BoE nudging mainstreamers toward re-discovery of credit channel ?

Looks as if just before the yachting season BoE economists have allowed themselves another peek beyond the pale of the classic Savings&Loans specs:

… “No existing studies that address the comovement puzzle account for the empirical movements in bank equity and credit spreads (see eg DiCecio (2009); Sterk (2010); Carlstrom and Fuerst (2009)Katayama and Kim (2013)Di Pace and Hertweck (2019) among others). …

Developing structural models which resolve the comovement puzzle has important policy implications since a lack of comovement can result in near monetary neutrality. We show that supply-side financial frictions are an important mechanism to resolve the comovement puzzle. This channel can be complemented by other mechanisms suggested in the literature – we show for example that the financial channel is strengthened by the introduction of nominal wage rigidities. However, our work accounts for an important dimension that has been ignored in the existing literature on the comovement puzzle. As a distinguishing feature to previous work, we highlight the importance of the financial channel. It helps not only matching the empirical comovement between expenditure categories, but accounting for financial frictions is also crucial to resemble the empirical responses of the excess bond premium and bank equity to an unexpected monetary contraction. …”… – June 2021 – sectoral-comovement-monetary-policy-and-the-credit-channel – Federico Di Pace and Christoph GÖrtz – PDF hereBankUndergroundMacroeconomicsMonetary Policy  17 8 2021  Federico Di Pace and Christoph Görtz

Except for some Austrian, Marxist or otherwise heteros who more or less unwittingly host in the utility room of their conceptual mansion a defunct saving&loans expert, the “loans create savings” versus “savings create loans” dichotomy roughly matches hetero- versus ortho-economics.

Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a two-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalise the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis, creditors stop financing debt rather than current accounts, and because following a crisis, current accounts are not the primary channel through which balance sheets adjust. Second, we reinterpret the global saving glut hypothesis by arguing that US households do not finance current account deficits with foreigners’ physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin’s current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by US and non-US banks rather than US current account deficits. Finally, we demonstrate that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate sets of economic decisions. 8/2020 How does international capital flow? By Michael Kumhof, Phurichai Rungcharoenkitkul, Andrej Sokol

It speaks to the ideological and ahistorical rigidity of the Academy that it takes contemporary DSGE-speaking , bank employed researchers like Kumhof etal to pierce clogged academic ears and embolden The Economist to occassionally reconsider the savings&loans dogma.

As Larry Summer’s daring reconsideration of Wicksellian wisdom showed, what follows is a big fat headache of undisguised confusion in face of too many uncomfortable implications.

The Economist article illustrates just how much confusion there is over the accounting identities that describe the balance of payments. The piece starts out by reminding readers of a reference Ben Bernanke made in 2005, when he was chair of the Federal Reserve, to a “remarkable reversal in the flows of credit” to emerging economies, particularly in East Asia. These countries had begun to save more than they invested at home, morphing into a “net supplier of funds” to other parts of the world. He called this a “saving glut.” …

It is true, as the Economist points out, that the flow of financial savings is not the same as the flow of savings that occurs through the current account, but the concept of a saving glut nonetheless remains a very useful concept in understanding trade imbalances. As Matthew Klein and I discuss in the book Trade Wars Are Class Wars, ever since the late twentieth century, the main sources of trade imbalances in the advanced economies have been savings imbalances caused by distortions in the distribution of income in surplus countries. But while these savings imbalances are exported through the current account, the impact they have on global imbalances can best be understood by the capital account, namely the way in which current account surpluses are paid for by the acquisition of claims on foreign assets.” 12/2020 Saving Gluts and American Financial Imbalances Michael Pettis

But the typically younger Kumhofs of the profession seem intent on nudging at least themselves off the myopic mainstream. Perhaps because it offers zero relevance, or because one finds oneself unable to disagree with the conclusion reached by virtually all who can be bothered to actually engage in the argument, rather than mimic the defensive aggressive ad hominems of the intellectually insecure incumbent.

Abstract – In his recent article, Keen resumes the debate with Krugman about the effects of debt upon the economy. It is hard to see how the question can be settled as long as all participants apply their idiosyncratic models. Hence the issue boils down, as Krugman rightly put it, to the deeper question: “how should one do economics.” Sketched with a broad brush, the consensus is that Orthodoxy has failed and that Heterodoxy has no convincing alternative to offer. The conceptual consequence of the present paper is to restart from a firm common formal ground. This relocation makes the debate solvable.  2014 Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right by Egmont Kakarot-Handtke

Or is it , yet again, that due to closer vicinity to reality, bank employed economists are having to actually think creatively rather than defensively?

And should anyone even care as Anglo Conservatives have shown how there is no need to give a farting farthing about economists’ rationalisations of the status quo. As Boris’ Tories demonstrate, you can worship Ayn Rand on Sundays and practice Corbynism during the week. If power requires symphonic incontinence, then yesterday’s austerity gospel can be rebranded into its opposite with just a whimsical whistle of political rhetoric.

Such fun but hard to keep up at times?

Just follow the money…

see also


GaiaMoney YouTube





Leave a Reply