Monetary inflation

Fraser Institute News Release: Continued financing of government debt by the Bank of Canada poses significant economic risks

Retrieved on:

Tuesday, May 18, 2021

Economy, Money, Inflation, Macroeconomics, Modern Monetary Theory, Quantitative easing, Central bank, Hyperinflation, Bank of Canada, Money printing, Monetary inflation, Government bond

b'VANCOUVER, British Columbia, May 18, 2021 (GLOBE NEWSWIRE) -- The idea that the Bank of Canada can continue to finance government debt by printing money without a clear commitment to repayment, known as Modern Monetary Theory (MMT), poses enormous risks to the Canadian economy, finds a new study released today by the Fraser Institute, an independent, non-partisan, Canadian public policy think-tank.\n\xe2\x80\x9cModern monetary theory is a pipe dream, and if the federal government and Bank of Canada go down this road, the damage to the Canadian economy could be substantial,\xe2\x80\x9d said Steven Globerman, resident scholar at the Fraser Institute and author of A Primer on Modern Monetary Theory.\nAdvocates of MMT assert that a government that issues its own currency (like Canada and the United States, among others) cannot default on debt issued in its sovereign currency because it has the power to print as much currency as needed to pay off the public debt.\nIndeed, during the current COVID-19 crisis, Canada\xe2\x80\x99s central bank financed historically large shares of government bonds to encourage lending and investment\xe2\x80\x94a practice described as Quantitative\xc2\xa0Easing.

Key Points:

b'VANCOUVER, British Columbia, May 18, 2021 (GLOBE NEWSWIRE) -- The idea that the Bank of Canada can continue to finance government debt by printing money without a clear commitment to repayment, known as Modern Monetary Theory (MMT), poses enormous risks to the Canadian economy, finds a new study released today by the Fraser Institute, an independent, non-partisan, Canadian public policy think-tank.\n\xe2\x80\x9cModern monetary theory is a pipe dream, and if the federal government and Bank of Canada go down this road, the damage to the Canadian economy could be substantial,\xe2\x80\x9d said Steven Globerman, resident scholar at the Fraser Institute and author of A Primer on Modern Monetary Theory.\nAdvocates of MMT assert that a government that issues its own currency (like Canada and the United States, among others) cannot default on debt issued in its sovereign currency because it has the power to print as much currency as needed to pay off the public debt.\nIndeed, during the current COVID-19 crisis, Canada\xe2\x80\x99s central bank financed historically large shares of government bonds to encourage lending and investment\xe2\x80\x94a practice described as Quantitative\xc2\xa0Easing.
If the Bank of Canada does not require the government to repay that debt once it matures, Quantitative Easing will have evolved into MMT.\n\xe2\x80\x9cThe Bank of Canada is facing an imminent test of its credibility and independence over the coming months,\xe2\x80\x9d commented Globerman.\nCrucially, where MMT has been tried in the past, it has resulted in inflation, sometimes even hyper-inflation, with devastating consequences for domestic economies.\nIn particular, the implementation of MMT in Latin America and Greece resulted in runaway inflation and a significant decline in standards of living.\n\xe2\x80\x9cThe arguments for MMT are really arguments for much higher levels of government spending financed by borrowing provided by the central banks, which has failed everywhere it\xe2\x80\x99s been tried,\xe2\x80\x9d Globerman said.\n'

Results of the ECB Survey of Professional Forecasters in the second quarter of 2021

Retrieved on:

Sunday, April 25, 2021

Economic forecasting, Inflation, Economy, Macroeconomics, Economy of the United States, Survey of Professional Forecasters, Harmonised Index of Consumer Prices, SPF, Monetary inflation

23 April 2021

Key Points:

23 April 2021
In the ECB Survey of Professional Forecasters (SPF) for the second quarter of 2021, HICP inflation expectations stood at 1.6%, 1.3% and 1.5% for 2021, 2022 and 2023, respectively.
Compared with the previous round for the first quarter of 2021, these were revised upward by 0.7 percentage points for 2021 but unchanged for 2022 and 2023.
Respondents reported that they considered the factors behind the upward revision for 2021 to be largely temporary.
Indicators of the uncertainty surrounding expectations for the main macroeconomic variables mostly eased somewhat but remained elevated by historical standards.

