Monetary Policy Transmission Mechanism

 US Monetary Transmission Mechanism 

From a presentation by Jonathan McCarthy of the NY Fed .back in March.   Neither the Fed funds target nor the change of reserves directly impact aggregate demand.   

McCarthy identifies six channels by which monetary policy changes can indirectly impact demand:  interest rats, exchange rates, wealth effect, balance sheet, bank lending and portfolio balance. 

ECB Monetary Policy Transmission Mechanism

And how the ECB understands the transmission mechanism of its monetary policy.  

A compare and contrast essay of the two is stuff that a dissertation is made of.  For our purposes here, note that the output for the ECB is price developments.  For US monetary policy it is aggregate demand.  

Many of the components and factors are indeed the same, though the Federal Reserve has a more significant role for policy communication and commitment.  

Perhaps from another perspective, the US transmission mechanism is about what policy can do, while the ECB's transmission mechanism seems more to do with the limits of monetary policy.  

Hear the Bond Markets Howl

What to expect ?

Erratic and irrational behavior in the markets puzzled lots of investors.  To understand these patterns and what to expect here some thoughts.

“Thinking About Thinking?”

“Thinking, good thinking that is, is a lonely sport. This may explain why so many of us do it so poorly. Good thinking is also an inefficient process. It takes a lot of thinking to come up with those few good, new ideas that are clearly worth thinking about – ideas that can be exploited in the marketplace. Particularly, as often accurately noted in 1912, ‘Most coming events cast their shadow before, and it is on that intelligent speculation must be based.”

“At the heart of the thinking process is the need to anticipate change correctly, and on a timely basis. Investment thinkers must develop for themselves a model, or systematic perception, as to how markets really work. Those believing strongly in the efficient market hypothesis are, of course, relieved of such undertakings. However, as is becoming increasingly clear, portfolio theory does not fully explain security price movements, either here or abroad, or tell us too much about how to achieve better-than-average performance. Most practitioners of active money management need to improve their thinking procedures.”

... Arthur Zeikel, “On Thinking” (1988)

What does it mean? 

It means that a deep, underground redevelopment, is occurring. He is not apparently seen because currents and force of opposite senses confront one another and fall out, the incidental mingles with the fundamental. 

- The transition in the United States is prepared, the reduction of the purchases of titles, reduction of QE, can be that this reduction will concern the most questioned part, the MBS. 

- Success, success of Japanese politics are doubted, they become nervous 

- They become aware of the unexpected largeness of consequences not wanted of the led monetary policies and contradictions which they carry in them. Of the importance of capital flow and their destabilising character. Perhaps even the myth of the omnipotence of the Central Banks is flaking. 

- A more realistic evaluation on European situation is carried. And, what was put aside during the weeks of speculative euphoria, cost as a boomerang. All the more so as financial status, true, not that of Rajoy or Holland, deteriorates and all the more so as Germany hardens discreetly its conditions of structural reforms. Perhaps that Turkey makes think to the sorcerer's apprentices of social destabilization. 

- They note down the next revision, independent check, strong word is "independent", of balance sheets of the European banks and of the position of Germany which wants that every country audits its situation itself, and makes it at the need by amputating the creditors and agents of banks. 

- They pay attention to the worrying purposes that one neglected until then. 

Two weeks ago, it was Volcker who made a peremptory condemnation of the politics of Bernanke and its phantasms. Some days ago, it was Fisher of EDF of Dallas that demonstrated its disapproval with a barely diplomatic vigour. Then, it was the turn of Esther de la Fed of Kansas City. 

What is not perceptible, and it is the same error as at the time of the crisis of subprimes, it is that very, in reality, in spite of visible diversification, everything is corrélé. The error of the models of risk on subprimes was not to take into account the fact that the subjacent was the same: the accommodation. And that it subjacent, by phenomenon of crowd, could very well follow not linear ways, ways of contagion. 

