John Hawkins

Banking crises require prompt responses because of their serious macroeconomic consequences. The responses often initially take the form of government assistance, followed by institutional arrangements to manage impaired assets and injections of new capital after changes to ownership.

The impact of deregulation on the profitability and pricing policies of Australian banks were among topics covered in the House of Representatives Economics Committee's 1991 report A Pocket Full of Change. This article summarises some of the main findings.

This paper traces the development of economic thought about “currency boards”; a rule-based monetary policy regime, involving much less (or no) discretion than most other monetary regimes. Adopting a currency board aims to get some of the credibility advantages of using a globally respected currency without foregoing seignoriage revenue or the symbolic importance often attached to a national currency.

Business cycles can be identified, with varying degrees of precision, for most of the past two centuries of Australia’s history. For the period covered by quarterly national accounts, there are clear ‘classical’ downturns in the early 1960s, mid 1970s, early 1980s and early 1990s. The current economic expansion is the longest in at least a century, but this does not in itself make a recession inevitable. Expansions are only ended by shocks or a buildup of imbalances.

This paper looks at the accuracy of economic forecasts and whether it is possible to rank different forecasters by their degree of accuracy. The first section examines the accuracy of economic forecasts in general and by examining a subset of twelve Australian forecasters over a five year period. The second section addresses the question of whether it is possible to rank forecasters in order of merit. The paper concludes that the problems are sufficiently large for it to be unlikely that a meaningful and stable ranking could be obtained.

As a small open economy with no capital controls Hong Kong is potentially vulnerable to destabilising capital flows. Its monetary policy has been directed towards maintaining a linked exchange rate which has resulted in rapid monetary growth at times. While this has meant that the burden of internal adjustment has been borne by other policies, the flexibility of the economy has meant that domestic economic performance has been favourable.

Hong Kong's rapid economic growth reflects a combination of rapid labour force growth, increases in the capital stock and improved quality and use of these resources. The maintenance of sound fundamentals, and the boost from links with China, should help Hong Kong to continue to enjoy increases in its standard of living.

Economic theory suggests the development of financial markets can promote economic growth and there is some empirical support for this. In Hong Kong, financial market development has taken the form of expanding the bond market, establishing new institutions, improving supervision and creating new monetary policy instruments. This appears to have led to a sounder and more efficient financial system.

Econometric tests show that the demand for Hong Kong dollar appears sensitive to income, interest rates, inflation, business activity and sentiment. After declining for many years, the ratio of currency to GDP turned upward from 1994, attributed to HK dollars circulating outside HK.

Fry, Goodhart and Almeida's book covers central banking activities in non-OECD economies. Relative to those in OECD economies, the central banks examined here tend to play a large role in the financial system with a smaller role for market forces. Much of the book is based on statistical analysis of the results from a questionnaire sent to the central banks.

This paper looks at what variables have been found useful in various studies for predicting financial crises. In particular it shows how data compiled by the Bank for International Settlements can assist in this process. It concludes by drawing some implications for statistical agencies.

Weaknesses in the financial systems of Thailand, Malaysia and Indonesia were exacerbated by very large devaluations in 1997 and early 1998. While all three countries set up agencies to manage bad assets and established schemes to inject public money as capital into the banks, the differences between the responses reflect three main factors: the severity of the problems, political factors and the structure of the banking system.

Crises in the 1990s revealed major shortcomings in the management of foreign debt and liquidity in emerging market economies. Possible responses include an integrated approach to managing risks in a broader national balance sheet and reforms to the government’s own asset and liability management practices. Another important topic was how far the adequacy of foreign exchange reserves should be judged in relation to short-term foreign debt.

This paper describes some experiments with the construction of relatively simple indices which summarise in a systematic and objective way information about emerging economies currently under pressure in financial markets and those
vulnerable to such pressure in the future. A survey of the literature suggests financial crises are typically preceded by overvalued exchange rates, inadequate international reserves, recessions and excessive credit growth. These indicators are included in the summary indices of vulnerability, which are shown to have modest predictive power for the pressure index but are far from conclusive in themselves.

The banking industry world wide is being transformed by global forces such as technological innovation; the domestic deregulation of financial services and opening-up to
international competition; and changes in corporate behaviour, such as growing disintermediation and increased emphasis on shareholder value. Recent banking crises in Asia and Latin America have accentuated these pressures. The banking industries in central Europe and Latin America have also been transformed as a result of privatisations of state-owned banks that had previously dominated their banking systems.

