2019-27 Another risk to watch

This Bloomberg article discussess the worries of central bankers about one important consequence of low interest policies: risky behaviour by investors (investors here are understood, as in common language,  as people who buy stocks and bonds. Recall that, in economics, this is not considered investment: it is just a change in ownership.  We define investors as people who build new factories, machines, office buildings etc).
What is the issue: with low interest rates around the world, people are searching for return, and put insufficient weight on risk. Here are a few quotes from the aticle:
"A prolonged period of low rates could also “spur reach-for-yield behavior, thereby increasing the vulnerability of the financial sector to subsequent shocks,” .
The ECB -- whose own benchmark rate is below zero -- highlighted threats to investment funds, insurers and in some real-estate markets. It also had a warning that mispriced assets could face corrections in future.
At Germany’s Bundesbank, which has long warned of the dangers of too-loose policy, Vice President Claudia Buch says there’s an “underestimation of credit risk.”"

2019-26 China is getting old

Please read the article in the Economist, posted in Readings as 2019-26 Old China

2019-25 Cryptocurrencies in China

Don't have much future. From the Economist: 

China’s central bank announced a new crackdown on cryptocurrencies in the country’s financial hub, Shanghai. The government had encouraged the development of blockchain technology. But the bank, which has ambitions to launch its own digital currency, warned that this should not be confused with the unregulated issuance of virtual currencies.

2019-24 The world economy is slowing down

From the Economist daily update:

The OECD predicted that the world economy would grow at just 2.9% this year, its weakest showing for over a decade. The club of mostly rich countries also forecast little improvement in growth over the next two years. It blamed, among other things, political uncertainty and the Sino-American trade war, and called for clearer climate-change policies. Note: OECD - the organization of Economic Cooperation and Development - is an international organization with 36 members; mostly developed countries but also some emerging economies. More information can be found here and here. It is an excellent source of economic data.

2019-23 Minimum wage

We have just talked about the effect of minimum wages on unemployment. Please read the article:
2019-23 As Push for Higher Minimum Wages Grows, New York Offers a Test, posted on MLS under Readings.
It is a mandatory reading; there will be question (s) about it on the exam.
It describes the situation in adjacent areas in two neigbouring states: New York and Pennsylvania. New York has been increasing minimum wage significantly. It is now $11.10; next year it will be $12. In contrast, minimum wage in Pennsylvania is $7.25

Here is a graph showing restaurant employment changes in the counties at the border of Pennsylvania and New York

2019-22 FED on climate change

The US central bank, FES, has a dual mandate: "The Fed is legally charged with promoting stable prices and maximum sustainable job growth". It has recently started paying attention to global warming. The article posted under 2019-22 Readings describes the discussion. Please read the article.

2019-21 Interest rates and exchange rates

On Wednesday, the Bank of Canada kept its policy rate unchanged, while the Federal reserve reduced its policy rate by 0.25%. As you recall from chapter 4, that should result in a appreciation of the Canadian dollar. As you can see on the graph below, it actually depreciated.
Why? Hard to say. Perhaps currency traders expect that, with the US central bank stimulating the economy and Canadian central bank doing nothing, in the future the US economy will get stronger.
A more sinister explanation: currency traders got convinced, just before the US central bank move, that interest rates will fall. This means bond prices will increase. So they sold various assets, including Canadian bonds, and bought US bonds.

2019-20 Challenges for the new President of the European Central Bank

Christine Lagarde, the former French finance minister and head of the International Monetary Fund has started as the President of the European Central Bank (ECB); the home of the Euro. There is an excellent summary of her challenges in an e-mail from the Economist.
1. The European economy is weak, and the economy of the biggest country, Germany. is shrinking.
2. Central banks are run by committees (in ECB: the Governing Council), which is divided; her role would be to build a consensus.
3. The division in the Governing Council is about how aggressive should monetary stimulus be. In the latest round, 
- the policy rate (a short-term interest rate controlled by central banks) was reduced to -0.5% (i.e. banks that keep their reserves at ECB are charged 0.5% per year).
- ECB restarted a bond - buying program. ECB buys bonds, which raises bond prices and reduces their interest rates.
All this is to increase inflation in the Euro area to the target, just under 2%. As the graph below shows, the inflation rate has been around 1% for several years now (the core inflation, which excludes prices in volatile categories: in particular oil and food, is the one that matters).