important channel of their effectiveness, namely their ability to help lessen the spillover effects of foreign shocks.

Simon Lloyd works in the Bank’s Global Analysis Division. This post was written whilst Andra Coman was working in the Bank’s Global Analysis Division.

If you want to get in touch, please email us at or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

Textbook Teaching in Macro- and Monetary Economics

Published by Anonymous (not verified) on Wed, 11/12/2019 - 1:57am in

An interview from Rethinking Economics:

Andrea, what is your experience with using textbooks when teaching macro and monetary economics?

I have long been teaching undergraduate courses in macro and monetary economics, and I always found the most popular textbooks only partially helpful. Hence, in those courses where I still have a textbook, I always complement the main text with a reading list and my own lecture notes.

Do you feel this position is shared by other economics instructors?

Read more on Rethinking Economics

RIP, Paul Adolph Volcker

Published by Anonymous (not verified) on Tue, 10/12/2019 - 5:45am in

Paul Adolph Volcker is dead at the age of 92. (Most accounts of the man suppress the middle name, though it was often pointed out with bitter glee by builders and others who were undone by his high interest rate policies in the early 1980s.) As I wrote in LBO when he left office in 1987, if capitalism gave out a Hero of Accumulation award, he would have been first on the honors list.

Let’s recall what he did, because all the worshipful obits will almost certainly sanitize the history. Volcker was appointed chair of the Federal Reserve by Jimmy Carter—on the recommendation of David Rockefeller—to get inflation under control. Carter’s old Georgia friend and advisor Bert Lance tried to tell him it was a mistake, and that it would almost certainly cost him re-election. Lance, now remembered as little more than a Good Old Boy, if he’s remembered at all, was right. But Carter ignored him. The charms of a Rockefeller are irresistible.

Inflation is a complicated thing, and this is no place to delve into those complexities. For the purposes of this post I’ll just say a couple of things. Part of the reason for rising inflation in the 1970s was that oil exporters had been jacking up prices—from under $4 a barrel to over $10 in the first oil shock of 1973–1974, and then from under $15 to over $30 in the second shock, 1979–1980. Other commodity-exporting countries were trying to emulate their oil-exporting colleagues. And with those commodity price moves came calls for a new world economic order—one in which the North no longer lorded it over the South, and one in which the South claimed a larger portion of global wealth.

Domestically, labor was restive. There were an average of almost 300 major strikes a year during the 1970s—more in the earlier years of the decade, but they persisted throughout. There was a lot of worry that the working class had developed a serious attitude problem. There’s an appealing theory that reads inflation as a sign of stalemate in the class conflict: workers push wages higher and employers respond by raising prices to protect profits. If the workers were winning, profits would suffer; if employers were, wages would suffer. Neither happened in the 1970s.

The month Volcker took office, August 1979, the consumer price index was up almost 12% from the year before. (See graph below.) But the unemployment rate was 5.8%—not low, but below average for the 1970s. In Congressional testimony a couple of months later, Volcker declared that “The standard of living of the average American has to decline” if inflation was going to be subdued. He worked hard to make that happen.

Volcker years

He made that happen by driving interest rates up to levels previously unknown in US history (and the history at my fingertips goes back to 1857). The federal funds rate—the rate at which banks lend each other money overnight, the most sensitive indicator of Fed policy—went from 10.9% when he took office to 17.6% in April 1980. That drastic tightening of monetary policy sent the economy into a sharp recession. Unemployment rose by almost two points in a matter of months. The downturn was so brutal that Volcker retreated. He—and while Fed policy is set by a committee, the institution is dominated by its chair, and Volcker was a particularly forceful chair—drove fed funds briefly below 10% in the summer of 1980.

But inflation persisted as the economy recovered, so Volcker went back to war. He pushed the fed funds rate to a peak of 19% in January 1981, let it fall a few points into the spring, then pushed it back to 19% in June and July. The economy went into a deep recession, the worst since the 1930s (though we outdid it in 2008–2009). Bankruptcies zoomed, and the unemployment rate broke 8% in November 1981, 9% in March 1982, and 10% in September. Inflation, which had been falling in 1980 but not seriously enough for Volcker, began falling for real in late 1981.

With inflation breaking below 6%, Volcker relented in August 1982—not so much because the US working class was suffering and interest-sensitive industries like housing and manufacturing were in depression, because Mexico was about to “blow,” as he put it. Like many Latin American countries, Mexico had borrowed heavily in the 1970s, the the interest rate spike was ruining them. Fearing that a Mexican default would bring down the banking system, Volcker began pushing down the fed funds rate, and in August 1982 made it clear that the regime of extreme monetary tightness was over. Inflation continued to fall, however, breaking below 3% in 1983.

From the POV of the ruling class, a couple of very good things happened as a result of that regime of extreme tightness. The recession scared the hell out of the working class, leaving millions in terror of job loss. That consciousness was reinforced by Reagan’s firing of the striking air traffic controllers in August 1981; the leader of the striking local was hauled away in chains, a picture that spoke many more than a thousand words. Strikes fell from an average of 300 in the 1970s to 80 in the 1990s—and 23 since.  The stock market took off the minute Volcker made it clear that interest rates would fall; investors celebrated the decisive victory of the owners’ contingent in the class war, a party that has continued to this day. That fearful consciousness instilled by Volcker and Reagan persists in the US working class almost forty years later: make no demands or you might find yourself sleeping on the sidewalk.