Frank Elderson: Q&A on Twitter

Retrieved on:

Thursday, March 18, 2021

European Union, Eurozone, European Central Bank, European System of Central Banks, Monetary policy, Inflation, Frank Elderson, Price stability, Monetary inflation, Money

Interview on Twitter with Frank Elderson, Member of the Executive Board of the ECB, conducted and published on 16 March 2021 17 March 2021 Hello, this is @FrankElderson, Executive Board member at the ECB.

Key Points:

Interview on Twitter with Frank Elderson, Member of the Executive Board of the ECB, conducted and published on 16 March 2021

17 March 2021 Hello, this is @FrankElderson, Executive Board member at the ECB.
Im looking forward to answering your questions for the next 45 minutes or so.
#AskECB #AskECB Why dont you better explain your policies by indicating the aimed positive consequences, but also the potential negatives.
@FrankElderson: While the evidence is that our policies are very effective we certainly also have possible side effects on our radar.
@FrankElderson: Inflation increased sharply in January and February and is likely to go up further in the coming months.
This is mainly due to transitory factors, which we look through.
The pandemic is deep but temporary, so the risk of zombification is less pronounced than in other downturns.
In general, the share of zombie companies in the euro area has declined since 2014 #AskECB What are you proud of?
@FrankElderson: It is true that pandemic-related supply constraints, among other factors, are expected to increase inflation during this year.
@FrankElderson: Im very excited that we are setting up the @ecb climate change centre and are currently recruiting its head.
But our actions must not prejudice our objective of price stability #AskECB Any efforts to make the ECB board more diverse?

Frank Elderson: Q&A on Twitter

Retrieved on:

Wednesday, March 17, 2021

European Union, Eurozone, European Central Bank, European System of Central Banks, Monetary policy, Inflation, Frank Elderson, Price stability, Monetary inflation, Money

Interview on Twitter with Frank Elderson, Member of the Executive Board of the ECB, conducted and published on 16 March 2021 17 March 2021 Hello, this is @FrankElderson, Executive Board member at the ECB.

Key Points:

Interview on Twitter with Frank Elderson, Member of the Executive Board of the ECB, conducted and published on 16 March 2021

17 March 2021 Hello, this is @FrankElderson, Executive Board member at the ECB.
Im looking forward to answering your questions for the next 45 minutes or so.
#AskECB #AskECB Why dont you better explain your policies by indicating the aimed positive consequences, but also the potential negatives.
@FrankElderson: While the evidence is that our policies are very effective we certainly also have possible side effects on our radar.
@FrankElderson: Inflation increased sharply in January and February and is likely to go up further in the coming months.
This is mainly due to transitory factors, which we look through.
The pandemic is deep but temporary, so the risk of zombification is less pronounced than in other downturns.
In general, the share of zombie companies in the euro area has declined since 2014 #AskECB What are you proud of?
@FrankElderson: It is true that pandemic-related supply constraints, among other factors, are expected to increase inflation during this year.
@FrankElderson: Im very excited that we are setting up the @ecb climate change centre and are currently recruiting its head.
But our actions must not prejudice our objective of price stability #AskECB Any efforts to make the ECB board more diverse?

Subdued Inflation Data Extends the Rebound of Gold Prices

Retrieved on:

Thursday, March 11, 2021

Macroeconomics, Inflation, Economy, Money, Financial economics, Monetary policy, Monetary inflation

The gold price rebound follows subdued inflation data, which has pushed U.S Treasury yields down.

