SAFE policy letter
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101
Um eine grüne Transformation der Volkswirtschaft zu erreichen, werden Finanzmärkte und die mit ihnen verbundenen Banken eine wichtige Rolle einnehmen müssen. Aber allein vermögen Banken und Kapitalmärkte wenig, wenn sie nicht im Kontext einer klugen, politischen Rahmensetzung und einer transparenten Erfassung der verursachten Schäden auf Unternehmensebene gesehen werden. Diese drei Pfeiler stellen bildlich den tragenden Unterbau für eine Brücke hin zu einer klimaneutralen Wirt-schaftsverfassung dar. Ihr Zusammenwirken ist eine Voraussetzung dafür, dass die Finanzwirtschaft die benötigten Finanzmittel für die grüne Transformation bereitstellen kann.
102
This Policy Letter presents two event studies based on the pre-war data that foreshadows the remarkable way in which Russian economy was able to withstand the pressure from unprecedented package of international sanctions. First, it shows that a sudden stop of one of the two domestic producers of zinc in 2018 did not lead to a slowdown in the steel industry, which heavily relied on this input. Second, it demonstrates that a huge increase in cost of fuel called mazut in 2020 had virtually no impact on firms that used it, even in the regions where it was hard to substitute it for alternative fuels. This Policy Letter argues that such stability in production can be explained by the fact that Russian economy is heavily oriented toward commodities. It is much easier to replace a commodity supplier than a supplier of manufacturing goods, and many commodity producers operate at high profit margins that allow them to continue to operate even after big increases in their costs. Thus, sanctions had a much smaller impact on Russia than they would have on an economy with larger manufacturing sector, where inputs are less substitutable and profit margins are smaller.
103
A safe core mandate
(2023)
Central banks have vastly expanded their footprint on capital markets. At a time of extraordinary pressure by many sides, a simple benchmark for the scale and scope of their core mandate of price and financial stability may be useful.
We make a case for a narrow mandate to maintain and safeguard the border between safe and quasi safe assets. This ex-ante definition minimizes ambiguity and discourages risk creation and limit panic runs, primarily by separating market demand for reliable liquidity from risk-intolerant, price-insensitive demand for a safe store of value. The central bank may be occasionally forced to intervene beyond the safe core but should not be bound by any such ex-ante mandate, unless directed to specific goals set by legislation with explicit fiscal support.
We review distinct features of liquidity and safety demand, seeking a definition of the safety border, and discuss LOLR support for borderline safe assets such as MMF or uninsured deposits.
A safe core formulation is close to the historical focus on regulated entities, collateralized lending and attention to the public debt market, but its specific framing offers some context on controversial issues such as the extent of LOLR responsibilities. It also justifies a persistently large scale for central bank liabilities (Greenwood, Hansom and Stein 2016), as safety demand is related to financial wealth rather than GDP. Finally, it is consistent with an active central bank role in supporting liquidity in government debt markets trading and clearing (Duffie 2020, 2021).