In Zimbabwe, the new currency of choice as a medium of exchange (and soon as a unit of account?) will be gas coupons.

Bidders (at a car auction) must put down a deposit of 1,000 liters (220 gallons) of gas coupons, worth about $1,500 at the current gas price in Zimbabwe, and pay the rest in coupons when they pick up their purchases.

Zimbabweans face acute shortages of local currency. Already gas coupons can be used to pay some household accounts. Many businesses also pay workers part of their earnings in scarce foodstuffs, or demand dollars for purchases, which is illegal.

It's worth remembering that this currency shortage doesn't mean that there's not enough currency. Rather, there is so much money that nobody wants to use it. (cf. Hans Sennholz.)

From the same story, the removal of zeroes from the currency had as expected no effect, but

Obsolete coins also have been revalued, sending Zimbabweans hunting for coins they squirreled away in recent years.

Shops battled to count heaps of coins, causing long lines at checkout counters. One enterprising Harare business on Tuesday advertised coin weighing machines that even banks had discarded after coins went out of circulation in 2002.

Shopping and visits to cafes and restaurants became further confused this week by a range of different exchange rates used against the U.S. dollar.

On Wednesday, banks quoted the official exchange rate at about 10 new Zimbabwe dollars (1 billion old Zimbabwe dollars) to a single U.S. dollar. Businesses quoted an exchange rate in new dollars of between 25-1 and 100-1.

There is thus not only uncertainty about which currency gets used as the medium of exchange, but also what numeraire to use. At these levels, the output costs of hyperinflation must be huge.

Labels: economics, Feminists, inflation, money

Controlling P-R-I-C-E.

Seeking to tame galloping food prices ahead of parliamentary elections in early December, the Russian government on Wednesday signed an agreement with major food producers instituting temporary price controls on basic products.

A tersely worded statement posted on the Web site of the Agriculture Ministry said the producers had signed the agreement “at their own initiative.”

“Producers and retail organizations, understanding the social responsibility of business in the balanced and stable development of the consumer market in Russia, will take necessary measures over the course of the agreement to ensure that the most vulnerable strata of the population can purchase products at acceptably stable prices,” the statement read.

Prices for products like cheese and vegetable oil have jumped and even doubled in some regions in the past two months.

Here's the Nixon period from Commanding Heights. Arthur Burns at the Fed raised the money supply 13% in that period in advance of Nixon's re-election. M2 in Russia at this time is up almost 28%.

A deep recession followed the relaxation of price controls in the US in 1974-75. Those investing in Russia are hereby warned.

(h/t: Greg Mankiw.)

Labels: economics, inflation, money

I realize that to some readers details of monetary policy are arcana. If you feel that way, go to the next topic; I'm going to work through this morning's report on the Federal Reserve's increased transparency proposal.

The discussion about Ben Bernanke since the minute after he was nominated to chair the Fed was whether and when the Fed would switch to an inflation targeting strategy for monetary policy. Today's report says the Fed is deferring that debate to a later time, and some might take from this that the inflation targeting is not in the cards. I read this report to say just the opposite.

The centerpiece of their new communications steps would be the release of economic forecasts of policy makers four times a year, instead of the current two times, with additional detail and background, according to people familiar with the matter. Moreover, the horizon for those forecasts would be extended to three years from two.

The new initiatives have been in the works all year. Earlier this year, the Fed had hoped to finalize them by this month. But the fallout of the market turmoil that erupted in August has complicated the agenda of next week's meeting of the policy-making Federal Open Market Committee and it may defer decisions on its communications policy to a later meeting.

Inflation targeting is really inflation forecast targeting. The central bank issues a report on what it thinks inflation will be over some time horizon. It then establishes a target inflation rate. The two put together inform one what the path of monetary policy would be. But they pretty much have to come in that order: A target without a forecast is a useless signal; a forecast tells you something even if you do not have a specific target in mind. I can think inflation should be higher or lower than the forecast without saying how much, though how much is something we would want to know.

