Monday, May 19, 2014

What caught my eye

1. Brazilians turn against the canarinha (for now).
2. Bad dreams about Russia, China, and World War.
3. What do cancer and unemployment have in common?
4. NBER papers: phasing out paper currency, and permanent changes to monetary policy.

1. "I want Brazil to lose," says a Brazilian. I seldom hear good things about the World Cup, which makes me think the event will be a positive surprise. (By the way, remember the comments in the months prior to London's Olympics?)

2. Russia strengthening ties to China. Perhaps it's WWI centennial fever, but I can't erase from my mind the idea of a China-Russia military alliance, against the "oppression," "bullying," etc. from the U.S.-Western Europe-Japan trio. Articles like this, on China supposedly following Japan's prewar blueprint, don't help put me at ease.

3. The odds of developing certain cancers decline with age, just like the odds of escaping unemployment decline with the length of the jobless spell, by Jim Hamilton.

4. Two papers from this week's NBER crop:

4.1 Costs and benefits to phasing out paper currency, by Kenneth Rogoff.
Despite advances in transactions technologies, paper currency still constitutes a notable percentage of the money supply in most countries.  For example, it constitutes roughly 10% of the US Federal Reserve's main monetary aggregate, M2.  Yet, it has important drawbacks. First, it can help facilitate activity in the underground (tax-evading) and illegal economy. Second, its existence creates the artifact of the zero bound on the nominal interest rate.  On the other hand, the enduring popularity of paper currency generates many benefits, including substantial seigniorage revenue.  This paper explores some of the issues associated with phasing out paper currency, especially large-denomination notes.
4.2 Has the financial crisis permanently changed the practice of monetary policy?, by Benjamin Friedman.
I argue in this paper that one of the two forms of hitherto unconventional monetary policy that many central banks have implemented in response to the 2007 financial crisis - large-scale asset purchases, or to put the matter more generically, use of the central bank's balance sheet as a distinct tool of monetary policy -is likely to become part of the standard toolkit of monetary policymaking in normal times as well.  As intended, these purchases have lowered long-term interest rates relative to short-term rates, and lowered interest rates on more-risky compared to less-risky obligations.  Moreover, their introduction fills a conceptual vacuum that has long stood at the heart of monetary policy analysis and implementation. By contrast, forward guidance on the future trajectory of monetary policy has been less successful.  Public statements by central banks about their actions and intentions will no doubt continue, but transparency for the sake of transparency is not the same as the deliberate attempt to shape market expectations for purposes of achieving specific monetary policy objectives. Finally, there is a conceptual component to all this as well.  In contrast to the last century or more of monetary theory, which has focused on central banks' liabilities, the basis for the effectiveness of central bank asset purchases turns on the role of the asset side of the central bank's balance sheet. The implications for monetary theory are profound.

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