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

The Chinese stock market mess may have a long term benefit

The Chinese stock market rise and fall is relatively unimportant for the Chinese and global economies but it has harmed the government’s reputation and may set back reform. But it if helps to kill the idea that the market can be controlled it will have some long term benefit. * There is an old jokeContinue Reading

When should we forgive debts?

Debt is a contract but sometimes contracts must be broken, either in the mutual interests of the contracting parties or in the interests of justice. But it’s hard to come up with general rules for this. The long-running arguments about whether to forgive Greek national debt provide an example of the difficulties. * Debt isContinue Reading

Why grading class participation is wrong

Giving marks for class participation is inefficient, unfair and offers an excuse for poor teaching. It is not allowed on the Cambridge MFin. * The majority of business schools include class participation in grading of students, typically 20-30% of the total mark and sometimes more. The justification is that it rewards the type of behaviour thatContinue Reading

Socially useful finance

Evidence from Nigeria shows that access to finance can help households reduce the impact of bad luck, reducing the fall in consumption that they suffer. * Yesterday I was part of a group discussing a draft research paper on the ethics of banking, prepared for the Cambridge Judge Business School Centre for Compliance and Trust. IContinue Reading

Should we be trying to change the world?

After introducing the MFin to a group of new joiners to Cambridge Judge Business School last week, one asked me whether we on the MFin were actually trying to change the finance industry? I think his unspoken assumption was that the industry needs changing, and that if we teach students the same old finance stuff thenContinue Reading

Can a central bank go bust?

Central banks have balance sheets like other banks and in theory their liabilities can exceed their assets, meaning they are insolvent. But they can always create new money so they can settle their debts. So can they really go bust? * A bank (or any other company) is insolvent if its assets are less thanContinue Reading

Too much debt? There is a better way

Pretty much all financial crises involve too much debt. The global financial crisis was triggered by excessive lending for US property purchase. The slow recovery from the crisis is probably because of too much debt. China’s successful plan to insulate its economy from the post-crisis recession has left it with its own debt problem. ThoseContinue Reading

Africa and the “resource curse”

Sub-Saharan Africa (SSA) is abundantly endowed with natural resources, whose value has increased in recent decades. But this has not led to increased benefits for the majority of the people. A recent IMF working paper sheds more light on the challenge of making Africa’s wealth work for most Africans. Ahead of the forthcoming annual CambridgeContinue Reading