Wednesday, October 29, 2008

deja vu all over

I don't know if it's just me, but the global financial crisis seems to me written "deja vu" all over it.

I will not dwell into the comparisons with Japan's financial crisis and lost decade; there are many excellent articles on that topic. Nor would I like to don the cynical Cynaro costume and bash developed country governments for having lectured to Turkey and other emerging markets that "markets are good, government intervention is bad". What makes me scratch my head and wonder "where I've seen all of this before" is two smaller examples from my own SOE (small open economy), Turkey:

First, as you can see in the excellent posts by Brad Setser and James Hamilton, following Fed's balance sheet has been a favorite pastime for economists. I do not want to do the guy an injustice (and I dare not, knowing he is an accomplished boxer), but Deniz Gokce made a name for himself in the 1990s with his interpretations and explanations of the Central Bank Analytical Balance Sheet. At the time, market participants tried to get a sense on where USDTRY was headed by looking at the balance sheet. In addition, with the Treasury being funded by the CBT, following the balance sheet was an important indicator where the economy is heading. Deniz Gokce the concept in a monetary policy framework in article from early 2007- for a more detailed expose, see his paper for TUSIAD back in 1995.

Second, Iceland's central bank raised interest rates 6% on Tuesday, more than reversing the 3.5% cut of two weeks ago. As an FT article reports, it was rather the IMF that raised interest rates, but the episode nevertheless reminded me of the trajectory of Turkish policy rates in April-June 2006.

Speaking of the 2006 episode, one of the factors that exacerbated the crisis then was the row that ensued on the appointment of a new Central Bank governor. A new paper finds that markets react negatively to irregular governor changes. BTW, the Serdengecti-Yilmaz transition is classified in their dataset as an irregular change...

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