The last three or four decades have seen a remarkable evolution in the institutions that comprise the modern monetary system. The financial crisis of 2007-2009 is a wakeup call that we need a similar evolution in the analytical apparatus and theories that we use to understand that system. Produced and sponsored by the Institute for New Economic Thinking, this course is an attempt to begin the process of new economic thinking by reviving and updating some forgotten traditions in monetary thought that have become newly relevant. Three features of the new system are central. Most important, the intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis revealed those vulnerabilities for all to see. The result was two years of desperate innovation by central banking authorities as they tried first this, and then that, in an effort to stem the collapse. Second, the global character of the crisis has revealed the global character of the system, which is something new in postwar history but not at all new from a longer time perspective. Central bank cooperation was key to stemming the collapse, and the details of that cooperation hint at the outlines of an emerging new international monetary order. Third, absolutely central to the crisis was the operation of key derivative contracts, most importantly credit default swaps and foreign exchange swaps. Modern money cannot be understood separately from modern finance, nor can modern monetary theory be constructed separately from modern financial theory. That's the reason this course places dealers, in both capital markets and money markets, at the very center of the picture, as profit-seeking suppliers of market liquidity to the new system of market-based credit.
Central Bank as FX Dealer of Last Resort
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来自 Columbia University 的课程
Economics of Money and Banking
631 个评分
从本节课中
International Money and Banking, continued
The next two lectures use the Treynor model to understand how exchange rates are determined in dealer markets. In the second, we confront directly the puzzle we observed earlier in the course, namely why uncovered interest parity (UIP) fails to hold in real world markets.
与讲师见面
Perry G MehrlingProfessor
Economics, Barnard College
[INAUDIBLE].
Where does the central bank come in?
[NOISE]
We remember from last time that the central
bank comes in when the private dealers are done.
When these private dealers no longer can.
They, I mean, the central bank has to come in at that, at that stage.
It could come in earlier to try to influence behavior but
its easiest to introduce it by saying the private dealers are done.
They have done all of this and prices have moved
enough to encourage them to be willing to hold this but they
are not willing to do any more, even if prices move dramatically.
They're not willing to do anymore.
They have as much risk as they want. So now
[COUGH],
we have the surplus country and the debts of
the country and we have the central banks of
the two countries. So I'm going to put them right under here.
So this is the surplus country, central bank.
[COUGH]
And this is the deficit country.
I'm going to.
Here just for the, for the sake of
completeness and so I don't have to introduce
anyone else imagine that everything the deficit country
is doing and the surplus country is doing.
They're doing with each other or their private citizens which is up there okay,
and not with not with some third country or with the IMF or something like that.
But once you see the logic of it you'll
see that it could be some third country in, in, involved here.
There's no particular reason for the
surplus countries to help the deficit countries.
Okay.
But, for, for, for today, it's easier to treat, treat it like that.
Because, otherwise I have to add even more balance sheets, and that's not so.
That's not so pretty.
Okay.
So how, what is it when the dealers are done and we still have, you know, and
we still have to make a payment? Okay.
We still have to make a payment.
the private agent in the deficit country still needs to sell FX for dollars.
Okay.
And those dollars need to be transferred to
be an asset of the surplus country, okay.
And if they can't do that with private dealers,
they do it with their central banks, that's the idea,
okay.
And I'm going to just suggest that it starts with a borrowing of reserves.
From the deficit country central bank, from the surplus country central bank.
Okay. So, we'll, we'll have borrowing reserves.
And
so that we have a liability. Of
[SOUND],
we borrow for a term. And I'm going to write RG here.
well, R star G.
Okay. Because G is for government.
Okay.
That the, this might not be the, the market rate of interest.
Okay.
This is an agreement between set between central banks.
And they're borrowing from,
the surplus central bank.
And the other side, so this is just there's
a swap of IOUs just like all banking is, okay?
Is a $10 spot.
Oh, that's not right, that's not right, sorry.
it's well you can do it that way, in fact I will do it that way, I will do it,
yes there's a reason I did that, $10 spot
$, $10 spot.
