Peter Howells

Central Banks and Market Interest Rates

Abstract: In a world of endogenous money, the central bank’s role in monetary policy is reduced to the setting of a very short-term official rate of interest, which indicates the price at which it will make liquidity available to the banking system. However; it is changes in market rates that affect behavior; and so the ability of the central bank to influence anything at all depends, first, on the interaction between official and market rates. In this paper; we use a vector autogressive error correction model to explore the response to changes in the central bank rate of three short-term market rates that have beenfeatured previously in this journal in debates about the demand for endogenous money.

The Endogeneity of Money: Empirical Evidence

For many years, the endogenous nature of the money supply has been a cornerstone of post-Keynesian economics. In this paper we survey the empirical work which has been done on both the ‘core’ thesis – that loans create deposits – and on peripheral questions such as the origin of the demand for loans, the reconciliation of the demand for money with the loan-created supply and the accommodationist/structuralist debate. The originality of the paper lies in its demonstration that while post-Keynesians may have thought they were fighting in heroic isolation, most economists involved with the real world of monetary policy-making in practice took much the same view. The consequence is that we can find empirical investigations of issues relating to the endogeneity in a wide range of locations.

Monetary Policy Transparency in the UK:The Impact of Independence and Inflation Targeting

Abstract There is a widespread belief that the transparency of UK monetary policy has increased substantially as a result of the introduction of inflation targeting in 1992 and a number of procedural and institutional reforms which accompanied and followed it. Here, money market responses (and other data) are used to test the possibility that improved anticipation of policy moves may be the result of developments other than the institutional reforms popularly cited. We find overwhelming evidence that the switch to inflation targeting itself significantly reduced monetary policy surprises, while subsequent reforms have contributed little. Where we advance substantially on earlier work is to look at the cross‐sectional dispersion of agents’ anticipation. If the benefit of transparency is the elimination of policy surprise, there is little benefit if the averagely correct anticipations of agents conceal a wide dispersion of view.

The 1520-1640 "Great Inflation": An Early Case of Controversy on the Nature of Money

Abstract: The causes of the “great inflation” of the sixteenth century have long been the subject of controversy. Since some major work in the 1930s, historians have argued over a “monetary” and a “real” interpretation. What we show in this paper is, first, that there was a dissenting opinion even then; second, that recent scholarship shows that the dissenters’ view of events was probably the more accurate as to fact; third, that the monetary interpretation of the day drew intellectual support from aflawed source; andfinally, that the dissenters were mounting the earliest argument for the endogenous origins of money.

Monetary Policy Transparency:Lessons from Germany and the Eurozone

The conduct of monetary policy emphasises institutional arrangements which make monetary policy decision-making more ‘transparent’. Judged by these institutional features neither the Bundesbank, nor the ECB, score very highly. We test for (i) agents’ average ability to anticipate policy rate changes under the Bundesbank and the ECB and (ii) and agents’ forecasting unanimity of money market rates. Rising forecasting uncertainty may either be due to a lack of ECB transparency or to larger inflation and growth forecasting errors. Our results indicate that inflation forecast spreads widened amongst private agents and that inflation forecasting uncertainty increased the forecasting spread of money market rates

A two-state Markov-switching distinctive conditional variance application for tanker freight returns

The few papers that explore different ways to measure shipping freight dynamics have differed in their interpretation of the most suitable measure for conditional freight volatility and consequently for the most appropriate freight risk measure. Furthermore, recent empirical work in maritime studies suggests the possibility of conditional freight volatility switching between different regime states that are dynamically distinct. This paper attributes these dissimilarities in findings within maritime literature to the possibility of freight returns switching between distinctive volatility structures. Therefore, it proposes a two-state Markov-switching distinctive conditional variance model by matching the two-state conditional freight variance to the most suitable GARCH specification. This provides for the first time a distinctive empirical insight into the dynamics of tanker freight rates by explaining the dissimilarities within the maritime literature in measuring freight risk that improves our understanding of the changes in volatility dynamics of the freight supply curve. Thus, this study postulates that the dynamics of freight rates are distinct and conditional on the freight volatility regime-state that prevails at the time. Empirical findings postulate that volatilities within tanker freight returns are better modelled by a framework that is capable of capturing volatility dynamics within the tanker freight market. This study attempts to explain the dissimilarities within the maritime literature in measuring freight risk by improving our understanding of the changes in volatility dynamics of the freight supply curve.