Key Points:

The gold price rebound follows subdued inflation data, which has pushed U.S Treasury yields down.
Economists and analysts note that weak inflation pressures could be a positive for gold prices.
A report by Kitco also indicates that analysts have pointed out the latest inflation data gives the Federal Reserve some flexibility to provide more accommodative monetary policies.
Exploits has received diamond drilling permits for 12 holes totaling 3,000 metres at the True Grit Gold Project.

Subdued Inflation Data Extends the Rebound of Gold Prices

Retrieved on:

Thursday, March 11, 2021

Macroeconomics, Inflation, Economy, Money, Financial economics, Monetary policy, Monetary inflation

The gold price rebound follows subdued inflation data, which has pushed U.S Treasury yields down.

Key Points:

The gold price rebound follows subdued inflation data, which has pushed U.S Treasury yields down.
Economists and analysts note that weak inflation pressures could be a positive for gold prices.
A report by Kitco also indicates that analysts have pointed out the latest inflation data gives the Federal Reserve some flexibility to provide more accommodative monetary policies.
Exploits has received diamond drilling permits for 12 holes totaling 3,000 metres at the True Grit Gold Project.

Fabio Panetta: Mind the gap(s): monetary policy and the way out of the pandemic

Retrieved on:

Wednesday, March 3, 2021

Economy, Money, Macroeconomics, Inflation, Monetary policy, Macroeconomic policy, Public finance, Economic policy, Euro, Fiscal policy, Monetary inflation, Yield curve

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi UniversityIn 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.

Key Points:

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi University

In 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.
Monetary and fiscal authorities everywhere intervened to support the economy on a massive scale.
But in 2021, with the progress made on vaccine technology, policy choices have become less clear-cut.
As such, it might be tempting to conclude that there is less need for monetary policy support.
We will still face two prominent gaps that we need to close: the output gap and the inflation gap.
At present, the risks of providing too little policy support still far outweigh the risks of providing too much.

Eliminating downside risks

There is a good chance that a recovery will take hold in the latter part of this year.
But that is not a justification for policies to run on neutral.
First, in a dramatic crisis like this one, macroeconomic policymakers should not bank on the most favourable scenario materialising.
As I have argued elsewhere, the pandemic has produced an asymmetric balance of risks, which requires an asymmetric reaction function.
Just as we looked though temporary negative inflation in recent months, we will look through this transitory hump in inflation.
And this shallow growth path remains vulnerable to a series of downside risks.
This divergence will bring risks of its own: in fact, we are already seeing undesirable contagion from rising US yields into the euro area yield curve.
The risks to private consumption growth are therefore substantial.

Chart 1 Household financial situation and savings

Given the weak financial starting point of many firms, investment is likely to only increase gradually and cautiously.
[5] A risk management approach would therefore clearly call for policy to eliminate these risks and reinforce the central growth path.
And, if we were to do too much and push the economy onto a stronger growth path, that would in fact be a welcome result.

Closing the gaps faster

But the experience of the last cycle suggests that it is hard to lift inflation dynamics without demand testing potential more dynamically.
Despite several years of robust economic growth, the euro area economy might still have been operating with significant economic slack even on the eve of the pandemic.

Chart 2 Pre-crisis and recent estimates of the output gap in the euro area

In the decade after the Lehman crash, yearly domestic demand growth in the euro area was almost 2 percentage points lower on average than it had been in the previous decade, and it was much lower than that of our main trading partners (Chart 3).
This contributed to compressing inflation persistently below our aim, leading to a significant price level gap (Chart 4).
[6] That was not the case in the United States or the United Kingdom, where domestic demand stayed on a stronger trajectory.

Chart 4 Harmonised Index of Consumer Prices (HICP)

This clearly called for action, as reflected in the additional support we decided on in December.
Boosting demand is also necessary to reduce hysteresis risks after the pandemic.
[8] Policy should not accept hysteresis as a reality which imposes new supply constraints, but rather explicitly set out to test those constraints.
[9] A tight job market also improves the outlook for future demand, thereby strengthening business investment.

