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Belka-gate – the Polish version of the Sumner Critique?

A key Market Monetarist insight (it is New Keynesian insight as well…) is that budget multiplier is zero if the central bank says it is so. Or rather it the central bank targets inflation, the price level or nominal GDP then the central and will offset any shock – positive or negative – to nominal spending (aggregate demand) from changes in fiscal policy.

This means that the central bank – rather than the ministry of finance – has the full control of aggregate demand in the economy. No matter what the government does with fiscal policy the central bank has the instruments to fully offset this. This is the so-called Sumner Critique.

A major scandal involving the Polish central bank governor Marek Belka that has developed over the last couple of days is a powerful illustration of the Sumner Critique.

This is from Reuters:

A Polish magazine said on Saturday it had a recording of a private conversation in which the central bank chief told a minister the bank would be willing to help rescue the government from economic troubles on condition the finance minister was removed.

The weekly Wprost news magazine said it had a recording of a meeting in a Warsaw restaurant last July between central bank governor Marek Belka and Interior Minister Bartlomiej Sienkiewicz. It did not say who recorded their conversation, or how it had obtained the recording.

According to extracts of the audio recording posted on the Internet by the magazine, which have been heard by Reuters reporters, and were also emailed to Reuters by Wprost in transcript form, the minister sets out a possible future scenario in which the government could not meet its financial commitments and faced election defeat.

The man identified in the transcript as Sienkiewicz refers in vague terms to monetary policy action carried out elsewhere in Europe – an apparent reference to central bank stimulus.

“Is that precisely the moment for launching this sort of solution, or not?” Sienkiewicz asks Belka.

Belka replies, according to the transcript: “My condition would be the removal of the finance minister.”

The finance minister at the time, Jacek Rostowski, was removed last November as part of a cabinet reshuffle.

There you go. Central bankers have the power to control nominal spending in the economy. They might even have the power to have finance ministers removed. Never ignore the Sumner Critique.

PS the Polish central bank has said that the recordings are authentic, but that they have been manipulated and that Belka’s comments regarding the removal of the Finance Minister were taken out of context.

PPS It has been – and still is – my view that Polish monetary policy has been far too tight since early 2012. Maybe an explanation to the overly tight stance could be – and I am speculating – dissatisfaction with the Polish government’s fiscal stance.

PPPS for game theoretical based discussion of the Sumner Critique see my earlier posts here and here.

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Unfocused vacation musings on money – part 1

It is vacation time for the Christensen family. We are in the Christensen vacation home in Skåne (Southern Sweden) and my blogging might reflect that.

There are really a lot of things going on the in world and I would love to write a lot about it all, but there is not enough time. But here are a few observations about recent global events from a monetary perspective.

Egyptian Regime Uncertainty

I am not getting myself into commenting too much on what is going on in Egypt other than I fundamentally is quite upbeat on the Egyptian economy, which I easily could see growth 7-8% y/y in real terms in the next 1-2 decade (with the right reforms!)

Remember the Egyptian population is going from 80 to 90 million within the next decade and the labour will be growing by more than 1% a year in the same period (as far as I remember). With the right reforms that is a major growth boost. So Egypt is a major positive long-term supply side story – short-term it is a major negative supply side story.

What we have in Egypt is of course a spike in what Robert Higgs calls Regime Uncertainty. That is a negative supply shock. The Egyptian central bank should of course allow that to feed through to higher prices – don’t fight a supply shock with monetary policy. There is a lot to say about how Egyptian monetary policy should be different, but monetary policy surely is not Egypt’s biggest problem. If you want to understand Egypt’s problem I think you should read “Why Nations Fail”.

I earlier wrote a post on the implications of recent Turkish political unrest from an AD/AS perspective. I think that post easily could be copy-pasted to understand the economics of the Egyptian crisis.

A Polish deflationary monetary policy blunder

I have followed the Polish economy closely for well over a decade and I love the country. However, recently I have got quite frustrated with particularly the Polish central bank. Yesterday the Polish central bank (NBP) cut its key policy rate by 25bp. No surprise there, but the NBP also (wrongly) said it was the last rate cut in the rate cutting cycle.