PATCO in chains.png

There was an international dimension to that class war victory as well. Capital successfully turned Mexico’s threatened default into a great opportunity to restructure the global economy to its liking. As a condition for getting fresh loans, and indulgence on the old ones, Latin American and other debtors had to agree to open up their economies to foreign capital and trade and lift domestic regulations and subsidies—the entire package of hypercapitalism that would come to be known as neoliberalism. In less than a decade, calls for a new world economic order, one favoring the South, were replaced by a intensified arrangement of rich countries telling poorer ones what to do, down to the level of what basics like food should cost. As with the domestic reconstruction, Volcker was at the center of it.

RIP Paul Volcker, Hero of Accumulation.


Is the United States the Champion of Global Finance or its Victim? A New Look at the Fed’s Low-inflation Policy

Published by Anonymous (not verified) on Sat, 23/11/2019 - 3:52am in

By Arie Krampf* My article “Monetary Power Reconsidered: The Struggle between the Bundesbank and the Fed over Monetary Leadership”, recently published in International Studies Quarterly, contributes to the burgeoning literature that challenges the US-hegemony hypothesis in the global financial sub-order. It … Continue reading →

Monetary Policy Transmission and the Size of the Money Market Fund Industry

Published by Anonymous (not verified) on Wed, 20/11/2019 - 11:00pm in

Marco Cipriani, Jeff Gortmaker, and Gabriele La Spada

Monetary Policy Transmission and the Size of the Money Market Fund Industry

In a recent post, we documented the transmission of monetary policy through money market funds (MMFs). In this post, we complement that analysis by comparing the transmission of monetary policy via MMFs to the transmission via bank deposits and studying the impact of the differential pass-through on the size of the MMF industry. To this purpose, we focus on rates on certificates of deposit (CDs) offered to banks’ retail customers and compare their response to monetary policy with that of retail MMF yields.

Differential Pass-through across Bank CDs and MMFs

The chart below shows the time series of three-month CD rates, MMF net yields, and the effective federal funds rate. Although both CD rates and MMF yields track the federal funds rate, their response to monetary policy changes is starkly different and has become even more so during the last tightening cycle.

Monetary Policy Transmission and the Size of the Money Market Fund Industry

Between May 2004 and July 2006, the effective fed funds rate increased from 100 to 525 basis points (bps). During the same period, the net yield of retail MMFs increased by roughly the same amount, from 0.5 percent in May 2004 to 5 percent in July 2006. As the table below shows, this corresponds to a pass-through of 99 percent. In contrast, over the same period, rates on three-month retail CDs increased only by half as much, reaching 3 percent in July 2006—a pass-through of only 50 percent. The pass-through on one-month CD rates was even lower, just 30 percent; indeed, the one-month CD rate was short of 200 bps by the end of the tightening cycle.

Monetary Policy Transmission and the Size of the Money Market Fund Industry

After a long period with policy rates at the zero lower bound, the Federal Reserve started a new tightening cycle in December 2015, which continued until December 2018. Over this period, the effective federal funds rate increased by more than 200 bps. Over the same period, the net yield of retail MMFs increased by roughly the same amount, with a pass-through of 91 percent, confirming the very high elasticity (or beta) to rate hikes observed in the early 2000s. In contrast, rates on retail CDs barely moved. The rate on three-month CDs remained below 10 bps until July 2017, and only increased to 20 bps by the end of the tightening cycle, a pass-through of only 5 percent; the pass-through to the one-month CD rate was similarly low, at only 2 percent.

The Expansion of the MMF Industry during Monetary Policy Tightening

Given the lower responsiveness of bank CDs to monetary policy tightening, one could expect that, during a tightening cycle, money flows from CDs to MMFs.

Indeed, as the chart below shows, the size of the MMF industry increased during both tightening episodes, lagging the increase in the spread between retail MMF yields and CD rates by roughly a year. From May 2004 until July 2006, the assets under management (AUM) of retail MMFs increased by 5 percent, followed by a further increase of 16 percent over the next year.

Consistent with the fact that rates on bank deposits have become stickier, during the last tightening cycle, the MMF industry increased even more dramatically. AUM of retail MMFs increased from $700 billion in December 2015 to almost $1 trillion in December 2018, a 37 percent hike, and kept increasing during the first half of 2019.

Monetary Policy Transmission and the Size of the Money Market Fund Industry

Is the Lower Beta on Deposits due to the 2014 MMF Reform?

A possible explanation for the lower elasticity of bank CD rates during the last tightening cycle is the effect of the 2014 MMF reform by the Securities and Exchange Commission, which went into effect in October 2016. By stripping prime MMFs of some of their liquidity features, the reform has made such investment vehicles a less attractive option for cash investors.

The sharp increase in the size of the MMF industry over the last three years belies such an explanation. If anything, as described above, the AUM of retail MMFs have increased even more sharply than in the early 2000s. Indeed, as documented by Cipriani and La Spada (2018), although prime MMFs have become a less attractive liquidity vehicle and have shrunk as a result of the reform, investors have shifted to government MMFs, which were not affected by the amended rules. Moreover, as shown in a previous post on Liberty Street Economics, within the MMF industry, government and prime MMF exhibit a similar monetary policy pass-through. Therefore, the intra-industry shift from prime to government MMFs should not have made easier for banks to leave their CD rates low.

