What exactly is “the” exchange rate?

Exchange rates are ratios of the price of one currency to another. We should be careful about saying “the” exchange rate without being clear as to which particular ratio we mean and why. * Exchange rates often dominate the financial news. In 2016 the Chinese exchange rate has been frequently mentioned as a source of concern.Continue Reading

Markets versus economics

The turbulent financial markets in early 2016 can be seen as a battle between two groups of ideas – the economists see little reason for sudden concern but the markets are worried about hidden risks * Global stock markets performed worse in the first few weeks of 2016 than in living memory. Since markets are supposedContinue Reading

Davie Bowie innovated in finance too

David Bowie, among his many other creative achievements, was an innovator in finance, with the first ever intellectual property rights securitisation. * Nearly everyone seems to have been affected by the death of David Bowie, a uniquely creative and influential musical artist. I’ll add my own personal memories to the list. I think the firstContinue Reading

When bank notes were fun

The ever fascinating blog of the New York Fed tells us that, among the many different types of bank note issued by around 1,600 US banks during the nineteenth century, some included pictures of Santa Claus. Only in 1861 did the Federal Government start issuing paper currency; from that point the Treasury had a monopoly on noteContinue Reading

Some quotations on my birthday

Be kind, for everyone you meet is fighting a hard battle. Plato (possibly – it is disputed) [I]in the whole world there are really only two problems. [..] One problem is, “you know what you want but you don’t know how to get it”, and the only other problem is, “you don’t know what youContinue Reading

Why nuclear?

Nuclear energy brings a lot of problems but it is a necessary part of the fight against climate change * I recently did a webinar about the planned new nuclear power station at Hinkley Point in Somerset, based on part of my forthcoming book The Fall and Rise of Nuclear Power in Britain – AContinue Reading

The IMF includes the RMB in the SDR basket

On 30 November 2015 the IMF voted to include the RMB (the Chinese “people’s currency” denominated in yuan) in the basket of currencies it uses to calculate the value of the Special Drawing Rights, from October 2016. This is largely symbolic but should encourage further international financial reform in China. * What does it actuallyContinue Reading

The true story of the Euro crisis

Most economist agree on the causes of the repeated crises of the Eurozone but that explanation is not the one that many governments, and the European Commission, want you to believe. * The problems of the Eurozone – bank failures, sovereign debt crises and bailouts and above all a protracted recession and mass unemployment –Continue Reading

Changes in the Federal Reserve’s measurement of short term interest rates

The Federal Reserve, the US central bank, is making some changes to the measurement and monitoring of the short term interest rate between banks, which is its key target for monetary policy, * Most central banks have goals such as low inflation and high employment. After experimenting over the years with tools to achieve these goals, mostContinue Reading

Cash remains king

Despite the increasing ease of electronic payments, cash remains popular in the UK, according to the Bank of England. * Money is anything that fulfils the three functions of money: i) a means of payment; ii) a unit of account; and iii) a store of wealth. Physical cash does all of these rather well andContinue Reading

Global foreign reserves are now falling

The foreign exchange reserves held by governments, having risen for over a decade, have recently fallen. This is mainly because they are being used, as intended, to protect against turbulence in financial markets that would otherwise hurt the developing economies. * Foreign reserves are assets held by governments as a safety net against abrupt changesContinue Reading

Bank executive pay appears rigged against women

Research from the Federal Reserve Bank of New York finds evidence that women’s pay in banks is not just lower than that of men but the structure is different, in a way that best be explained by the view that boards decide pay, not based on economic efficiency, but on the basis of power, whichContinue Reading

Is a market determined exchange rate always a good thing?

For years there has been pressure on China to allow its exchange rate to be determined by market forces rather than by the central bank. Now that seems closer to happening but it might mean a fall in the RMB, which is not what most of China’s critics wanted. * For years, China held downContinue Reading

Thinking about the risks to global economic growth

The fundamentals of global economic growth seem broadly positive but there are some reasons for caution, which can be understood through the savings-investment framework described in the previous blog. If savings are “too high” or investment “too low” then the equilibrium rate of interest that makes savings and investment equal may be negative. That meansContinue Reading

The elements of macro-finance

Macroeconomics is a complicated subject but it’s possible to understand quite a lot about the key questions in macro, and some of the policy challenges, by considering a few key concepts. This blog gives the elements of what ties macroeconomics to finance. I’ll apply these concepts in a follow-up blog to try to explain why thereContinue Reading