Monday, December 31, 2018

Central Banking Stories to Watch in 2019

Happy New Year, everybody! 2018 has been a quiet year for my blog, but productive on other fronts, as I've kept busy with research and my family. But here are a few central bank-related stories I'm interested in following in the new year.

1. New Governor at Reserve Bank of India

Following the early exit of Governor Urjit Patel in December, Prime Minister Modi appointed the third central bank governor in just three years: Shaktikanta Das. Patel's resignation followed reported pressure from Modi to relax lending criteria. This is certainly a troubling sign about central bank independence, but Das' words and actions in 2019 should give us a better picture of just how troubling. And it is part of a larger trend of political pressure on central banks post-crisis.

2. Central Bank Independence Reforms in Brazil

Among the many reform plans considered by Brazil's right-wing President-elect Jair Bolsonaro-- already dubbed "Bolsonomics" -- is more legal independence for the central bank.

Before the 2014 elections in Brazil, I wrote about President Rousseff's debates with Socialist Party candidate Marina Silva about central bank independence. Silva favored reforms to insulate the central bank from political pressure, but of course was not elected.

3. Reserve Bank of New Zealand Switching to Committee-Based Policy and Dual Mandate

Most central banks make monetary policy by committee, but the Reserve Bank of New Zealand (RBNZ) has been a notable exception. Monetary policy decisions are made by the Governor alone, with a committee that serves a purely advisory role. That is expected to change as part of reforms that will give the finance minister the ability to appoint a monetary policy committee, including a non-voting Treasury observer. Alan Blinder is the expert on monetary policy committees, and he has said that they are generally better than monetary policy by individual though the optimal size and structure is still not clear.

The RBNZ, one of the first adopters of inflation targeting, is also adopting a dual mandate that calls for maximizing sustainable unemployment.

4. U.S. Unemployment Duration Approaching Pre-Recession Levels

In November, the median duration of unemployment in the U.S. was 8.9 weeks. That is down from a peak of 25.2 weeks in June 2010. (Unemployment duration is a trailing indicator, so it peaked long after the recession was over.) The average from 2005-2007 was 8.6 weeks. The mean duration of unemployment is higher than the median, since the distribution is heavily skewed. It was 21.7 weeks in November, versus around 40 weeks in 2011 and 17.4 weeks in 2005-2007.

Source: https://fred.stlouisfed.org/graph/?g=mw0X

I classify this as a central banking story because some literature finds that high long-term unemployment can reduce the slope of the Phillips curve, as workers who have been unemployed for a long time are less attached to the labor market and exert less pressure on wages and prices. It's also a central banking story because one of the big questions for the Fed and other central banks is whether the labor market is "back to normal" and what that even means, and what, if any scars from the Great Recession will remain. The labor force participation rate, for example, is still higher than pre-recession and doesn't appear to be falling. But even a few years ago, unemployment duration looked like it would never return to normal.

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