Bernanke has been using forecasts more, elevating them in policy discussions. To have those now made public and more frequent is an important first step necessary for inflation targeting. It's not sufficient, though.

So what has to be discussed? This gets to the very heart of the Federal Reserve Act of 1913, the law that created and controls the behavior of the Fed. The Federal Reserve has a dual mandate to both maintain price stability and provide for high employment. Frederic Mishkin, in an interview just published by the Minneapolis Federal Reserve, discusses this compared to the European Central Bank, which has a mandate for price stability first. He says

The Congress has given us a dual mandate; that is, the Federal Reserve seeks to promote the two equal objectives of maximum employment and price stability, so that's what we have to execute. Even if the Congress hadn't given us such a mandate, the basic structure of the dual mandate is what I would feel is appropriate, and so we should be aiming to pursue such an objective anyway.

A hierarchical mandate says that first we focus on price stability and if we're successful then we'll focus on other concerns, particularly output fluctuations. If you interpret a hierarchical mandate as focusing on price stability in the long run, making sure that long-run inflation expectations are grounded—and we've seen tremendous success not just in the United States but in Europe in terms of grounding inflation expectations—then the dual mandate and the hierarchical mandate are identical.

Some people have said to me that the dual mandate versus hierarchical mandate dichotomy is a red herring. I don't agree, because I think it is an important issue in communications strategy. It's important to make it clear that you care about output fluctuations, but you're going to look at this from a long-run context and never take your eye off the inflation ball. That's the right way to do the dual mandate.

Similarly, with the hierarchical mandate, you should not be an “inflation-nutter,” as Bank of England Governor Mervyn King has expressed it. That is, you shouldn't be focused solely on inflation control. You must also worry about the fact that if you act too quickly to get inflation down to your long-run objective, you might have excessive, unnecessary fluctuations in output. So I think modern monetary theory, in writing down a hierarchical mandate or a dual mandate, will write exactly the same loss function, exactly the same kind of optimization theory for a central bank.

My suspicion is that this statement by Mishkin reflects Bernanke's view as well. (It's very unlikely that in a Fed publication a governor is going to say anything contrary to the view of the Board.) So the Fed may think it can accomplish the inflation target within the context of the dual mandate. But it has a second issue -- does it have complete goal independence to make this statement on its own, or will it need Congress to give some support? I turn to the means by which the Bank of Canada adopted inflation targeting, in which the Bank and the government made a joint statement in 1991. In both cases, the legislature can stop a proposal to create inflation targeting; in the Canadian case, the Bank was able to convince the government of its plan. (I'll point to this paper by Michael King for Canadian central banking history.)

It is interesting then that the Fed continues to refer to these changes as part of its communications strategy. Communicate with whom? I suspect communication is much towards Congress as it is with Wall Street. It needs at least tacit approval from both, in my view, to put inflation targeting on the front burner, and it may need legislation -- something to which both Congress and Wall Street will be loath. It should make for an interesting few years with Bernanke's Fed.

Labels: economics, Federal Reserve, money

When I worked in Ukraine it wasn't unusual for there to be problems with small change in retail transactions. Indeed, more than once I got a stick of gum for change in lieu of, say, 1000 karbovanets (would would have been $.006). I took the gum, never chewed it (I could only imagine what would be in my mouth), and never could pass it off as Krb 1000. I suspect I mostly threw them away. That's a loss.

Frank Stephenson today writes of a small currency problem in Guatemala that was due to government error. A friend of his in the country wrote:

Last year -nearing the Christmas season- the Banco de Guatemala (our central Bank) acknowledge to the embarrassment of it's authorities that it had run out of cash (due to bad planning, really). You can imagine that a large portion of Christmas sales in Guatemala are transacted in cash so the ineptitude of the central bank caused a mini-crisis specially in rural areas. The Banco de Guatemala did not acknowledge this but I know that they were purchasing Q20 bills for up to Q40 and Q50 (!!!). Somebody made a bundle out of this mess.

