Central banking – a science or an art?
Session organizer/s: Lars Fredrik Øksendal and Anders Ögren
1930s Swedish financial crisis revisited—central banking and the lender of last resort
Session: 1
Authors: Liang Zhao
Co-authors: NA
Abstract: During the 1930s financial crisis, Central bank of Sweden (Riksbank) actively intervened the liquidity of banks and the market through a range of monetary operations. The monetary policies combined with the devaluation of currency, was regarded as a crucial factor that led to the quick and strong recovery of Sweden. By making use of the balance sheets of the whole banking system, this paper explores the detailed content of monetary policies before, during and after the 1930s crisis of Sweden, and provides new evidence on the monetary stance and policy goals. The main findings are: 1) Since early 1931 Riksbank changed its role in lend of last resort from a channel to a real supplier of liquidity. However, after leaving gold standard, Riksbank started to be cautious in expanding money supply unless in urgent need of bailout.2) The rising in the deposit reserve ratio of banks offset the expansionary monetary policies and thus the actual money circulated in the market was even in contraction in most of the time under the study. 3)The reserve and currency value, instead of domestic monetary demand, were the main goals of monetary policies after leaving gold standard.
A ‘license to innovate’ – the politics of money at the European Central Bank
Session: 1
Authors: Ingrid Hjertaker
Co-authors: NA
Abstract: Central banking has seemingly undergone tremendous change since the 2008 financial crisis, with the major central banks, such as the Fed, the European Central Bank and the Bank of Japan, broadly viewed as having become more powerful. Yet, absent any significant changes to central bank mandates, any change to de facto power needs to be both theoretically conceived and empirically supported. This is especially important for the case of the European Central Bank – for which claims of increased power have been the most pronounced, and changes to mandate entirely absent. The European Central Bank is broadly considered to be the central bank designed to best fit the “ideal” of the central bank independence-model; a highly independent, rule-based central bank narrowly focused on maintaining price stability and (then thought) explicitly forbidden from acting as lender of last resort. Yet, some years into the euro crisis, the European Central Bank was innovating on unconventional monetary policies even more so than the Fed, with open-ended asset purchasing programs and targeted long-term repurchasing arrangements. During the Covid pandemic, the ECB was even admitting that its asset purchases would target member states in crisis. This paper does not compare the European Central Bank’s response to the euro crisis and the pandemic as separate cases, but instead examines ECB actions and public communication over the 2007-2022 period as a single, evolving case, a ‘critical juncture’ in the development of a new central banking regime. Analyzing central bank press conferences, reports, speeches and press coverage over this period, including the launch of the Transmission Protection Instrument in 2022, I demonstrate a process of continuous learning over time. I argue that through specific failures and controversies, as well as from successes, the European Central Bank has learned both what kind of policies it can pursue and how it should frame them to maintain legitimacy. In so doing it has reestablished and deepened its bureaucratic autonomy while maintaining its reputation vis-à-vis political audiences. The ECB has in practice been given a “license to innovate”, in other words a license to conduct monetary policy as art, while still maintaining that it is a science. This license arguably makes the ECB more powerful than it used to be. Yet, at the same time, the ECB along with other major central bank, face deeply financialized and liquidity-dependent global markets, partially of their own making, against which they are ‘powerless’ to do anything but backstop.
Riksbanken och regimskiftet: “Ett oroande spring av utländska banker”
Session: 1
Authors: Cecilia Kahn
Co-authors: NA
Abstract: The 1970’s was a time of regime change. Major changes occurred within the international exchange rate system, regulation of international capital flows, domestic economic policy goals, and financial regulations. In Sweden however, the regime of the post-war period lingered until the second half of the 1980’s. From 1985, the so-called ‘Riksbank regulations’ were dismantled. These had been an important ingredient of the post-war economic and regulatory regime. In this study, the implementation of the Riksbank regulations in the 1970’s is studied. The goal of the Riksbank was the balance of payments, rather than inflation or the current account balance. Due to the currency regulations, the Riksbank believed it could act with some independence visavi international economic pressures. The Riksbank hence acted with the purpose of upholding the economic and regulatory regime. However, these actions led to the unavoidable demise of the regime. Results are thus in line with Andersson (2021) who shows how economic policy towards the end of a regime starts to be implemented in a way that undermines the regime and thus leads to its collapse.
The Illusory Independence of Bank of Japan
Session: 1
Authors: Åsa Malmström Rognes
Co-authors: NA
Abstract: Central bank independence became something of a trend in the 1990s. The reasons include memories of stagflation in the 1980s, the success of the German Bundesbank in keeping inflation in check, the memories of the ERM crisis in the early 1990s and the preparation for the independent European Central Bank (ECB). Revised central bank laws provided for independence for several central banks in mature economies, including the Bank of England, Riksbanken, the ECB and the Bank of Japan (BoJ). Central bank autonomy had already been defined and analysed, in particular with respect to monetary policy outcome and the ability to keep inflation in check. A framework by Bade & Parkin in 1977 formed the basis for analysis of autonomy and has been refined and further developed by among others Grilli, Masciandaro & Tabellini (1991), Cukierman (1992) and Arnone et al (2006). The autonomy or independence can be analysed in terms of de jure and de facto independence to tease out what independence means in practice. The new Bank of Japan law in 1998 provided for an independent central bank. This paper analyses the de jure and de facto independence of the Bank of Japan and how unconventional monetary policy affected this and finds that the increased intertwining of monetary and fiscal policy makes the independence somewhat illusory.