What is not perceptible in current stage, it is that everything is also corrélé, by means of subjacent discreet who joins all assets, their price, their volatility their risk and it under - ownerless that bursts eyes but which are not seen, it is the currency. 

What is in the middle of any financial transaction, of very market, it is what they receive least, what they want not to see, what the maitres of the world retracts, the currency. We say that opposite force which is in work conceals, distort phenomenon, but we are attending repetition, in the first starts, of a new stage of crisis. New borders are touched.

Russian - Swiss Innovation Day

The New Economy and its Global Challenges 

- Shared Experiences between Switzerland and Russia - 

The first " Russian-Swiss Innovation Day ", organized on the initiative of Mr Frederik Paulsen, the honorary consul of Russia, gave us a chance to compare the logic of innovations between Switzerland and Russia. It was held at the Rolex Technology Center, landmark building of the Swiss innovative spirit, it gathered more than 350 participants.

This comparison may seem surprising at first. If we look at the relative size of these economies, Switzerland is a squirrel and Russia would be a bear. Yet, in terms of innovation, Switzerland weighs much more than what we could imagine on the basis of its population and its territory. The success of the Swiss "model" innovation is undeniable and supplies the dynamism of the Suisse Romande. Export sectors of pharmaceuticals, medical equipment, precision mechanics drive the economy and are strongly linked to innovation.

The latter are aggregated and are now clusters of innovations that are mutually reinforcing. We can therefore speak of the creation of an "innovative district" about the group consisting of around Lausanne and its surroundings. It is run by prestigious universities (UNIL and EPFL among others), both public and private laboratories, some of which are home to giant projects like Human Brain, and companies ranging from start-up to the multinationals through medium-sized companies.

The foundations of the existence of the “regions of innovation”

But how can we succeed in creating a dynamic set on innovation? Skolkovo project officials presented their vision of this ambitious project which already attracts considerable capital. Announced with great buzz by D. Medvedev when he was president, however, it seems to have been significantly reduced and led to investigations for embezzlement of public funds. It counts today (2013), by Mikhail Myagkov, Vice-President of the Skolkovo Institute, only thirty-eight students at Skolkovo and it is expected to have no more  than two thousand  in 2018. This means that it is far not only from the major platforms such as Silicon Valley (with Stanford University) or the Boston area (with MIT), but also compare to the region of Toulouse, France. Skolkovo is even smaller when compared to the center formed by the EPFL, which account for its 4,000 students and nearly 2,500 full-time researchers, or UNIL in Lausanne.

Traditionally, the innovative regions are created around big universities. From this point of view, the presentations of the president of the EPFL Mr Patrick Abisher, of Dominique Arlettaz, the rector of the UNIL or of Martin Vetterli, the National Head of government of Helvetic research sharp on from the speech admitted by the representatives of Skolkovo. 

They besides stressed three points which were essential in the constitution of a «region of innovation» around Lausanne.

The first is the presence of big multi-disciplinary university institutions which assure the existence of a reservoir, both by the professors and by the advanced students and postgrade, for innovation. The big universities, through the offer which they bring on the same place but also by the habits of cooperation which weave between students, teachers and researchers, are therefore particularly important fields from this point of view.

Second is the importance of public financing. These last are essential at the same time for the development of basic research, but also to a large extent of applied research. Indeed, as well as various dealers reminded of him, different Swiss public funds contribute at the level of 75 % to 90 % (according to plans) in the total financing. At a time when they do not cease extolling the charms of (Private Public Partnership), it was good that is restored the truth of figures.

The third key point widely noted by stakeholders, is a spirit of openness, both vis-a-vis researchers from around the world from the point of view of businesses, they come, attracted by the "district innovation "or the start-ups. On this point, the participants emphasized the high "mortality rate" in start-ups (about 90%). In fact, given the extreme novelty of the areas where these companies grow, failure is statistically more the rule than the exception. This is the principle "trial and error" that is the only to reach a good relationship between an innovative principle and a particular form implemented in a given company.