Delivering the necessary policy stance

So the challenge we face is how to deliver the necessary policy stance.
Since the start of the pandemic, monetary policy in the euro area has gone through three phases.
In the first phase the phase of fragmentation the flexibility of our pandemic emergency purchase programme (PEPP)[10] averted an unjustified widening of spreads which would have disrupted monetary policy transmission.
In the second phase, the PEPP increasingly became a tool for steering the overall monetary policy stance.
This essentially means more focus on anchoring key financial variables above all, lending rates and the yield curve as key indicators of the monetary policy stance.
So, that constellation of financing conditions should be seen as the reference point for our policy moving forward.

Chart 5 Euro area real and nominal rates

In this way, we can prevent a tightening of financing conditions which would otherwise lead to inflation remaining below our aim for longer.
Eventually, firm commitment to steering the euro area yield curve may allow us to slow the pace of our purchases.
But in order to reach that point, we must establish the credibility of our strategy by demonstrating that unwarranted tightening will not be tolerated.

From policy fatalism to policy coordination

But counterfactual analysis shows that after the financial crisis and during the COVID-19 shock the ECBs expansionary policies have been highly effective.
Without our policies, inflation and GDP growth would have been dramatically lower and many more people would have lost their jobs.
Preserving favourable financing conditions will have a powerful effect on demand and inflation.
However, given the fall of the natural rate of interest,[14] monetary policy is more effective if deployed in sync with other policies.
Monetary, fiscal and structural policies must reinforce each other in order to cut slack and close the gap between saving and investment.
Fiscal policies continue to be a key channel for transmitting monetary policy to the real economy[15] and they are expected to remain supportive in 2021.

Chart 6 Euro area real and potential GDP

They need to target investment in technology, education and infrastructure, creating an environment that bolsters growth and supports the sustainability of debt.
We have a joint interest in making the European economy more dynamic.
[16] NGEU is an important tool precisely because it ensures that common spending triggers growth-enhancing reforms that subsequently benefit all.

Conclusion

My main message today can be summed up with the title of a song by the electronic music duo Daft Punk[18]: Harder, better, faster, stronger.
The harder we push to close the output and inflation gaps, the better the outlook for the euro area economy.
Achieving this will require the right combination of monetary and fiscal support at the EU level, and it will require continued, determined reforms at the national level.

Luis de Guindos: Interview with Público

Retrieved on:

Wednesday, March 3, 2021

Economy, Money, Macroeconomics, Inflation, Monetary policy, European Central Bank, European System of Central Banks, Eurozone, Monetary inflation, Central bank, Euro, Distributional effects

Interview with Luis de Guindos, Vice-President of the European Central Bank (ECB), conducted by Sérgio AníbalIn 2020, inflation was 0.3% and, with the recovery of the economy, we projected in December that inflation would be 1% on average.

Key Points:

Interview with Luis de Guindos, Vice-President of the European Central Bank (ECB), conducted by Sérgio Aníbal

In 2020, inflation was 0.3% and, with the recovery of the economy, we projected in December that inflation would be 1% on average.
In terms of this debate surrounding inflation, we need to take into account that there are forces at odds with each other.
On the one hand, we have the pandemics impact on the output gap, which shows that there is currently a lack of demand.
On the other hand, there is a great deal of monetary and fiscal stimuli, plus an increase in commodity prices and the recovery in world demand.
But in the short term, in the next 12 months, inflation will remain below our aim on average.
So, will the plans that the ECB had for the next few months remain unchanged?
We will have to see whether this increase in nominal yields will have a negative impact on financing conditions.
Yields are going up, but this is the case in both core and peripheral countries.
This will be the key factor over the coming weeks and months for our monetary policy, i.e.
understanding whether this increase in yields is due to trends in inflation or whether there are other factors that could hinder economic recovery.
Do you see a risk of a divergence between economies, which might trigger some degree of fragmentation in terms of access to financing?
We are using instruments classified as non-standard but which are becoming more conventional and will form part of any central banks toolkit.
But we need to be careful with respect to the side effects they could have, mainly in terms of financial stability.
Do you think that the moratoria may have a bigger impact on bank ratios in some countries than in others?
This is something that we have started to do with our non-monetary portfolio, which could be a first step.
Is this something you are doing because you are afraid of the potential effect that crypto-currencies could have on your monetary policy?
The main reason is that digitalisation has become increasingly relevant and the pandemic has accelerated the pace of digitalisation.
Over and above the doubts about the use of these assets, one of the issues raised is that they are very volatile instruments.