The rapid spread of the internet and some aspects of  e-finance are changing the financial system in ways that are hard to predict. This has potential ramifications for monetary policy all through the process of its operation. Effects may be felt on the central bank’s ability to operate monetary policy,
the connection between interest rates it controls and key market rates, how these rates affect the real
economy and inflation, and the feedback from real economy data to policy setting.

Various mechanisms of prudential oversight over the financial system can help to make an economy more resistant to contagious financial shocks. Better and more realistic
supervision of institutions is needed both in capital-importing and capital-exporting countries. This paper examines  international rules for capital ratios, how far implicit and explicit guarantees undermine financial agents’ and institutions’ sense of responsibility for their own decisions, what can be done to strengthen the operation of
market discipline for banks, and the need to develop deeper
financial markets so that the concentration of the risks in the banking system can be diluted. Given differences in country circumstances, the focus of international cooperation
should be to ensure that generally agreed principles needed to
ensure strong banking systems are applied worldwide.

An important aspect of the development of bond markets is the impact on the banking system.  On the other hand, if it means firms are less vulnerable to weaknesses in the banking
system, corporate bond issuance can help central banks achieve steady economic growth. Banks also play an important role in developing a private sector bond market as they are often among the most important issuers, holders, dealers, advisers, underwriters, guarantors, trustees, custodians and
registrars in this market. Indeed, banks are deriving more of their profits from such activities and less from lending. For this reason, it is important to have healthy banks to have a sound bond market. And a bond market may improve the health of banks, by improving market discipline.

This paper summarises work on early warning indicators for emerging economies. It describes in particular the use within the BIS of relatively simple indices summarising information about emerging economies currently under pressure in  financial markets and those vulnerable to such
pressure in the future. The survey of the literature suggests financial crises are typically preceded by overvalued exchange rates, inadequate international reserves, large foreign debt, recessions and excessive credit growth. These indicators are included in the summary indices of vulnerability. The vulnerability indices have modest predictive power for the pressure index but like other early warning signals are best regarded as an aid to analysis rather than a definitive predictive tool.

Economic forecasts in emerging economies, like those for advanced economies, show little sign of consistent biases but turning points are almost invariably underestimated, individual forecasts tend to converge with each other and become more accurate as the forecasting horizon reduces, the consensus forecasts for GDP and inflation are significantly better than simple alternative forecasting rules, and it is rare for individual
forecasters to consistently outperform the consensus. A key difference, however, is that average forecasting errors are larger in emerging economies, given their greater exposure to
external shocks and poorer data. A policy implication for central banks is that inflation targets should be less ambitious than in advanced economies.

Electronic trading is a force for change across markets, enabling a greater variety of trading arrangements, which in turn can affect the performance of markets and welfare more generally. This article first considers why the extent and speed of adoption of new trading systems has been very
different between markets. It then focuses on two important issues raised by recent developments. One is the degree of fragmentation or consolidation of trading arrangements, where it is argued that electronic trading can facilitate either effect. The other is the degree of transparency of trading
information, where the hugely expanded possibilities that electronic trading offers highlight the choices in this controversial topic. Policy-makers are interested in the wider impact of changes to trading arrangements on the broader economic and financial system. But policy judgments need to be made carefully because the effects can be market specific, uncertain or even counter-intuitive. Moreover, problems arising in market arrangements may prove short term or self-correcting. These considerations all bear on the judgments on whether or how to intervene to address apparent market failures.

This paper reviews how a central bank’s involvement in activities such as foreign exchange intervention and restructuring banking systems at the behest of the government may affect its balance sheet and the possible implications. If such operations leave the central bank with low, or even negative, capital its (perceived) independence and ability to conduct monetary policy may be affected.

International bank lending is a major component of capital flows between advanced and emerging economies. In recent years, however, these flows have been going the wrong
way, like water flowing uphill. Even four years after the Asian crisis, there is a net flow of funds from emerging economies to banks in advanced economies. Factors influencing these flows.  include both cyclical influences (both ‘push’ and ‘pull’)
and structural changes within the banking industry. There is some evidence that international lenders are now discriminating more between the various emerging economies.

Globalisation has encouraged a convergence of monetary policy operating procedures in emerging market economies towards market-based instruments.  This has been accompanied by greater transparency and more explicit signalling of changes in the stance of monetary policy.

The proportion of Australian domestic expenditure spent on imported goods has been steadily increasing over the past two decades. This reflects higher incomes (as imports tend to be luxury goods), the decrease in the relative price of
imported goods (reflecting technology and cuts in protection and transport costs), a preference for variety in goods and
companies increasingly operating globally (leading them both to import and to export more components and finished goods).