Innovation in Russia

One might think that Russia is well fenced in  projects without a future, but it is not the case. Other speakers have shown that innovation is growing rapidly in many cities in Russia through the creation of science parks -Technoparks-  and incubators. In fact, for nearly four years, all the major state universities and the Specialist Schools have created innovation parks. The most famous is undoubtedly that of the University of Novosibirsk, but others exist in major academic centers.

They are the product of a strong interaction between the scientific potential of high quality and funding, direct or indirect, of the state. Industry, both Russian and foreign, also does not make mistakes and develop (or acquire an interest) next business parks and incubators which develop these "clusters" of innovation.

There is thus not only the innovative potential of Russia is important in these areas, but opportunities and markets exist. International cooperation on some of these projects are already largely developed. The Director of the Department of Innovation Rostekhnologia (SOE) and the Rector of the Moscow Institute Baumann emphasized the synergies that are taking place for several years between basic research and application development, which then ensures Rostekhnologia industrialization or in state-owned companies or in joint ventures.

Mrs Irina Ananich, head of strategical cooperation to the Russian agency of energy stressed biomaterials for the development of alternative forms of energies. Studies, among which some were jointly led with Swiss companies, showed the interest of the creation of thermal power stations of small sizes to give energy in a decentralised way, especially in the case of the rural communities. These power stations should use the waste of agriculture (the biomass). Also, the use of some waste to feed thermal power stations is a solution for cities. A particularly important point is that the question of the development of new energies go hand in hand with that of the treatment of waste but also that of the treatment of the water. There is therefore here a very significant example of the necessity to link different disciplinary fields in the field of the sciences of nature (from biology to the physics), but also to link them up with social sciences, as economy (for an analysis of costs), sociology or demography (to envisage the temporal dynamics of these communities). Other examples were given, which confirm the necessity of it «to think global» which is at the root of modern innovation.

Skolkovo would not therefore have become the tree which conceals the forest. Innovation develops fast in Russia. But, all this will have sense only if the movement of investments in fixed assets stays in Russia. So that innovations spread in the country, it is not only necessary that the investment develops, but that the part of this investment which concerns the industrial equipment does not weaken.

Innovation is not therefore initiated out  of people shouting and jumping on chairs "innovate, innovate …". It can not be imposed either by the creation of specialized public agencies targeting a particular area, even though it may require the establishment of appropriate financial institutions. It involves thinking globally economic policy and system research and education. It also involves maintaining a balanced to ensure demand economy. It involves, finally funding in all its complexity, and to ensure that the micro-instruments, but also macroeconomic (and in the foreground with the monetary policy of the Central Bank) are consistent with this policy. Finally, it requires constant commitment of the State in all its ways. None of this is easy, and some of these instruments could be inconsistent with the current rules of the European Union.

It also proved that  the Swiss economy is much more than only its three caricatural poles : banks, watches , chocolate !

From Skolkovo to Kazan, visit top innovation spots 

Held last April in Moscow and Kazan, Tatarstan, the 2013 edition of the Russian tech tour offered yet another illustration of the growing appeal of the Russian tech scene to venture capitalists.

Not only did we visited some of the Russian capital’s hottest tech spots, from Skolkovo to Digital October Skolkovo to Digital October, we also paid a two-day visit to Kazan, the capital of Tatarstan. At 500 miles from Moscow, this autonomous Republic of the Russian Federation has developed several major innovation projects  over the past few years.

The Kazan part of the tour very much impressed the foreign participants. We highly appreciated the quality of the projects, not to mention the city’s historical heritage.

Twenty-five startups were presented to the tour’s participants – selected from among 150 applicants. The better part of these finalists were  IT companies, but others related to cleantech and renewable energy, new materials and processes, and medical instrumentation. Just two were applying for seed funding while 32% were at start-up stage, 56% at expansion stage, and one presented itself at being at pre-IPO stage.

Tech Tour’s 25 select emerging Russian tech companies

Please click here to download a more detailed overview.