Central Bank Toolkit Gains Track Record: Cutting Research

Central banks are finding success in deploying their new tool for economic management, suggesting so-called macroprudential policy may be used more in the future.

With such policy increasingly viewed as a way to keep finance in check, Goldman Sachs Group Inc. economist Hui Shan reviewed the history of central banks trying to reduce the risk to the whole financial system from pockets of excess such as house prices.

Shan’s analysis of 20 countries in the Organization for Economic Cooperation and Development from 1990 to 2012 found macroprudential policies do affect household credit and housing prices.

Restrictive policies reduce credit growth and house price gains by one percent annually, Shan estimated. Banking regulation focused on mortgage lending is most effective in damping credit growth, while loan curbs best slow house price appreciation, New York-based Shan said in a report last week.

Policy makers turned more to macroprudential measures in the last two decades, Goldman Sachs said in the report. During the 1990s, one such housing policy was adopted per year on average, with that number increasing to eight between 2007 and 2011.

The rate may accelerate. From the first quarter of 2009, nominal house prices rose 61 percent in Israel, 35 percent in Norway, 29 percent in Australia and 28 percent in Canada. Gains in U.K. property prices are already prompting speculation the Bank of England will act.

“In the current environment where risks in the housing market and the importance of financial stability has both risen in many countries, the trend of a greater usage of macroprudential housing policies to prevent housing market overheating is likely to continue,” Shan said.

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Asia added an economy the size of Germany in the aftermath of the financial crisis and can do so again.

Despite concern China is slowing, economist David Carbon of DBS Group Holdings Ltd., Southeast Asia’s largest lender, reckons the region will still add a Germany every 3.5 years. The timeframe will fall to three years by 2018 and keep declining, allowing Asia to add the equivalent of three euro-areas over 25 years.

“For the most part, it’s brute force growth -- catchup with the West after lagging for 150 years,” said Singapore-based Carbon. “But force is force, and the shift in gravity that most denied just 5 years ago is bound to bring enormous change.”

Among the changes: more sway for Asia over global politics and financial markets with China’s yuan destined to supersede the dollar. Urbanization will also accelerate, as will energy demand and capital flows to the continent.

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Proximity means Mexico and Canada are set to benefit from a likely increase in U.S. imports of factory-produced goods, although other economies will also feel a lift.

Mexico has a 21 percent share of U.S.-bound non petroleum exports in terms of gross domestic product, while Canada has 13 percent, according to Bank of America Corp. economist Emanuella Enenajor in a May 7 report.

After them, Thailand and Malaysia have 6 percent shares, South Korea 5 percent and Switzerland 4 percent.

Such data give Enenajor reason to hope a U.S. recovery will boost global growth even though the import share of U.S. GDP has been declining since 2011. Falling energy imports and weak foreign prices explain the drop, she said.

“When we control for these two factors, the trend in real non-petroleum imports to real GDP is roughly on track as in pre-crisis times,” Enenajor said. “Thus, as U.S. real GDP growth picks up, real imports of factory goods should also accelerate, supporting global growth.”

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Falling wealth may explain why U.S. unemployment hasn’t declined more quickly.

A working paper by International Monetary Fund economist Dmitry Plotnikov found if wealth decreases, then unemployment rises for a potentially indefinite period.

This feeds the so-called hysteresis effect, where skills atrophy while people are out of work, making it even harder to find new employment.

“This feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire post-war period,” Plotnikov said.

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It’s still worth going to university.

So says a May 5 study by Federal Reserve Bank of San Francisco economists Mary C. Daly and Leila Bengali. They found a four-year college degree remains a worthwhile investment.

The average graduate paying annual tuition of about $20,000 can recoup the costs of schooling by age 40. A difference in earnings continues, so that by retirement, the college-educated worker earns over $800,000 more than the average high school graduate.

“These findings suggest that redoubling the efforts to make college more accessible would be time and money well spent,” said Daly and Bengali.

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