Fabio Panetta: Mind the gap(s): monetary policy and the way out of the pandemic

Retrieved on:

Wednesday, March 3, 2021

Economy, Money, Macroeconomics, Inflation, Monetary policy, Macroeconomic policy, Public finance, Economic policy, Euro, Fiscal policy, Monetary inflation, Yield curve

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi UniversityIn 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.

Key Points:

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi University

In 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.
Monetary and fiscal authorities everywhere intervened to support the economy on a massive scale.
But in 2021, with the progress made on vaccine technology, policy choices have become less clear-cut.
As such, it might be tempting to conclude that there is less need for monetary policy support.
We will still face two prominent gaps that we need to close: the output gap and the inflation gap.
At present, the risks of providing too little policy support still far outweigh the risks of providing too much.

Eliminating downside risks

There is a good chance that a recovery will take hold in the latter part of this year.
But that is not a justification for policies to run on neutral.
First, in a dramatic crisis like this one, macroeconomic policymakers should not bank on the most favourable scenario materialising.
As I have argued elsewhere, the pandemic has produced an asymmetric balance of risks, which requires an asymmetric reaction function.
Just as we looked though temporary negative inflation in recent months, we will look through this transitory hump in inflation.
And this shallow growth path remains vulnerable to a series of downside risks.
This divergence will bring risks of its own: in fact, we are already seeing undesirable contagion from rising US yields into the euro area yield curve.
The risks to private consumption growth are therefore substantial.

Chart 1 Household financial situation and savings

Given the weak financial starting point of many firms, investment is likely to only increase gradually and cautiously.
[5] A risk management approach would therefore clearly call for policy to eliminate these risks and reinforce the central growth path.
And, if we were to do too much and push the economy onto a stronger growth path, that would in fact be a welcome result.

Closing the gaps faster

But the experience of the last cycle suggests that it is hard to lift inflation dynamics without demand testing potential more dynamically.
Despite several years of robust economic growth, the euro area economy might still have been operating with significant economic slack even on the eve of the pandemic.

Chart 2 Pre-crisis and recent estimates of the output gap in the euro area

In the decade after the Lehman crash, yearly domestic demand growth in the euro area was almost 2 percentage points lower on average than it had been in the previous decade, and it was much lower than that of our main trading partners (Chart 3).
This contributed to compressing inflation persistently below our aim, leading to a significant price level gap (Chart 4).
[6] That was not the case in the United States or the United Kingdom, where domestic demand stayed on a stronger trajectory.

Chart 4 Harmonised Index of Consumer Prices (HICP)

This clearly called for action, as reflected in the additional support we decided on in December.
Boosting demand is also necessary to reduce hysteresis risks after the pandemic.
[8] Policy should not accept hysteresis as a reality which imposes new supply constraints, but rather explicitly set out to test those constraints.
[9] A tight job market also improves the outlook for future demand, thereby strengthening business investment.

Delivering the necessary policy stance

So the challenge we face is how to deliver the necessary policy stance.
Since the start of the pandemic, monetary policy in the euro area has gone through three phases.
In the first phase the phase of fragmentation the flexibility of our pandemic emergency purchase programme (PEPP)[10] averted an unjustified widening of spreads which would have disrupted monetary policy transmission.
In the second phase, the PEPP increasingly became a tool for steering the overall monetary policy stance.
This essentially means more focus on anchoring key financial variables above all, lending rates and the yield curve as key indicators of the monetary policy stance.
So, that constellation of financing conditions should be seen as the reference point for our policy moving forward.