Summing Up

The elasticity of bank CD rates to monetary policy tightening is much lower than that of MMF shares and has become ever lower after the financial crisis. The weaker elasticity of CD rates relative to MMF shares is accompanied by an expansion of the size of the MMF industry during tightening cycles. Such expansion was more pronounced for the last tightening cycle than during the previous one. This evidence casts doubt on the view that the MMF reform is a reason why the beta on CD rates has become so negligible.

Marco CiprianiMarco Cipriani is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Jeff Gortmaker is a former senior research analyst in the Bank’s Research and Statistics Group.

Gabriele La SpadaGabriele La Spada is an economist in the Bank’s Research and Statistics Group.

How to cite this post:

Marco Cipriani, Jeff Gortmaker, and Gabriele La Spada, “Monetary Policy Transmission and the Size of the Money Market Fund Industry,” Federal Reserve Bank of New York Liberty Street Economics, November 20, 2019,


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Can the Bank of England do it?

Published by Anonymous (not verified) on Tue, 12/11/2019 - 7:30pm in

It is now widely acknowledged that central banks acting in
isolation do not have the capacity to stabilise the economic system. Larry
Summers recently
that central bankers are facing “black hole monetary
economics”, wherein the usual tools of monetary policy have become
powerless. At what was effectively his last European Central Bank press
conference, Mario Draghi noted
“there was unanimity [among the council members] that fiscal
policy should become the main tool”.

Even a few years ago such views would have been seen as
heretical: it was assumed that a return to the system of macroeconomic
management that prevailed before the financial crisis was just around the corner. Instead,
discussion is now dominated by the tools that central banks should turn to next:
, deficit
or negative
interest rates
? Demands are also growing for central banks to join the
fight against climate

The disintegrating conventional view, that a return to
pre-crisis orthodoxy is both possible and desirable, mirrors what Henderson and
Keynes called “the fashionable view” of the 1920s: the view that all
that was necessary to recover the sunny, predictable comforts of Edwardian
empires was a return to the monetary arrangements that obtained before the war.

On the 90th Anniversary of Henderson and Keynes’s “Can Lloyd George Do It?“, which argued against this view, and in favour of Lloyd George’s programme of public spending, we have written a report for the Progressive Economy Forum on the effectiveness of the Bank of England’s monetary policy.

The report argues that a reversion to pre-crisis central
banking is neither possible nor desirable. Just as the Bank did not have the
capacity to stabilise the pre-crisis economic system — stable inflation during
this period was, instead, due to factors outside the Bank’s control — it does
not have the capacity now to achieve stabilisation using a broader array of
tools. Nor does it have the power, acting alone, to achieve productivity
targets or a carbon-neutral transition.

The principal reason why pre-crisis central banking is not
possible is that the Bank of England now has a substantial balance sheet which
cannot be reduced without adverse consequences for capital markets in Britain.
The principal reason why pre-crisis central banking is not desirable is that it
was precisely that model of central banking, restricting monetary policy to the
management of short-term interest rates, that contributed to the crisis that
broke out in 2007 and caught the Bank of England by surprise. The Labour
Party’s review of policy offers an opportunity to re-examine how central banks
can contribute to stabilising economic activity at high rates of employment.

The report reviews various proposals that have been put forward for enhancing the responsibilities of the Bank of England. Targets for productivity would work in a perverse way and may create unemployment, while credit support for greening the economy requires a much greater investment irrespective of Bank support. The report concludes that the Bank has limited instruments for influencing economic activity, and those instruments should be concentrated on what the Bank can do effectively, which is to contribute to economic growth and prosperity by maintaining financial stability. We therefore argue that the Bank should be given an enhanced financial stability mandate in the form of a target to conduct open market operations to keep the yield curve stable. This should be implemented through a policy of open market operations aimed at keeping rates of interest at different maturities stable at levels that support the solvency of financial institutions, and the availability of finance for investment. This is what the Bank of England can do. Stabilisation of the economic system and regulation of employment and investment is a matter of policy for Government, not the central bank.

The full report can be read here. Photo credit: Flickr/Dun.can.

The post Can the Bank of England do it? appeared first on The Progressive Economy Forum.

Bitesize: What can the MPC minutes tell us about the policymaker’s uncertainty?

Published by Anonymous (not verified) on Mon, 21/10/2019 - 7:00pm in

Michal Stelmach

Policymaking is invariably uncertain. I created a new index of ‘policymaker’s uncertainty’ based on a textual search of the minutes of the MPC meetings since 1997. The index is constructed by simply calculating the number of references to the word ‘uncertainty’ (and its derivatives, including ‘not certain’ and ‘far from certain’) as a share of the total word count. To avoid double-counting, it also excludes the Monetary Policy Summary that was introduced in 2015. One caveat of this approach is that it doesn’t distinguish instances of low or falling uncertainty from those where uncertainty was high. That aside, this measure can offer a new insight into uncertainty compared to indicators based on media references or business surveys.

