Choosing central bankers: three lessons from the U.S Fed’s history

May 22, 2018

Interesting post by Klodiana Istrefi of Banque De France.

The three lessons are:

1. Policymakers do have types, such as “hawk” or “dove”.

2. …but over time policymakers can change their tune. 

3. The center of gravity of the committee matters … as does committee management.

The author applies Dove-Hawk index to the tenure of Fed’s policymakers:

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What it’s like curating ancient fossils? Hear from the curator itself….

May 21, 2018

Gaokgatlhe Mirriam Tawane, Curator of Plio-Pleistocene Palaeotology at Ditsong Museums of South Africa has a superb piece:

Not many people can say their working days involve living in the past – but as a museum curator, that’s a big part of what I do.

Curation is an interesting field, and one that’s not well known or understood. It involves preserving and managing a collection of some scientific significance; tangible scientific assets housed either at a museum or a university. A curator safeguards these heritage objects for future generations.

That’s no easy task, particularly when you’re curating a specialist museum that houses a collection of fossils and other heritage objects such as ancient art and artefacts.

I’m the curator of the Plio-Pleistocene collection at South Africa’s Ditsong National Museum of Natural History. This collection comprises of hominin specimens from a variety of sites located in the Cradle of Humankind.

As is often the case in the world of palaeontology, where we deal with scarce fragmentary materials, once a heritage object is damaged or lost, it is gone forever. It cannot be replaced. Even a cast of that particular item does not hold the same significance as the original material.

I protect a sort of treasure. Museums might look dull and old from the outside, but they house a wealth of knowledge that we cannot afford to lose.


Will Norway issue an e-kroner?

May 21, 2018

The Norway Central Bank (called Norges Bank) has issued a research paper looking at whether the central bank will issue a digital currency.

It is too early to conclude whether Norges Bank should take the initiative in introducing a CBDC. The impacts of a CBDC – and the socio-economic cost-benefit
analysis – will depend on the specific design. The design, in turn, will depend on the purpose of introducing a CBDC. The working group points in particular to three possible purposes, which require further analysis:

– A credit risk-free alternative to deposit money.
– An independent back-up solution for the ordinary electronic payment systems.
– Legal tender, if cash can no longer be regarded as “generally” available, as legal tender is normally understood to be.

On the other hand, the working group has not identified issues allowing it to conclude at present that introducing a CBDC can be ruled out. The working group has identified a number of factors that suggest caution, particularly in order to avoid conversion of bank deposits into a CBDC that is so rapid and so extensive as to impair lending. 

There is thus a need to examine the purposes of a CBDC and the most relevant solutions in more detail than permitted by the scope of this study. This will also make it possible to elaborate on the impacts of a CBDC and the cost-benefit analysis. This is planned for the project’s second phase. A premise underlying this work is that the existence and scope of a CBDC must not impair the ability of banks and other financial institutions to provide credit.


What is interesting is how these North European countries have different views on CBDC. Sweden is very aggressive whereas others are evaluating their choices.

What is money exactly? Cod vs Code forms of money..

May 21, 2018

Jon Nicolaisen, Dep Governor of Norges Bank looks at features of money in this speech.

In Slide 15, there is this neat chart of differentiating paper money with digital money. Norway’s banknotes have pictures of Cods on them for trust whereas digital currency has code for trust. So we trust both cods and codes.

Slide 2 also has picture of the first banknote in Europe issued in Sweden.

Overall a nice and useful speech on money..

The future of Cash: Iceland vs Sweden

May 18, 2018

JP Koning in another brilliant post tells this contrasting story of Sweden and Iceland. In former, cash is declining whereas in latter cash usage is rising.

The reason for Iceland’s liking for cash is the banking crisis of 2008:

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It’s time to rethink what’s meant by “mother tongue” education

May 18, 2018

Lara-Stephanie Krause writes on the topic:

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Bhimjee Parekh- the tycoon who introduced printing press in India…

May 18, 2018

Madras Courier has an account of Bhimjee Parekh..

Should Federal Reserve issue e-USD?

May 18, 2018

Central bankers of most advanced economies have spoken on the subject of digital currency.  Federal Reserve has been reticent so far.

Thus, it is interesting to read this speech by Governor Lael Brainard of Federal Reserve. Should Fed issue an e-USD?

…there is no compelling demonstrated need for a Fed-issued digital currency. Most consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. Moreover, people are finding easy ways to make digital payments directly to other people through a variety of mobile apps. New private-sector real-time payments solutions are beginning to gain acceptance in the United States. And the Faster Payments Task Force has laid out a roadmap embraced by a variety of stakeholders for a fast, ubiquitous, and secure payments system to be in place in the United States in the next few years. In short, a multiplicity of mechanisms are likely to be available for American consumers to make payments electronically in real time. As such, it is not obvious what additional value a Fed-issued digital currency would provide over and above these options.


When a leading Presidential candidate is campaigning from prison: Case of Brazil

May 17, 2018

Politics and politician’s ambitions never cease to surprise:

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There’s no such thing as moderate Marxism

May 17, 2018

Nice piece by Clive Crook:

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When Amazon acquired Whole Foods and cultures collided (Lessons for Flipkart??)