Stephen Bell’s study of the Reserve Bank of Australia describes the political economy of how key monetary policy decisions shifted from being made by the government to the Bank. The book's extensive quotations from interviews with many protagonists will also be a much valued source for future economic historians.

Treasury’s macroeconomic forecasts, over the period from 1989-90 to 2003-04, show little evidence of bias although, in common with most forecasts, they tend to underestimate large changes. Over recent years, forecast errors in real GDP and the GDP deflator have tended to offset each other, likely because of a predominance of unanticipated supply side shocks over recent years, which have moved real output and prices in
opposite directions. The forecasts of CPI inflation have been significantly more accurate than those of the GDP deflator.

Macroeconomic forecasting in some form has a long history, although its current nature is a product of the Keynesian revolution. Forecasting is an important part of the budgetary process. Treasury has a wide-ranging approach to forecasting, gathering insights from business liaison, econometric models  and partial and leading indicators, interpreted with a good deal of judgement. Over time, Treasury has made public more
details of its forecasts. The accompanying narrative also now gives more attention to risks and uncertainty surrounding the forecasts.

Mining commodities form a large share of Australia’s exports, and Australia is a leading producer of many commodities. Their contribution to the Australian economy can be volatile, however, as commodity prices often rise or fall by large amounts and there are long lags in increasing production.
Contrary to some expectations, there does not appear to be a long-run tendency for the prices of mined commodities to fall relative to the price of manufactures. Recently, mineral prices have been very strong. Looking at past experiences suggests that the projected increase in demand will underpin current prices for at least another year, but beyond that the prospects are less certain.

1 William Watt was a protégé of Alfred Deakin and succeeded him as Australia's leading parliamentary orator. He served as Victorian Treasurer and Premier before moving to federal politics, where he rose to be Treasurer and handled the transition from war to peacetime economy. Watt was also Acting Prime Minister for over a year before clashes with Billy Hughes led

Chifley was a ‘true believer’ in the Labor Party and in the role that government could play in stabilising the economy and keeping unemployment low. He was an active treasurer, initially working well with Prime Minister Curtin and then serving as both Prime Minister and Treasurer himself. He managed the war economy competently and achieved a smooth transition to a peacetime economy, although he allowed inflationary pressures to build up in the post-war years. Among his economic reforms were increased welfare payments, uniform income taxation and developing central banking powers (through direct controls rather than market mechanisms) for the Commonwealth Bank.

Sir Arthur Fadden served as treasurer for nine years and brought down eleven budgets. In his first budget he faced the challenges of funding military expenditure in World War II. Returning to the Treasury in the early 1950s, there were again challenging times as the Korean war boom exacerbated inflationary pressures. In response Fadden brought down the ‘horror budget’, the first explicitly Keynesian approach to fight inflation. Critics called it ‘too much, too late’ but inflation was squashed and the economy grew well for the rest of the decade. In many ways, Fadden’ period as treasurer coincided with a golden age for the Australian economy.

Harold Holt is regarded as one of the most amiable and diligent treasurers. His reputation as treasurer was enhanced by strong economic growth and low inflation and  unemployment, although the 1961 credit squeeze was a blot in his copybook. He oversaw the establishment of the Reserve Bank and the smooth introduction of decimal currency. Sadly his career as treasurer and prime minister was overshadowed by the political difficulties in his last year and the tragic circumstances of his death.

William McMahon was Australia’s first treasurer formally trained in economics. He brought extraordinary energy to the role. The economy performed strongly during McMahon’s tenure, although there are no major reforms to his name, and arguably pressures were allowed to build which led to the subsequent inflation of the 1970s. Never popular with his cabinet colleagues, McMahon’s public reputation was tarnished by his subsequent unsuccessful period as prime minister.

Les Bury was a Treasury employee who rose to become Treasurer. Although one of the best qualified treasurers, with a serious interest in economics, he only had a short time in the job and was by most accounts well past his peak before he became treasurer. He was ahead of his time in advocating broader measures of wellbeing, taking steps towards replacing some income tax with indirect tax and supporting the compilation of forward estimates.

There are essentially four approaches to constructing a better measure than GDP of whether the nation is making true progress in improving wellbeing; adjusting GDP to make it more suitable, replacing it with a ‘dashboard’ of alternative indicators, weighting these alternative indicators to form a composite indicator, and using peoples’ own reported assessments of their well-being.

This thesis describes the office of Australian treasurer (the equivalent of finance minister in most European countries) and how it has evolved over time, distinguishing between those occupants who only sought to manage the economy and finances and those who sought fundamental reforms.