Financial innovation and the long-run demand for money in the United Kingdom and in West-Germany

Financial Innovation and the Long-Run Demand for Money in the United Kingdom and in West Germany. — This paper uses a cointegration model to compare the long-run demand for broad money in the UK and (West) Germany during the period 1963Q1–1990Q2. In the long-run demand function for Germany, real M3 is determined in classical manner by real income and a single opportunity cost variable. By contrast, the UK demand function requires in addition an explicit own rate on money as well as a risk variable. The income elasticity is also very high. These differences reflect the more rapid pace of financial innovation in the UK in the 1970s and 1980s.ZusammenfassungFinanzinnovationen und die langfristige Geldnachfrage in Großbritannien und Deutschland. — In diesem Aufsatz wird ein Kointegrationsmodell benutzt, um die Geldnachfrage in Großbritannien und der Bundesrepublik Deutschland im Zeitraum 1963/1–1990/2 zu vergleichen. In der langfristigen Nachfragefunktion für Deutschland ist die reale Geldmenge M3 geradezu klassisch durch das Realeinkommen und eine einzige Opportunitätskostenvariable bestimmt. Dagegen sind in der britischen Nachfragefunktion außerdem eine explizite Ertragsrate der Geldhaltung wie auch eine Risikovariable zu berücksichtigen. Die Einkommenselastizität ist zudem sehr hoch. Diese Unterschiede reflektieren den vergleichsweise starken Einfluß von Finanzinnovationen in Großbritannien in den 70er und 80er Jahren.

The endogeneity of money

For many years, the endogenous nature of the money supply has been a cornerstone of post-Keynesian economics. In this paper we survey the empirical work which has been done on both the ‘core’ thesis – that loans create deposits – and on peripheral questions such as the origin of the demand for loans, the reconciliation of the demand for money with the loan-created supply and the accommodationist/structuralist debate.

Central Bank Communication, Transparency and Interest Rate Volatility: Evidence from the USA

The FOMC has changed its way of communication twice, recently: from 2000-2003, the Committee imparted information about its assessment on the economic outlook (the balance-of-risk statements) and since August 2003 the FOMC informs additionally about its outlook’s implications on the future federal funds target rate (forward-looking language). The result should be that agents do not need to deduce FOMC’s likely policy move on every twitch of central bank communication and macroeconomic news. Markets have anticipated FOMC policy decisions on the day of the meeting very well since 1994. Therefore, the focus of the paper is on the behaviour of market rates between FOMC meetings and on testing for greater ‘smoothness’ and lower volatility of market rates since 2000. We apply an EGARCH model to forward rates at the short end of the yield curve. The model is used to test for the effects of the three disclosure regimes (pre-2000, 2000-2003, post-2003) on the dependence of previous and current changes of the market rates in the conditional mean equation. It is expected to observe higher inertia during the periods when market participants are better informed. Furthermore, generally, news increases interest rate volatility, since markets adjust interest rates in response to relevant news. However, other FOMC communication (other than the press statements after the FOMC meeting), may have a lower news value in the new disclosure regimes than it had in the pre-2000 period. Therefore, ‘other’ central bank communication may affect the volatility of interest rates differently in the three different regimes. This effect is tested for in the conditional variance of the regression model. We find that there is evidence of differences in smoothness between the period until 2000 and the period of the balance-of-risk statement. Furthermore, we find that the effect of other than Fed press statements after FOMC meetings varies in the three periods. This is particularly so for Fed communication concerning economic outlook and speeches by the chairman of the Board.

The U.S. Fed and the Bank of England

This essay looks at the foundation and development of the U.S. Federal Reserve and the Bank of England through the perspective of the recent debate over central bank independence in the design of optimal monetary policy. It shows that the creators of the Federal Reserve were acutely aware that they were establishing a central bank (based to some degree on the Bank of England as it had then evolved). Thus they were troubled by the potential power that such an institution might wield and so the question of control and influence was paramount. Interestingly, the founding fathers eventually opted for independence from the money interests of Wall Street rather than independence from the state. The Feds reputation for policy competence and independence owes much more to the role of strong chairmen in recent years than to any statutory design. By contrast, the Bank of England was founded as a private bank. Concerns about independence played no part in its early history and came to the fore only after it had acquired, step by step, the responsibilities of a central bank. The first serious concerns about independence were voiced in the inter-war period when it was thought that the Bank was too keen to support Londons role as the center of international finance, against the interests of the domestic economy. Partly for this reason, it was nationalized in 1946. When it was granted operational independence in 1997 it was stripped of two of its oldest responsibilities in order to avoid conflicts of interest. What the history of the two banks shows is firstly, that it is not independence from the government that is essential for optimal policy, but a freedom to pursue one, single priority and secondly, that the effectiveness with which this is carried out has little or nothing to do with laws, charters, and statutes.