What have policymakers been most uncertain about? The indicator points to factors beyond the direct control of monetary policy, such as fiscal policy or the global environment. It peaked in the run up to the EU referendum and more recently over Brexit. For example, uncertainty was mentioned 15 times in the September 2019 minutes, just shy of the 18 times it scored in April 2016. Perhaps counter-intuitively, but similar to other metrics, the index was low by historical standards during the 2008-09 recession. But this feature may capture its beauty too: it seems to pick up second-moment shocks (uncertainty) well, without being contaminated by the first-moment shocks (the central case).

Chart 1: References to the word ‘uncertainty’ in the MPC minutes

Note: The chart shows quarterly averages.

Michal Stelmach works in the Bank’s External MPC Unit.

If you want to get in touch, please email us at or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

The ownership of central banks

Published by Anonymous (not verified) on Fri, 18/10/2019 - 7:00pm in

David Bholat and Karla Martinez Gutierrez

Around the world, central banks have a number of different ownership structures. At one end of the spectrum are central banks, like the Bank of England, that are wholly owned by the public sector. At the other end are central banks, like the Banca d’Italia, whose shareholders are wholly private sector entities. And there are central banks, like the Bank of Japan, that lie in-between. But do these differences matter?

In this blog post, we explore the variety of central bank ownership structures, both historically and globally.  We also suggest areas for future research on the topic.

The separation of central bank ownership and control

Ownership is a complex concept, a bundle of rights and responsibilities. In ordinary language, if I say I own a bike, then this implies I possess the bike and can use it as I please. Ownership implies control.

However, as Thorstein Veblen, Adolf Berle and Gardiner Means first observed, control is sometimes unbundled from ownership in modern corporations. The owners of corporations (shareholders) are usually abstracted from their day-to-day operations. Instead, control of corporate resources is ordinarily exercised by its management. Therefore, to say that I own shares in a corporation has a much narrower meaning than when I say I own a bike.  In the case of a corporation, I am mainly saying that I have a financial interest in the business, specifically, that I am a residual claimant on the corporation’s profits after all other claimants such as employees, creditors and the government (taxes) have been paid.

Veblen, Berle, and Means developed their ideas with for-profit private sector corporations in mind. Yet, the distinction they drew between ownership and control is surprisingly applicable to most modern central banks. The owners of central banks, mostly governments, are ordinarily responsible for making executive appointments, and receive a share of central banks’ profits. Day-to-day control of the central bank is delegated to the central bank’s senior management and policy committees.

While both modern central banks and modern corporations are often characterised by a separation between ownership and control, there are key differences in their organisational objectives. The purpose of most private sector corporations is the pursuit of profits for shareholders. By contrast, central banks typically have statutory mandates based on economy-wide goals – e.g.  price stability, financial stability and market functioning. This is irrespective of whether central banks are wholly owned by government, or, as in a handful of cases detailed below, their residual claimants are private sector entities.

Consequently, the issue of central bank ownership is considered by most scholars of marginal importance. Yet the issue of central bank ownership is a salient topic to revisit at present when the constitutional basis of central banks is receiving renewed attention (Goodhart and Lastra 2017; Tucker 2018). In what follows, we offer a survey of the variety of central bank ownership structures historically and globally.

The nationalisation of central banking

In the early twentieth century, there was a roughly even mix of central banks with private sector and public sector shareholders (Figure 1). That changed mid-century. Some established central banks, like the Bank of England, were nationalised (Figure 2). At the same time, almost all of the central banks created in post-colonial states were established fully state-owned. By the end of the century, just a handful of central banks with private sector shareholders remained.

Figure 1: Ownership model of central banks globally over time, 1900 to the present

Source: Central banks’ websites

Figure 2: List of nationalised central banks globally in order of year nationalised

Source: Central banks’ websites

While state-owned central banks now predominate, some central banks still have forms of private sector shareholding. These include central banks in the United States, Japan and Switzerland. Figure 3 classifies these central banks according to whether they are owned by government, private sector banks, other private sector shareholders, or some combination of these. ‘Other private sector shareholders’ means individuals and/or non-bank private sector institutions. The European Central Bank (ECB) represents a fourth ownership model not adequately captured by Figure 3, as it is established by treaty among EU member states. Besides the ECB, other supra-national central banks include the Eastern Caribbean Central Bank, the Bank of Central African States and the Central Bank of West African States.

Figure 3: Classification of central banks by ownership

Source: Based on de Kock (1965), Rossouw (2018) and information from central banks’ websites

Figure 4 provides more detailed information on central banks not fully owned by governments. Ownership models vary considerably among these nine central banks. Although the central banks of Japan, San Marino, and Turkey have some private sector shareholders, the majority shareholder is still the state. In Belgium and Switzerland, around half of the shares are held by the government. By contrast, the American, Italian, and South African governments have no formal ownership stake in their central banks. The Bank of Greece presents a more mixed model, although it is worth bearing in mind that it, along with the Belgian and Italian central banks, are members of the Eurosystem.

Figure 4: Institutional detail on central banks not fully owned by governments

Source: Central banks’ websites

Figure 4 also shows heterogeneity among these central banks in how they remunerate their private sector shareholders. In some cases, like the US Federal Reserve, the amount paid to shareholders is fixed such that the dividend closely resembles a coupon payment on a bond. In other cases, as in Turkey, the remuneration is variable and discretionary, although even here it is capped. A recent paper finds that central banks with private sector shareholders do not differ from central banks with only public sector shareholders either in their profitability or in the share of profits they distribute to shareholders.

