Wednesday, December 7, 2016

More on pins and rates

"When targeting a bond (of anything but an extremely short maturity), a central bank can determine either the price or the quantity, but not both. "

".... a useful recent analogy is the Swiss National Bank’s effort from September 2011 to January 2015 to cap the Swiss franc versus the euro (Cecchetti and Schoenholtz 2015). The SNB committed itself to acquire euros without limit, making the size of its balance sheet endogenous. However, doubts about the commitment, reflecting financial disruptions in the euro area, the advent of quantitative easing by the ECB, and Swiss political concerns about the potential losses on SNB holdings of euros, meant that the SNB had to acquire a massive volume of euros—as much as 70% of GDP—to maintain its commitment. As a result, when it reneged on the commitment in 2015, the SNB experienced large capital losses."

What losses if the cost of the francs sold was zero ?
" ? making its balance sheet endogenous, a central bank that targets a government bond yield passes monetary control to the fiscal authorities, who decide how much of the yield-targeted instrument to issue. "

Yikes ! 

"The most well-known central bank experience with targeting longer-maturity government debt was 
the Fed’s commitment to cap the US Treasury yield curve beginning in 1942. The yield curve pledge facilitated wartime finance. Following WWII, however, inflation reached double-digit levels during 1947 and 1948. It wasn’t until the Treasury Accord of 1951—amid inflationary pressures from the Korean War—that the Fed was able to exit this commitment, and only after open confrontation 
between the Fed and the Treasury..."

Imagine if they'd had a Colander Lerner  cap and trade mechanism 

Double yikes !!

1942 to 1951 

Possibly the greatest performing decade in our industrial history