Zero matters
The invention of the number zero transformed mathematics and laid the foundations for modern science. Zero is the additive identity (any number plus zero equals itself). It separates the positive and negative numbers. For a celebration of zero, see here.
Zero matters in economics, too.
Zero growth separates cyclical expansions and contractions. We need zeroes to measure the trillions of dollars of GDP, and even more zeroes to measure hyperinflations (during the record Hungarian inflation of 1945-46, the quantity of currency in circulation grew to a number with 27 zeroes). Most importantly, zero (or slightly less) marks the lower bound on nominal interest rates and a downward barrier for wage changes...
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Interview with Otmar Issing
Interview with Otmar Issing
President, Center for Financial Studies, Goethe University; former member of the Executive Board of the European Central Bank; former member of the Executive Board of the Deutsche Bundesbank.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Professor Issing: I would like to start by going back to the beginning of the ECB in 1998. The Maastricht Treaty gives the ECB the freedom to design its own instruments. There are almost no restrictions. By contrast, in the Bundesbank, everything was regulated in detail; what was not explicitly allowed in the law, the Bundesbank couldn’t do. At the ECB, things are very different. The treaty contains only general statements that the instruments had to be consistent with an open market economy.
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Is 2% still the solution?
The debate over the appropriate level for a central bank’s inflation objective reminds us of a 40-year-old Sherlock Holmes movie called “The Seven-Per-Cent Solution.” Convinced that Holmes’ addiction to cocaine (the solution in the title) had made him delusional, Watson took the master sleuth to Vienna to be treated by Sigmund Freud.
Has the 2% solution for inflation targeting in advanced economies made central bankers similarly delusional? Are they stubbornly attached to an outdated target? That argument gained ground in recent years as policymakers in Europe, Japan, and the United States struggled to stimulate weak economies and stabilize prices with policy interest rates stuck at the zero bound...
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Interview with Masaaki Shirakawa
Interview with Masaaki Shirakawa
Professor, Aoyama Gakuin University; former Governor, Bank of Japan; former Vice Chairman, Bank for International Settlements.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Governor Shirakawa: My view has not changed that much. I guess that this assessment is different from the frequently-heard view of U.S. and European policy makers...
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A Simple Guide to "Secular Stagnation"
Since its cyclical peak in 2007 – just prior to the financial crisis – the U.S. economy has grown by only 1.2% at an annual rate. This is down sharply from the 3.0% pace that had prevailed since 1990. The resulting cumulative shortfall now exceeds $2 trillion, or more than $6,500 per capita. Naturally, we all want to know why. And what, if anything, to do about it...
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Interview with Guillermo Ortiz
Interview with Guillermo Ortiz
Member of the Group of Thirty; former Governor of the Bank of Mexico; former Chairman of the Board of the Bank for International Settlements: former Secretary of Finance and Public Credit of the Mexican Federal Government.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Governor Ortiz: I think that we have to make a distinction between the central bankers in the developed world whose banking systems were affected and those in the emerging market world where banking systems were not affected...
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The cloudy future of peer-to-peer lending
Peer-to-peer (P2P) lending is all the rage. The idea is that individuals can bypass traditional financial intermediaries and borrow directly from investors at lower cost (or obtain credit that banks would not provide). Improving the lot of borrowers would be great if it works. But the key question is whether lenders can efficiently screen and monitor borrowers to get an attractive risk-adjusted return on their investment. In effect, individuals would be beating the technology that traditional lenders use. It’s far too early to tell, but there is plenty of scope for skepticism...
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Finance is great, but it can be a real drag, too
When we were college students in the mid-1970s, some of our friends wanted to change the world. Their work aimed at providing cheap energy, improving information technology, curing cancer, and generally making our lives better. By the 1990s, attitudes had changed. Many top students, including newly-minted Ph.D.s, moved from natural science and engineering to finance. Their goal was to get high-paying jobs.
Would we be better off today if some of these financial wizards had focused instead on inventing more efficient solar cells or finding ways to forestall dementia? The older we get, the more we think so. And, believe it or not, there is now notable, cross-country evidence buttressing this view.
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Interview with Paul M.W. Tucker
Interview with Paul M.W. Tucker
Senior Fellow, Kennedy School of Government and Business School, Harvard University; former Deputy Governor at the Bank of England; former member G20 Financial Stability Board Steering Committee.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Deputy Governor Tucker: It would be hard for it not to have made me think about many things. I identify three distinct dimensions: the first is about balance sheet policy, the second about the lender of last resort, and the third about macroprudential policy...
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Living with uncertainty: What central banks do when they don't know the natural rate
“Unfortunately, we have as yet devised no method to estimate accurately and readily the natural rate of either interest or unemployment. And the ‘natural’ rate itself will change from time to time.” Milton Friedman, American Economic Association Presidential Address, 1968.
What do you do if, on a dark and foggy night, you are forced to drive on a road with a sheer cliff on one side? Unless you know precisely where the road ends and the cliff begins, you will likely go slowly and keep your foot near the brakes. Driving like a tortoise is not the “first best” solution – fog lights that distinguish the road from the cliff would be better. But, absent proper illumination, going slowly is a safe response to perilous driving conditions. It helps prevent catastrophic, irreversible errors.
Such robust strategies are key to central bankers' success as well...
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