There was a period in Ukraine where the public phones needed coins that were worth maybe Krb 10 at a time where Krb 40,000 bought US $1. (Note: the karbovanets was Ukraine's temporary currency in the early 1990s, replaced by the hryvna in 1996.) The coins were worth far more for the metal than their exchange value, so they became scarce. But you needed them for calls, so babushkas would trade them at 15-20 times their face value. Some complained of this 'profiteering', so the government -- which owned the phone company still -- simply made public phones free. Result: babushki impoverished, and the phones soon neglected, broken and vandalized.

Tyler Cowen noted a few months ago that this phenomenon of small currency shortages is pretty common. Recommended therein is this book by Tom Sargent and Francois Velde, reviewed by Art Rolnick and Warren Weber at the Minneapolis Fed. But those stories apply mostly to token money (coins made of base metals worth much less than face value), not the paper currency Stephenson describes.

One thing I learned from gum money in Ukraine -- I used to try to buy beer on the street there (the local brand was Obolon', actually quite good in unpasteurized form if fresh), which came in both 0.33l and 0.5l bottles. I like the smaller bottles -- bring two home, one with dinner and one in the fridge for later, not too much for an evening. Alas, they are Krb 80,000 at the time and the seller didn't have change. (Gum and beer, not good.) The bigger ones? Miraculously, 100. Easier to buy those and just not finish the second ... though sometimes I did. Maybe more than sometimes...

Labels: economics, money, Ukraine

Greg Mankiw points out a press release by Rep. James Saxton that called for a Fed Funds rate cut of 25 basis points and says it's the last thing we need. Mark Thoma says "we should be very careful about compromising the Fed's ability to act independently of the rest of government."

The Milan conference was about this very point. So permit me to share a couple of thoughts. First, unlike the ECB, which has price stability as its sole objective , the Federal Reserve still operates under a dual mandate for both price stability and to promote economic growth. It is a creation of Congress. As John Wood presented at the conference, in the confirmation hearings for the renomination of William McChesney Martin in 1956, Senator Paul Douglas said:

I have had typed out this little sentence which is a quotation from you: “The Federal Reserve Board is an agency of Congress.” I will furnish you with scotch tape and ask you to place it on your mirror where you can see it as you shave each morning.

The Federal Reserve has some quasi-Constitutional status as an independent agency, but it is not above Congressional review. The degree of Congressional discretion has been long debated, but its protector is not a law; it's the bond market. (That point, by the way, is implicit in Alan Greenspan's direct-to-classic interview with Jon Stewart Tuesday night.)

This takes me to the second thought then, which is how independent SHOULD a central bank be. That is, given economic policy is something governments will do -- should they do any? take that question somewhere else please, no time for it here -- what is the optimal amount of delegation the government should give to a committee of experts? To get at that question (though it might not have been her intent) there was a presentation at the conference by Katrin Ullrich of the Centre for European Economic Research which posed the question of whether you would want to delegate fiscal policy at all. The reaction of the workshop was quite interesting; basically, you can't delegate fiscal policy because "taxing and spending the receipts of those taxes is what legislatures do." The reason we delegate the job of price stability to the sages like a Greenspan or a Trichet or a Bernanke is not just because they are smarter, more conservative (in the sense of more inflation-averse, not a political statement), but because monetary policy doesn't create winners and losers. But of course, unexpected inflation does, through the debtor-creditor hypothesis that most of my generation of economists had to learn in grad school.

Certainly on balance, economists have decided that countries where central banks are insulated from political pressure and have clear goals for policy do better in providing price stability. That's not the point -- it's whether elected officials can ever say anything about monetary policy. Most of the time what they say is self-serving blather. But if the optimal degree of delegation was 'complete' we'd all have the gold standard or a currency board and be done with it. Some economists may feel that's the right answer, but it isn't the majority. Every once in awhile, central bankers should look in the bathroom mirror.

Labels: economics, Federal Reserve, money