Instead of subtracting reserves, I'm having them
taking some risk here they're opening a
deposit account for the deficit country, and the deficit country has this $10 spot.
Okay.
Which they can now sell, they now have dollars here and they can sell that.
To their domestic domestic residents.
So
[NOISE],
plus 10S and I'm going to say that's, call that SG
FX,
so that's where instead of minus 10S here, it's
minus 10SG, okay.
So the, the domestic resident that needs dollars instead of buying
that from a private dealer is buying them from the Central Bank.
And again the, the interest rate i mean, exchange
rate that is used because the Central Bank isn't
necessarily market rate. The central bank can say we like you.
Okay, you are an important industry or
you are a connected fellow, or whatever reason.
Okay?
It, it's not necessarily a market rate of of exchange here.
And then once the, deficit country has these dollars, they
can pay them and they these are, these are, so that's
going to be a minus a ten, there was $10 spot to the credit
of the deficit country central bank. Okay.
And so there's a transfer of that,
to the domestic resident.
Okay, which is there, okay.
So it's just a, it's just a, a payment here.
[SOUND].
The consequence for the surplus central bank, if you see that.
Is that, there is an expansion of their balance sheet.
And an expansion, therefore of money supply domestically, okay?
Which they may not like okay, which, but, but this
is a surplus central bank and they could reverse that.
So, they could reverse that just by having by sterilizing it.
Minus $10
treasury bill of some kind. Minus $10
spot. Selling a treasury bill
for, for to, to, to sterilize that
[SOUND].
So this is the sterilization step, its not really a necessary
for our story here, so I'll draw a line under here.
It's not necessary for the, for the payment but I wanted to show this because
it shows why the surplus central bank, what
the surplus bank, central bank is actually doing.
If you look at the right hand side, all of these
things cancel, you know, plus, minus, plus, minus, they all cancel here.
What the surplus central
bank has actually done, okay, is to sell sell an asset.
and use the proceeds and then, lend the proceeds to another central bank.
Okay.
And it's sold an asset in this case I'm showing, it sold some government debt.
Okay, so it may be that the government of the surplus country is not so happy about
this, it's like you used to be holding treasury
bills and now you've lent this money to foreigners?
I'm a little worried about that.
That might
ring a bell to you, okay, about the
financial crisis that we were, that we're talking about.
So maybe you won't be able to do this but,
but this is the, this would be the sterilized thing.
Here this story is the equivalent sterilization
activity here would involve expansionary. Plus,
plus 10 let me just get this, the way this right in the, in the notes.
plus 10 times the spot rate FX term
so that might be a treasury bill. A, a, a ter, a term
deposit, it might be here. And plus
10S G FX spot.
Here.
And what, wha, the reason I, so this
is the sterilization equivalent for the deficit country.
And again you see a bunch of stuff canceling
here what do we see here that spot here.
So I think, this cancels, this cancels, this cancels, this cancels.
So the parts that are left are here and here.
What is this central bank doing? It's borrowing term,
dollars and it's lending term effects.
Does that look familiar to you? Okay.
Yeah. It's being a speculative dealer.
That's what it's doing.
It's taking the net, a naked forward position
in its own, in its own currency here, okay?
And it's doing so without a profit motive, okay.
These, these rates here this, this R, R g, okay, and this S g are
not necessarily rates that are going to, going to,
going to give you an expected profit on this.
If there was expected profit
on this.
The private dealers would be doing it and there'd
be no need for the central bank to do this.
Okay.
So this a sense I'm, I'm, I'm this, this whole example
is rigged to try to or I won't say rigged designed, okay.
Is designed to show the sense in which central bank is
acting as a back stop for the, for the foreign exchange market.
Okay.
It's acting as a back stop for the foreign exchange market.
As a consequence of it's commitment to peg overnight interest rates, okay.
Pegging overnight interest rates leads it to wind, winding, winding up being
in this position where it's the foreign exchange dealer of last resort.
