Central Bank Scorecard - June 18, 2019
“It Hasn’t Worked”
Yesterday, Leika Kihara’s article for Reuters pulled down any remnants of the façade of a focused and single-minded BoJ. Whether representative of a full reversal of narrative, “How Japan turned against its ‘bazooka’-wielding central bank chief” chronicles how Haruhiko Kuroda, who was “hailed as something of a monetary policy rock star by Wall Street when he became governor in 2013” has fallen in the public eye. Unfortunately for Haruhiko, “three years on, there is a broad consensus that Japan’s experiment in shock-and-awe monetary policy has failed”.
Hindsight appears to be 20-20. The article makes such claims as “almost immediately, it was clear within the BoJ that the move was a mistake”, which begs a whole series of questions, but Kihara’s sources offer some candor. On top of full admission of the damage done to banks “from years of ultra-low rates”, the sources revealed that some members of the BoJ “sought twice to prepare a plan to raise rates in 2018” (Rumor confirmed!). Additionally, the BoJ appears to be addressing some of its known unknowns and “has begun studying why Kuroda’s experiment failed to achieve its goal”. Though Warren Mosler and other MMTers would likely settle on the side of BoJ “radicals” who support spurring inflation on by “printing money to finance government spending”, Kihara’s article implies that the BoJ may be doing more than just navel-gazing.
“A Cut... is Actually Mildly Contractionary”
According to recent research from Eric Sims and Jing Cynthia Wu (of Wu Xia Shadow Rate Fame), it may not be the BoJ’s fault that their policies didn’t work (though their choice of policy certainly is!). In “Evaluating Central Banks’ Tool Kit: Past, Present, and Future” (Session 6), Sims and Wu present the results of a structural DSGE model they developed that includes unconventional monetary policy tools, including quantitative easing, forward guidance, and negative interest rate policy.
While on the wonkish side, Sims and Wu have developed a model that leads to interesting conclusions. In considering the size of Central Bank balance sheets, their model suggests, “if agents expect central banks to maintain a large balance sheet after the ZLB (zero lower bound), the economy could experience a deeper recession even with the central bank accumulating a larger quantity of bonds”.
Regarding QT, quantitative tightening, they find that expectations are paramount, “our results suggest the anticipated speed of unwinding after the ZLB ends has an important impact for how the economy fares during the ZLB” (emphasis added). Additionally, they find that “other things being equal, NIRP is less effective the larger a balance sheet a central bank carries” and conclude that after a certain percentage of GDP, “NIRP actually becomes mildly contractionary”.
Finally, and in line with the BoJ’s experience, “there exists a cutoff negative policy rate below which financial intermediaries would voluntarily choose to exit”. “Negative policy rates are essentially a tax on the holders of reserves. The more reserves there are, the more punitive is this tax, and at some point, intermediaries might find it undesirable to continue.” Glad someone is finally thinking of the banks.