A forward-looking research agenda

This blog has provided a primer on central bank ownership. Occasionally, some people argue central banks should be fully privatised, with the largest private sector banks playing the role of lenders of last resort. Conversely, some argue central banks should be fully nationalised. However, central bank ownership on its own may not matter. Instead, the crucial factors may be other aspects of their governance, especially their mission statements. Today, all central banks, whether wholly owned by government or with shares held by private sector entities, have mandates based on economy-wide outcomes.  A truly private sector central bank without implicit or explicit government guarantees, and which singularly pursued profits for its shareholders, would likely behave differently from current central banks, which take their objective to be the promotion of the public good.

Even so, we think the issue of central bank ownership is worth greater scholarly inquiry than has been the case to date. We conclude by suggesting two areas for future research.

1. The shares of central banks in Belgium, Greece, Japan, and Switzerland are publicly traded on stock exchanges. It would be interesting to understand the informational content conveyed by these share prices, in particular, the extent to which these central banks’ share prices lead or lag other macroeconomic variables such as GDP or wider stock market indices. For instance, Figure 5 shows that the National Bank of Belgium’s share price closely tracks the benchmark index (BEL 20) of the Euronext Brussels stock exchange on which it trades.

Figure 5:  Year-on-year changes in the value of the National Bank of Belgium’s stock and the BEL 20 stock market index (r = .706)

Source: Reuters

2. In other industries, it is sometimes argued that private sector ownership or public sector ownership improve an organisation’s ability to achieve its objectives. These general theoretical arguments could be subjected to empirical scrutiny in the specific case of central banks. Although different central banks have different objectives, two of the most common are promotion of monetary and financial stability. Monetary stability can be defined as low inflation, while financial stability can be defined by the absence of financial crises. Researchers could study whether there is any correlation between central bank ownership structure and these macroeconomic outcomes. For example, Figure 6 plots the number of years that OECD and G20 countries have experienced financial crises between 1970 and 2017. Countries are split between those with fully state-owned central banks, and those that have central banks with some form of private sector shareholding. The median value (8 years in a financial crisis) is the same for both countries with fully-state owned central banks, and those that have central banks with some form of private sector shareholding over this time period. There is thus no clear association between financial stability and central bank ownership structure, although we would like to see deeper empirical work to draw firmer conclusions.

Figure 6: Number of years between 1970 and 2017 that OECD and G20 countries experienced a financial crisis, as defined by the sources below, split by central bank ownership type

Source: Harvard Business School and Laeven and Valencia (2018), supplemented by Ueda (1998), Barandiarán and Hernández (1999), Sgard (2012) and  Lo Duca et al. (2017)

Note: The data includes all central banks with private sector shareholders globally, with the exception of San Marino. Saudi Arabia (a G20 country) is excluded from the analysis because no information was available. The Austrian central bank is classified as a central bank with private sector shareholders until 2009, after which it is classified a publicly owned central bank because it was nationalised.

David Bholat works in the Bank’s Advanced Analytics Division.

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The End of Super Imperialism?

Published by Anonymous (not verified) on Wed, 02/10/2019 - 7:05am in

T Sabri Öncü ( is an economist based in İstanbul, Turkey. This article was first published in the Indian journal the Economic and Political Weekly (EPW) on 28 September 2019.

Summary: With intensifying concerns regarding the soundness and stability of the international monetary and financial system, calls for reforming it have been on the rise. One recent call was made by the Bank of England Governor Mark Carney, in August 2019, in which he suggested a synthetic hegemonic currency to replace the US dollar as the key reserve currency. Whether such calls will lead to an end of the key reserve currency status of the dollar remains to be seen.

 Oldrich Vasicek is an old friend. When I started my “quant” career in bonds in January 1994 in Walnut Creek, California, Oldrich was there. A recently graduated PhD in mathematics, I received my first real-life finance education from him.

Vasicek (1977), a statistician by trait, is famous for developing the first theory of term structure of default risk-free interests rates in 1977. But, despite this, he had been unfortunate until lately because his theory allowed for negative nominal interest rates. Many modellers considered this as a flaw because negative nominal interest rates were unimaginable then.

And recently, the entire term structures or in non-academic parlance yield curves of Denmark (on 24 July 2019), Switzerland (on 29 July 2019), Germany (on 5 August 2019) and the Netherlands (on 5 August 2019) went below zero. On 15 August 2019, Finland’s entire yield curve also went below zero, but the next day, the longest maturity rate was above zero. I presumed it would go below zero again and, as expected, it went below zero on 28 August for another day. Belgium and Sweden seem to appear next in line, although which one will win the competition remains uncertain.

Negative Interest Rates

Let us forget about the theories and look at the history of nominal interest rates starting from about 5,000 years ago (who knows, maybe earlier?) when lending for interest started (Hudson 2018). Although negative interest rates had occurred on some rare occasions in the past, such as on some gold deposits during the gold rush of 1848–55 in California as protection costs, the start of the “formal” history of negative interest rates goes back to the 1970s.

