Category Archives: financial markets

Guest Contribution: “The European Central Bank’s Lack of Accountability Has Consequences”

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.

The European Central Bank (ECB) was set up as the most independent of all central banks. Its independence also made it unaccountable. Freed from public accountability, the ECB’s decisions have been swayed by its management’s ideological preferences and by national interests. The consequence is that some eurozone countries are now subject to long-term deflation risk and are locked into a currency that is too strong for their economies.

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Yield Curves Flattening in High Income Countries

A recent article on the predictive abilities of yield curves (Shrager/Quartz) includes a nifty interactive which allows you to look at yield curves over time. Below, I do a snapshot comparison, across the world.


Figure 1: Ten year-three month term spread (blue bars), as of 9 July 2016. China observation is Five year-three month term spread. Euro ten year rate is for Germany. Source: Economist, data as of April 18.
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Springtime for Social Scientists, Winter for Markets and Exporters

I’ve got new event study examples for my finance course! Trade policy measures that are evaluated to hurt profitability of major US listed firms have definitive effects on the Dow Jones index.


Figure 1: Dow Jones Industrial Average index. Red bold lines at announcement of impending Section 232 national security based trade restrictions on steel, and Section 301 trade sanctions aimed at China. Source: TradingEconomics.
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Economic Policy Uncertainty and Risk Indices: March 5, 2018

Remember those quaint notions of policy uncertainty holding back growth? Well, what to make of recent moves in uncertainty and risk indices, given all the talk of trade wars?


Figure 1: US daily Economic Policy Uncertainty index from Baker, Bloom and Davis (dark blue), and seven day centered moving average (red). Orange shading denotes Trump Administration. Source: policyuncertainty.com, and author’s calculations.

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A Fisherian Decomposition of the Recent Interest Rate Increase

How much of the increase in the 10 year constant maturity Treasury yield is from higher real rates, and from higher expected inflation?


Source: Federal Reserve Board via FRED.

Recalling the Fisherian identity:
  it = rt + πet

One can take the total differential:

  Δit = Δrt + Δπet

Hence, of the 0.49 percentage point change from December 15 to February 7 in ten year Treasury yields, 0.27 percentage points is accounted for by a real interest rate increase, and 0.22 percentage point by inflation expectations boost (abstracting from liquidity premia, etc.).

Over the five year horizon, of the 0.41 percentage point change, 0.28 percentage points is accounted for by the real rate change, and 0.21 percentage point from higher expected inflation.

All about why nominal rates are rising, in interview with Marketplace (Stan Collender comments too). We talk about the standard things — tax cuts, spending increases, Fed QE unwinding and rate increases, and (my contribution) the deceleration of foreign central bank Treasury purchases (graphical depiction here on page 6). Discussion of the last point with respect to China here.

Best Schematic Ever: Financial Frictions in Macro/Finance

I tire of hearing people who had one (or no) class in economics saying “the magic of the marketplace” will lead to the optimal outcome. What teaching finance has made me realize is that information problems are rife in many economic interactions. And one can’t be a student of currency crises without being even more convinced. The paper by Stijn Claessens and Ayhan Kose, “Macroeconomic Implications of Financial Frictions: A Survey” is a must-read for those who want to keep up with the literature. It has this fantastic schematic:

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