Say what? Poland is likely to have deflation before then end of the year and real GDP growth is well-below trend-growth. Not to talk about NGDP growth, which has been slowing significantly. I am not sure the NBP chief Marek Belka realises, but it did not ease money policy yesterday. It tightened monetary policy.

When a central bank tells the markets it will cut interest rates (or expand the money base) less than the markets have been expecting then it is effectively monetary tightening. That was what the NBP did yesterday – pure and simply. Now ask yourself whether that is the right medicine for an economy heading for deflation soon. To me it is a deflationary monetary policy blunder. (I will not even say what I think of the recent FX intervention to prop up the Polish zloty).

A confident Kuroda should not be complacent

This morning Bank of Japan governor Kuroda had press conference on monetary and economic developments in Japan. I didn’t read up on the details – I am on vacation after all – but it seems like Mr. Kuroda was quite confident that what he is doing is working. I agree, but I would also tell Mr. Kuroda that he at best is only half way there. Inflation expectations are still way below his 2% inflation target so his policies are not yet credible enough to declare victory yet. So let me say it again – more work on communication is needed.

Carney’s long and variable leads (I would have hoped)

Mark Carney has only been Bank of England governor since Monday, but it is tempting to say that he is already delivering results. The macroeconomic data released this week for the UK economy have all been positive surprises and it looks like a recovery is underway in the British economy. So why am I saying that Carney is already delivering results? Well because monetary policy is working with long and variable leads as Scott Sumner likes to tell us. There is a wide expectation in the markets that Carney will “try to do something” to ease UK monetary policy and that in itself is monetary easing (this is the reverse of the Polish story above).

However, my story is unfortunately a lot less rosy. The fact is that the market is not totally sure that Carney will be able to convince his colleagues on the Monetary Policy Committee to do the right thing (NGDP targeting) and judging from the markets a major change in policy is not priced in. So Carney shouldn’t really take credit for the better than expected UK numbers – at least not a lot of credit. So there is still no excuse for not doing the right thing. Get to work on an NGDP level target right now.

Summertime reading…

I hope to be able to do some reading while on vacation – at least I brought a lot of books (yes, one of them is about Karl Marx). Take a look…

Vacation books

PS It is 4th of July today. The US declaration of independence is surely something to celebrate and here in the small city of Skyrup in Skåne our neighbour always fly the Stars and Stripes on July 4th so we won’t forget. I like that.

Marek Belka suggests dual currency solution for Greece

In today’s edition of Financial Times Deutschland Polish central bank governor and former Director of IMF’s Europe department Marek Belka calls for Greece to introduce a dual currency system (See here). Belka clearly acknowledges in the monetary aspects of the European crisis including the Greek crisis.

Belka said that EU’s strategy of urging Greece to drastically cut prices and wages in order to become competitive and to accept bailout packages was “hopeless.”. Here is Belka (my translation):

“The country seems to need a special arrangement, perhaps for a limited time,” said the central bank governor … “I am not advocating or urging Greece to leave the euro. However, for internal purposes, for example, one could think of a payment instrument that would be used within the country, especially the state sector.”

It is the first time a top European official openly acknowledges the monetary nature of the crisis. Marek Belka is not a nobody. He is former Polish Finance Minister and former Prime Minister and importantly from a European perspective he has served as Director for the IMF in Europe. In 2003 he was effectively Iraqi Finance Minister in the interim coalition administration (the Bremer administration) of Iraq.

Needless to say Marek Belka has spend time at the University of Chicago and is well-schooled in monetary theory and history. Last year I had the oppurtunity to talk to him about monetary history. His standard reference to the Great Depression is Friedman’s and Schwartz’s Monetary History.

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Update: As a blogger I can see what countries my visitors come from. Normally most readers are from the US followed by Denmark and Sweden. Over the last 24 hours I have had quite a lot of visitors form Belgium…I wonder why anybody in Bruxelles would be so interested in this topic?;-)

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