Given that Super Imperialism was kicked off in 1971 (Hudson 2003), it does not come as a surprise that the first “formal” negative interest rates had been imposed on bank deposits of foreigners in Switzerland from 1972 to 1978 to discourage capital inflows to ease the appreciation of the Swiss franc. But, what is Super Imperialism and what happened in 1971?

Super Imperialism

Super Imperialism is a term coined by Michael Hudson (1972, 2003) in his celebrated book, Super Imperialism. The Pluto (publisher of the 2003 edition of the book) press release on 25 November 2002 describes the concept as follows:

Past studies of imperialism have focused on how corporations invest in other countries, extracting profits and interest. This phenomenon occurs largely via private sector investors and exporters. But today’s novel form of international financial imperialism occurs among governments themselves, and specifically between the US Government and the central banks of nations running balance-of-payments surpluses.

The larger their surpluses grow, the more dollars they are obliged to put into US Treasury securities. Hence, the book’s title, Super Imperialism.

 If you agree with this description, then the kick-off date of Super Imperialism was 15 August 1971, although the transition had taken place over about five years through the monetary crisis of 1968–73 and Super Imperialism formally started in 1973.

On the kick-off day, the then United States (US) President Richard Nixon gave his now-famous speech in which he announced his New Economic Policy in an address to the nation on “The Challenge of a Peacetime Economy.” He said:

We must create more and better jobs; we must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators.

 Among many policy tools to achieve these goals, he suspended the dollar’s convertibility into gold.

 Bretton Woods System

Although there has been much debate on when exactly the US started to challenge the United Kingdom (UK), there is little doubt that the “official” US takeover of the world hegemony from the UK took place in Bretton Woods, New Hampshire at the Bretton Woods Conference from 1 to 22 July 1944.

At this conference, 700 delegates from 44 countries met to establish a new international monetary system in which they would go back to a gold standard following World War II. At the time, the US held about 75% of the world’s gold stock. So, rather than a gold standard, the countries ended up with a dollar standard in which the US would fix the price of gold at $35 per ounce, and the rest of the world would fix their currencies to the dollar, albeit in some adjustable window.

Two important institutions came out of the conference: The International Monetary Fund (IMF) or the Fund, and the International Bank for Reconstruction and Development (IBRD) or the Bank, which soon came to be called the World Bank. The task of the Fund was to assist for the countries to fix their currencies to the dollar by providing short-term loans during temporary balance-of-payment deficits. The task of the Bank, on the other hand, was to provide financial assistance for the reconstruction of the countries devastated by World War II and for others so that they can “develop”, although its purpose has eventually become lending to emerging and developing market countries only.

The US Department of State website states that these institutions were created with the following in mind: [1]

The lessons taken by US policymakers from the interwar period informed the institutions created at the conference. Officials such as President Franklin D Roosevelt and Secretary of State Cordell Hull were adherents of the Wilsonian belief that free trade not only promoted international prosperity, but also international peace. The experience of the 1930s certainly suggested as much. The policies adopted by governments to combat the Great Depression—high tariff barriers, competitive currency devaluations, discriminatory trading blocs—had contributed to creating an unstable international environment without improving the economic situation. This experience led international leaders to conclude that economic cooperation was the only way to achieve both peace and prosperity, at home and abroad.

 So, according to the US Department of State, this conference was more about free trade than an international monetary system. The monetary system was to ensure that high tariff barriers, competitive currency devaluations, discriminatory trading blocs and the like did not occur.

Collapse of the Bretton Woods system

While the US had been a debtor country for most of the pre-war period, World War I changed that. The US emerged from World War I as the world’s largest creditor and largest holder of gold, mostly running balance-of-payments surpluses. At the time of the Bretton Woods Conference, this was still the case. And this was the main reason why other countries eventually agreed to hold dollars as the gold equivalent in their central bank reserves. But, there was a problem in this arrangement.

The central banks held the reserve currencies mostly in the form of government bonds and less often, other financial assets of the reserve currency-issuing country, at least, back then. Hence, the US had to pump more dollars into the world financial system by borrowing more from the rest of the world.

I must add that in the US most real assets, especially those the US government deems strategic, are not up for sale to the foreigners. So foreigners do not have many options. What the US Department of State calls free trade on its website means that the US can freely trade whatever it wants. But, the others cannot.

Let me also add that since 1986, the US has been in a perennial balance-of-payments deficit and the world’s largest debtor country. As the US hardly ever pays its Treasury bonds because it keeps them rolling, this means that the US gets others to pay for its foreign expenditures, including its military adventures. In a nutshell, this is what Hudson (1972) defined as Super Imperialism, the seeds of which were planted at the Bretton Woods Conference. Whether the US negotiators knew what they were doing at the time is, of course, open for debate.

The system operated reasonably well until the 1960s as there had been little doubt that the US was fully capable of redeeming these dollars with its enormous gold stock. However, when an attack on the dollar and run on gold pushed the price of gold temporarily up to $40 per ounce in the autumn of 1960, the eyebrows began to raise. Fears that the US was approaching the point at which its debts soon would exceed the value of its gold stock began to spread.

Attacks on the dollar and runs on the gold had continued, and finally, on Thursday, 14 March 1968, a major run on gold on the London Gold Exchange ensued, forcing the US to request the UK to suspend the London Gold Exchange. On Friday, 15 March 1968, the London Gold Exchange was closed temporarily. On Sunday, 17 March 1968 in Washington DC, an informal agreement was reached with the central banks of Belgium, Germany, Italy, the Netherlands and the UK that they would stop converting their dollar reserves into gold. And on Monday, 18 March 1968, the US Congress repealed the requirement for a gold reserve to back the US dollar.