Chart 5 Euro area real and nominal rates

In this way, we can prevent a tightening of financing conditions which would otherwise lead to inflation remaining below our aim for longer.
Eventually, firm commitment to steering the euro area yield curve may allow us to slow the pace of our purchases.
But in order to reach that point, we must establish the credibility of our strategy by demonstrating that unwarranted tightening will not be tolerated.

From policy fatalism to policy coordination

But counterfactual analysis shows that after the financial crisis and during the COVID-19 shock the ECBs expansionary policies have been highly effective.
Without our policies, inflation and GDP growth would have been dramatically lower and many more people would have lost their jobs.
Preserving favourable financing conditions will have a powerful effect on demand and inflation.
However, given the fall of the natural rate of interest,[14] monetary policy is more effective if deployed in sync with other policies.
Monetary, fiscal and structural policies must reinforce each other in order to cut slack and close the gap between saving and investment.
Fiscal policies continue to be a key channel for transmitting monetary policy to the real economy[15] and they are expected to remain supportive in 2021.

Chart 6 Euro area real and potential GDP

They need to target investment in technology, education and infrastructure, creating an environment that bolsters growth and supports the sustainability of debt.
We have a joint interest in making the European economy more dynamic.
[16] NGEU is an important tool precisely because it ensures that common spending triggers growth-enhancing reforms that subsequently benefit all.

Conclusion

My main message today can be summed up with the title of a song by the electronic music duo Daft Punk[18]: Harder, better, faster, stronger.
The harder we push to close the output and inflation gaps, the better the outlook for the euro area economy.
Achieving this will require the right combination of monetary and fiscal support at the EU level, and it will require continued, determined reforms at the national level.

Luis de Guindos: Interview with Público

Retrieved on:

Tuesday, March 2, 2021

Economy, Money, Macroeconomics, Inflation, Monetary policy, European Central Bank, European System of Central Banks, Eurozone, Monetary inflation, Central bank, Euro, Distributional effects

Interview with Luis de Guindos, Vice-President of the European Central Bank (ECB), conducted by Sérgio AníbalIn 2020, inflation was 0.3% and, with the recovery of the economy, we projected in December that inflation would be 1% on average.

Key Points:

Interview with Luis de Guindos, Vice-President of the European Central Bank (ECB), conducted by Sérgio Aníbal

In 2020, inflation was 0.3% and, with the recovery of the economy, we projected in December that inflation would be 1% on average.
In terms of this debate surrounding inflation, we need to take into account that there are forces at odds with each other.
On the one hand, we have the pandemics impact on the output gap, which shows that there is currently a lack of demand.
On the other hand, there is a great deal of monetary and fiscal stimuli, plus an increase in commodity prices and the recovery in world demand.
But in the short term, in the next 12 months, inflation will remain below our aim on average.
So, will the plans that the ECB had for the next few months remain unchanged?
We will have to see whether this increase in nominal yields will have a negative impact on financing conditions.
Yields are going up, but this is the case in both core and peripheral countries.
This will be the key factor over the coming weeks and months for our monetary policy, i.e.
understanding whether this increase in yields is due to trends in inflation or whether there are other factors that could hinder economic recovery.
Do you see a risk of a divergence between economies, which might trigger some degree of fragmentation in terms of access to financing?
We are using instruments classified as non-standard but which are becoming more conventional and will form part of any central banks toolkit.
But we need to be careful with respect to the side effects they could have, mainly in terms of financial stability.
Do you think that the moratoria may have a bigger impact on bank ratios in some countries than in others?
This is something that we have started to do with our non-monetary portfolio, which could be a first step.
Is this something you are doing because you are afraid of the potential effect that crypto-currencies could have on your monetary policy?
The main reason is that digitalisation has become increasingly relevant and the pandemic has accelerated the pace of digitalisation.
Over and above the doubts about the use of these assets, one of the issues raised is that they are very volatile instruments.