An old remedy for a new problem. How history provides the easiest route to making digital central bank money available to the public in a cash free world
Session: 2
Authors: Lars Fredrik Øksendal
Co-authors: NA
Abstract: The cryptocurrency frenzy and the diminished importance of notes and coins as means of payment have led to a scrutiny of the future of central bank money. At the core of the discussion is whether legal tender money, i.e., issued under a legal warrant by a central bank or other government institution, should be available to the public as digital central bank money after the final demise of cash or whether the whole field of money holding and payments should be left to private issuers (banks, potentially crypto agents). This article addresses the question from a monetary theory perspective and identify the critical issues at stake. Drawing on the historical example of how Norges Bank (as well as other banks of issue) functioned as deposit taking institutions available to the public until the inter-war years, a practical remedy is suggested.
Inter-state solution in the stateless market: the international debt crisis and the global supervision of the Eurocurrency market, 1979 – 1984
Session: 2
Authors: Seung Woo Kim
Co-authors: NA
Abstract: Apocalypse Now, the Bank of England circulated an internal report to member central banks of the Bank for International Settlements (BIS) in 1979. Prepared for ‘possible consequences of a debt service failure by a major borrowing country’, it warned of the growing indebtedness of less-developing-countries and lending practices of international banks. Some of the central bankers had called for the supervision of the Eurocurrency market, an offshore market for major currencies as well as a key channel for the recycling of petrodollars since the mid-1970s, against the threat of instabilities in the global financial market. However, the international financial organisation failed to prevent the much-prophesied crisis – the Latin American Debt Crisis of 1982. Two years later, the Eurocurrency Standing Committee, a specialist organisation of the BIS to tackle the growing debt burden of emerging markets, expressed a sense of frustration about the results of its work since 1980. This paper analyses the unsuccessful initiative by monetary authorities and international financial organisations to tackle the debt crisis and the governance of global finance before and after the Latin Debt Crisis of 1982. It contends that the economic sovereignty of nation-states and the offshore markets in the Global South was the key to understand the failure of synchronisation of national policies on the debt crisis. First, it examines key issues regarding the stateless market. The collection of consolidated statistics of Eurocurrency borrowings was the very first step towards the formulation of a regulatory framework. The BIS sought to set standard rules of prudential banking to prevent excessive lending operations and their macroeconomic ramification. And the assumption of lender of last resort by central banks compatible with the global expansion of the Eurocurrency market a contingent measure. However, national interests were prioritised than a global solution owing to diverged understandings of the market; hence, the lessons of the 1982 crisis was dismissed, which left the regulation of the global market at national levels. Second, this paper suggests that offshore markets around the world frustrated efforts by central banks of developed countries, including the United States, to formulate a comprehensive regulation of the global financial market. These global entities under the national jurisdiction were able to deliberately avoid the approach by the BIS to collect banking data. Instead, the competitive pressure in international banking business led to the establishment of the International Banking Facility in New York to further facilitate Eurocurrency lendings. This paper concludes that the incompatibility of the inter-state solution to the global Eurocurrency market and the cardinal element in the governance of global finance in the 1980s – the economic sovereignty of nation-states. It extensively uses original documents from the Federal Reserve Bank of New York, the Bank of England, and the UK government and contemporary periodicals such as Euromoney.
Nordic Central Bank Cooperation 1931-1939 – Challenging an era of deglobalisation and uncertainty
Session: 2
Authors: Gjermund Forfang Rongved
Co-authors: NA
Abstract: In the interwar years, Nordic central bank cooperation intensified and expanded. Before World War I, the Scandinavian countries had communicated per letter and thematically narrow as members of Scandinavian Monetary Union (SMU). In the 1920s, some crisis meetings during the war evolved into an institutionalisation of physical SMU meetings which gradually broadened the cooperation thematically, although a major theme was re-establishing the union. Despite Iceland formally becoming part of the union in 1924, the union broke up with the end of the gold standard in 1931. Along the way, the scope of Scandinavian central bank cooperation had expanded considerably, and with it the urge to encompass the entire Nordic region. Hence at the September 1931 meeting in the home of Riksbank governor Ivar Rooth, where it was decided to follow the British lead and abandon the gold standard, Finland participated for the first time, with Finnish central bank governor – and later Prime Minister and President – Risto Ryti.
The 1931 meeting marks a new era of Nordic central bank cooperation, and the cooperation of the 1930s is interesting in many respects. The Nordics had to navigate in unchartered waters without the gold compass, and at that when threatened by a political and economic storm. Hence, this happened at a time when the Great Depression threatened the global economies, when international political, economic, and monetary cooperation disentangled, with pressure from the growth of new major social groups nationally, and generally in an age where increased theoretical, political, and social criticism of central bank policies challenged their position. Although primarily looking out for their national economies, the Nordics were nevertheless dependent on international economic cooperation to overcome the crisis, and hence the central bank cooperation of the 1930s is an interesting – yet completely overlooked – field of study on several levels.
Based on the central bank archives of the Scandinavian central banks, this article discusses several research questions:
- At the most basic level, what was discussed at the Nordic central bank meetings in the 1930s and how did this cooperation evolve over the decade?
- Was new theoretical and political criticism of the central banks discussed at the Nordic central bank meetings, and how did the central banks respond?
- How did the Nordic central banks balance their concern for their national economies against the need to cooperate to overcome difficulties?
- How did the Nordic central banks balance Nordic cooperation with that of new international central bank cooperation efforts like the BIS, and did they join forces to try to even out the power imbalance favouring the Great powers?
- To the extent that the Nordic central banks were part of governmental efforts to counter the economic crisis and gradually had their independence curbed, how were they made part of and how did they respond to international small power efforts like the economic cooperation of the Oslo states, and did this conflict with their relationship with the central banks of the Great powers?