This was actually how the Bretton Woods system ended. What Nixon did on 15 August 1971 was just making it official. Since the US dollar was not backed by gold after 15 August 1971, it was made a floating currency. And by March 1973, all currencies were made floating and from a form of gold standard, the world moved to a form of US Treasury bond standard.

Finally, on 19 October 1976, the then President of the US Gerald Ford signed an act to put in law what was already true as a matter of formality.

Financial Crises

With the abandonment of capital controls after the start of Super Imperialism, capital started to flow across borders freely, and thus began a new era of financial crises. If I list only those crises I have personally experienced since I started my “quant” career in bonds in January 1994, I may run out of space. So rather than giving the full list, let me turn my attention to the last of the crises—the ongoing global financial crisis (GFC) that started in the summer of 2007. I have tried to chronicle the GFC in many articles in EPW and elsewhere, and my EPW readers would recall that I have always argued that the GFC has never ended (see, for example, Öncü 2015b). As my readers would know, I have been waiting for the end of the GFC like Waiting for Godot (Beckett 2011) and although, I am sure Godot will arrive one day, I still do not know when. And since the start of August 2019, I have started waiting for the end of Super Imperialism. I will explain why, but first, let me discuss some of the events of August 2019.

A Volatile Month: August 2019

The month began on Thursday, 1 August with a tweet of President Donald Trump announcing an additional 10% tariff on $300 billion in Chinese imports as of 1 September, and the world stocks and government bond yields started to fall. It must be that Trump is not one of those US policymakers who took lessons from the interwar period in which government policies, such as high tariff barriers, had contributed to creating an unstable international environment without improving the economic situation as the State Department had claimed.

Friday, 2 August was calm. The mayhem began on Monday, 5 August when China allowed its currency, the renminbi to fall to its lowest level against the dollar in more than a decade. The onshore renminbi traded at around 7.05 renminbi per dollar, and the world stocks and government bond yields fell even worse than they did on 1 August. Indeed, 5 August was the day when the entire yield curves of Germany and the Netherlands went below zero. Before further progress, let me go back to the history of the negative interest rates.

Although some ultra-short Japanese interest rates in the derivatives market had entered the negative territory for ultra-short periods in the 1990s, the second phase of the “formal” history of the negative interest rates started in Sweden in 2009, about seven months after the GFC reached its climax with the Lehman collapse of 15 September 2008.

Shortly after the US central bank, the Federal Reserve (Fed) started its first quantitative easing programme and the zero interest rate policy, the central bank of Sweden, the Riksbank, announced on 2 July 2009 that it lowered its repo rate (the rate at which it lends reserves to banks against collateral overnight) to 0.25%, pushing the deposit rate (the interest banks get for depositing reserves with the Riksbank overnight) down to -0.25%. Then in 2010, the European Debt Crisis started in Greece (Öncü 2015a). In response, Switzerland’s central bank, the Swiss National Bank, announced on 3 August 2011 that it was narrowing the target range for the three-month LIBOR from 0.00–0.75% to 0.00–0.25%. This pushed interest rates on the Swiss two-and three-year government bonds into negative territory and the rest is history.

Therefore, the fact that some more interest rates went negative on 5 August 2019 was not that novel. One novelty that occurred on 9 August 2019 that might have gone unnoticed was that Chase Bank, part of the New York-based JP Morgan Chase & Co, made the following announcement: [2]

Chase made the decision to exit the Canadian credit card market. As part of that exit, all credit card accounts were closed on or before March 2018. A further business decision has been made to forgive all outstanding balances in order to complete the exit.

 One takeaway from this is that debt cancellation is not religious fiction or ideal as some think it is (Öncü 2017). If so chosen, it can happen even today, as the Chase Bank demonstrated in Canada. Indeed, negative interest rates also are a form of debt cancellation. You lend someone some money today to get less in the future. According to Hudson, rates will quickly go as negative as 25% and thus erase some of the debt burdens. [3] However, I am less optimistic than him.

Then came Wednesday, 14 August. For no obvious reason, the 30 Year US Treasury bond yield dropped to its historical low below 2%. If you looked for a novelty, this was a novelty for sure. What was not novel was that on the same day, the spread between the 10-year and 2-year US Treasury yields went below zero. This spread is another measure of the US yield curve inversion (Öncü 2019). It has happened many times before, but the last time it happened was in the summer of 2007. When this inversion happens, many commentators start screaming, “recession.” Whether such an inversion signals recession or not is immaterial. If the market believes it does, it becomes a self-fulfilling prophecy.

An interesting observation came on 19 August 2019. [4] The observation is this:

A 4-sigma event would be expected to happen once or twice in a trading lifetime—according to the most popular VaR-based risk models. We’ve seen 10 of those this month in Treasuries. What we should have learned from the GFC has been all but forgotten. What the market had considered to be impossibilities (or at least highly unlikely…) is quickly becoming the norm.

