Market Is Full of Clues for Bank of Israel Chief Seeking Answers
Market Is Full of Clues for Bank of Israel Chief Seeking Answers
(Bloomberg) --
Bank of Israel Governor Amir Yaron is looking to markets for clues about how to navigate economic cross-currents.
Not all uncertainty is the same, and the impact on various assets can provide information to help policy makers, Yaron said in a speech at the Massachusetts Institute of Technology.
Financial data on instruments such as variance swaps can be useful in identifying the likelihood of contractionary periods, Yaron said in slides from his presentation seen by Bloomberg. Meanwhile, corporate bond spreads provide information on how rising government debt burdens create fiscal uncertainty.
Getting a grip on economic uncertainty is increasingly a challenge for central bankers charting policy in a world convulsed by trade disputes and geopolitical shocks. The International Monetary Fund just made a fifth straight cut to its 2019 global growth forecast, blaming trade tensions for what would be the weakest pace of expansion since a contraction a decade earlier.
Major central banks are now pivoting toward easier monetary policy though their interest rates remain historically low. In Israel, the central bank completed its own shift under Yaron, laying the groundwork for its first cut to official borrowing costs since 2015 even as its key rate remains just above zero.
About a year removed from academia, Yaron used the speech on Saturday to discuss the role of uncertainty in the macroeconomy and markets. He spoke at a conference where he was accepting the Stephen Ross financial economics prize for a 2004 paper he co-wrote on long-run risk.
It was published before he left his post as a finance professor at the University of Pennsylvania’s Wharton school of business to lead Israel’s central bank late last year.
While a rising ratio of debt to gross domestic product may be seen as improving liquidity -- because governments issue more debt to fund spending -- it can become problematic for growth when the load hits around 60% of GDP, Yaron said in his slides. Corporate spreads widen due to fiscal uncertainty and expectations of higher taxes.
That has implications for Israel, where the debt burden is just above 60% of economic output, and a widening deficit is causing worries about fiscal discipline.
However, not all uncertainty is bad, Yaron noted. Any disruption caused by technological progress has potential benefits, he said.
To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net
To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Mark Williams
©2019 Bloomberg L.P.