Here.
and I'm showing you that foreign exchange dealer last resort behavior.
Now knowing that it's going to be the dealer
of last resort it may well intervene earlier, right.
Because if you, if you look at, if you look
at this you can say well the matchbook dealers okay.
What they need to do their business is somebody whose willing to take this naked
exposure here and if, it may well be, you know, that these private dealers
here are just charging a ton of money in order to take this naked exposure.
The central and, and notice what they're doing, they're
pushing the forward rate away from its efficient level.
Okay.
So the central bank may say, I'm going to intervene before that.
These private dealers are just asking an arm and a leg to make this market.
I'll make this market. I'll make this market.
Okay. And I will provide the,
the forward hedge for the matchbook dealer.
I'll do that myself.
Central bank, the central banks that do that are typically central banks in
poorer countries or countries where there aren't
very well developed foreign exchanged dealer markets.
Okay, and so the, the premiums could be very large.
Okay. And so the central banks say.
I know I'm a minor currency okay, but my people are just as important as
your people.
And I'm going to, and you're charging an arm and a
leg and you're pushing prices away from their efficient level anyway.
So here I've just given you an argument for, for why exchange
intervention might sometimes be efficiency improving, okay.
Its efficiency improving precisely because the private dealer system needs profit,
it needs profit in order to and, and that
means that prices get pushed away from their efficient levels.
If you are a government, if you are a Central bank or
a treasurer you care about this, these prices are signals you know.
Right?
Economics tells you that. These prices are signals.
They're telling your companies, are you competitive?
Are you not competitive?
All of that, you know.
These are signals. and similarly,
interest rates you know, pushing terms rates around.
You know these are signals about is, is saving scarce?
Is saving not scarce?
But these signals are sending the wrong signal, you know.
It's not saving that's scarce.
Here, okay. It's liquidity that's scarce.
It's liquidity that's scarce.
And the central bank can make it less scarce okay, by acting as a dealer itself.
By saying I can lose money,
I don't care if I lose money for
a national purpose like helping industrialize my country.
Or I can just make sure that I don't, that, that my profit is zero okay,
as opposed to a private dealer who is
going to insist on the profit being positive, okay.
You could, you could not even say I'm going to lose
money I'm just going to make sure that I don't make money.
Okay, I don't, I don't, I don't need to make positive profits here.
My view is that the people, these people who
are doing the trading of goods, okay, are my people.
And I need to help them do
their foreign ex, foreign trade and it's actually going to be beneficial
for the country even if I don't make any money doing this.
So this is an argument for the money view for
why sometimes it might be, okay to have foreign currency intervention.
But be careful, it's not a general blanket
[LAUGH],
approval, right.
if your going to the business of offering foreign exchange
hedges to the world as a central bank and you say.
I am going to sell you, I'm going to, I'm
going to go in the business of, of doing these
naked speculative positions and I'm going to let you hedge
anything and you you offer that to the world, okay.
You're, you're, you're going to cause a bubble,
you're going to cause all kinds of problems,
okay.
So it's not, it's not a blanket, it's not
a blanket endorsement of currency of currency manipulation at all.
OK.
I'm just, just showing that one consequence of realizing that
the way the private market works, is, is by distorting prices.
Sometimes, sometimes there distortions can be very large.
If they're very large then, I think you do
have a prima facie case for the central bank intervening.
But, if they're very small. Why, why bother with that?
Okay?
Because you're, you're messing, you're messing with markets
that you want to be deep and liquid
and if you don't let them make money,
they're not going to do these things, okay?
You, you, you want these markets to be out there operating, so that you
don't have to be making political decisions
about who gets foreign exchange and who doesn't.
Okay?
Which is what you going to have to do. You can't be offering this trade
to everybody, okay, or you just going to, you're just,
you're just offering Golden sacks their next bonuses, okay.
That's not what you want to be doing.
Your, your, the reason you're intervening is to facilitate the
underlying trade okay, that's happening and not to let the scarcity.
A foreign get in the way.