 This may sound too technical. The author essentially is saying that if daily yield changes were distributed normally (assuming 252 trading days a year), the observed jumps in the US Treasury yields in the first half of August 2019 would have had an approximate daily frequency of once every 63 years. No one can claim the normal distribution of daily yield changes. But, if these many jumps happen in about 15 days, it is not normal. The last time something like this happened was in 2008. First, around the Bear Stearns collapse of 14 March 2008, and then, around the Lehman collapse of 15 September 2008.

But, the most important event of August 2019 was Mark Carney’s, the current governor of the Bank of England, speech at the Fed Jackson Hole Symposium on 23 August 2019.

When change comes, it shouldn’t be to swap one currency hegemon for another. Any unipolar system is unsuited to a multi-polar world. We would do well to think through every opportunity, including those presented by new technologies, to create a more balanced and effective system. (excerpt from Carney’s speech) [5]

 Here is a second excerpt:

Even if the initial variants of the idea prove wanting, the concept is intriguing. It is worth considering how an SHC in the IMFS could support better global outcomes, given the scale of the challenges of the current IMFS and the risks in transition to a new hegemonic reserve currency like the Renminbi. [6]


Carney’s synthetic hegemonic currency (SHC) proposal at the Fed Jackson Hole 2019 Symposium is reminiscent of Keynes’s bancor proposal at the Bretton Woods Conference of 1944 (Keynes 1943):

The proposal is to establish a Currency Union, here designated an International Clearing Union, based on international bank-money, called (let us say) bancor, fixed (but not unalterably) in terms of gold and accepted as the equivalent of gold by the British Commonwealth and the United States and all members of the Union for the purpose of settling international balances.

 Of course, neither Carney is Keynes, nor is the Fed Jackson Hole Symposium 2019 the Bretton Woods Conference 1944. Further, Carney is not the first major central bank governor who made such a proposal. Others have also made similar proposals and one of the first ones was Zhou Xiaochuan, the Governor of the People’s Bank of China. Shortly after the Lehman collapse of 15 September 2008, on 23 March 2009 in the Bank of International Settlements (BIS) journal BIS Review, Governor Zhou wrote: [7]

The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

 As Carney said on 23 August 2019 and Zhou appears to have agreed on 23 March 2009, “we need to improve the structure of the current IMFS.” Of course, Carney could not have said the following at the Jackson Hole Symposium, but I can write it here:

Our international monetary and financial system is broken. Indeed, it was this conclusion and the observations I have made in this and other articles that led me to ask the question in the title of this article: Are we approaching the end of Super Imperialism?


6 SHC is the abbreviation for synthetic hegemonic currency, and IMFS is the abbreviation for international monetary and financial system.


Beckett, S (2011): Waiting for Godot, New York: Grove Press; New York.

Hudson, M (1972): Super Imperialism: The Economic Strategy of American Empire, New York: Holt, Rinehart and Winston, New York.

— (2003): Super Imperialism: The Origin and Fundamentals of US World Dominance, London: Pluto Press, London.

— (2018): ... and Forgive Them Their Debts: Lending, Foreclosure and Redemption From Bronze Age Finance to the Jubilee Year, New York: ISLET, New York.

Keynes, J M (1943): “Proposals for an International Clearing Union,” White Paper given to British Government in April.

Öncü, T S (2015a): “Greece, Its International Creditors and the Euro,” Economic & Political Weekly, Vol 50, No 7, pp 10–12.

— (2015b): “When Will the Next Financial Crisis Start?” Economic & Political Weekly, Vol 50, No 24, pp 10–12.

— (2017): “Bad Bank Proposal for India,” Economic & Political Weekly, Vol 52, No 10, pp 12–15.

— (2019): “Thus Spoke the Bond Market,” Economic & Political Weekly, Vol 54, No 6, pp 10–12.

Vasicek, O (1977): “An Equilibrium Characterization of the Term Structure,” Journal of Finance, Vol 5, No 2, pp 177–88.

Bitesize: Fixing ideas – The Slowing of Interest-rate Pass-through to Mortgagors

Published by Anonymous (not verified) on Fri, 27/09/2019 - 6:00pm in

Fergus Cumming

When choosing a mortgage, a key question is whether to choose a fixed or variable-rate contract. By choosing the former, households are unaffected by official interest-rate decisions for the length of the fixation period. We can use transaction data on residential mortgages to get a sense of how long it takes interest-rate decisions to filter through to people’s finances.

The chart below shows how interest-rate pass-through has changed over time. The green line shows how long the average new mortgagor has to wait before monetary policy decisions affect monthly repayments. Before the Financial Crisis, people had just over a year to wait before their payments adjusted to changes in Bank Rate. Today, people wait almost three times as long.

This remarkable change in policy transmission is driven by two forces, shown in the chart below. First, the proportion of people taking out variable-rate mortgages has fallen from around a third in the Great Moderation to less than 1-in-20 today. Second, people are choosing to fix their rates for longer. This could be because interest rates are expected to rise gradually over the next few years from today’s low levels. There is also a certain attraction to minimising interest-rate risk when the world looks so uncertain.

Longer-term fixed-rate products are available in many countries (e.g. the 30y fix is common in the US). It is nevertheless interesting that mortgaged households in the UK have never been more insulated from interest-rate changes than they are today.

Fergus Cumming works in the Bank’s Monetary Policy Outlook Division.

If you want to get in touch, please email us at or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.