May 17, 2018

Michael Blanding discusses a case study in HBSWK.

This is all so familiar. One company acquires another and then cultural issues follow:

From the very start, Amazon made its name on being fast, cheap, and efficient—using data to drive its product mix and enforcing strict employee discipline to squeeze out cost savings to pass on to its customers.

Whole Foods, on the other hand, always prided itself on its personal touch, empowering individual stores—even individual employees—to make decisions about products that emphasize high quality, healthy, and local foods. That decentralization, however, caused enormous inefficiencies that drove up prices to the point where critics referred to the store as “Whole Paycheck.”

The acquisition was initially met positively by Wall Street, amid hopes that Amazon’s data-driven mindset might be just the thing to enable Whole Foods to scale up and add more stores while maintaining its employee-empowered culture.

That’s not quite what happened. “A lot of it from our perspective was centered on a culture clash,” says Campbell. “Whole Foods has a very high-empowerment kind of culture, so these  ‘draconian’ standards, telling people where to put things on the shelves and the loss of autonomy, employees were feeling angry from that.”

The new inventory system was actually something Whole Foods had started to implement before the Amazon deal, pressured by activist shareholders who had seen the grocer’s stock and sales margins slipping for two years. “This is not a story where there is a good guy and a bad guy,” says Campbell. “It’s a story about what the limits are to scaling this high-empowerment model, and what are the limits to a model where it’s all about standardization and data.”

This could be interesting as Walmart has recently acquired Indian e-retailer Flipkart. I don’t know culture at Flipkart so can’t say whether there will be clashes. But don;t be surprised if one does see them in future…

Greenland’s ice provides a detailed account of the Roman empire’s economy

May 17, 2018

Fascinating to read this account by Jason Daley.

Researchers are analysing icecaps to figure minting activity in Roman empire:

e know a lot about the Roman Empire. Not only did famous Romans like Julius Caesar write about their own accomplishments and plaster their names and works on public buildings, historians also chronicled the rise and fall of the powerful civilization. But sometimes it’s hard to know how the average person in the Empire was doing—while Caesar was off conquering Gaul, was the economy good? During the Year of the Four Emperors, when intrigue and infighting rocked the empire, was the government still minting money? As Katie Langin at Science reports, researchers recently found some insight locked in Greenland’s ice cap.

Besides the power of the legions, Rome’s might lay in its wealth, the cornerstone of which was a silver coin known as a denarius. Producing the silver needed to mint all those coins meant smelting silver ore, which produced a lot of lead pollution. Since the 1990s, researchers have realized that the lead pollution produced by smelters across the Empire drifted 2,800 miles and left traces in peat bogs in Scotland and the Faroe Islands and in ice cores from Greenland’s ice cap. But those layers were imprecise and could not give a year-by-year reading of how much silver was being produced.

Using new techniques, however, historians and ice core experts have been able to take a closer look at the ice, slowly melting the cores to get 12 lead measurements per year from the length of the Roman Empire, roughly 1100 B.C.E. to 800 C.E. The 1,900-year chronology mirrors many of the ups and downs of the Empire, as described by historians past and present. The research appears in The Proceedings of National Academy of Sciences.

Nicholas Wade at The New York Times reports that ice cores from Greenland are hard to get, and it can take years to carefully drill through all the ice to reach bedrock. Luckily, ice core expert Joseph R. McConnell—ironically of the Desert Research Institute in Reno—knew of a core that had to be abandoned and was able to convince the core’s drillers to let him analyze a section dating between 1235 B.C.E. and 1257 C.E.


In general, the smelting activity rises and falls with Rome’s civil wars and disease outbreaks. The levels finally drop to pre-Roman levels during the Antonine Plague of 165 to around 180 C.E. and they do not recover for another 500 years. It also plummets during the Plague of Cyprian in the 3rd century. “We found that lead pollution in Greenland very closely tracked known plagues, wars, social unrest and imperial expansions during European antiquity,” McConnell says in the release.


How Yap stone money is still valued and honored in Micronesia Islands..

May 17, 2018

Any article on Yap stone money is always interesting. To imagine such a money system exists and functions even in remote islands is quite something.

Robert Michael Poole in this BBC piece (HT: JP Koning) points how despite being Dollarised, people value payments in Yap money especially for saving facce anad maintaining honor:

Today, shell money has been replaced by the almighty US dollar for day-to-day transactions like grocery shopping. But for more conceptual exchanges, like rights or customs, stones remain a vital currency for Yap’s 11,000 residents.

Falmed’s family has only used its money twice, and one was as an apology. “We used it for one of my brothers who made trouble for another family,” Falmed revealed remorsefully. His brother’s marriage had failed. “One of the chiefs, his daughter got one piece of stone money as an apology, and they accepted it. When it comes to high ranks, you have to use stone money.”

The value of stone money has always been fluid, challenging the Western concept that currency value is pre-determined and fixed. The coins are valued by their size – they range from 7cm to 3.6m in diameter – as well as their ornateness and even for the sheer difficulty in obtaining the rock. How much a coin is worth also depends on who you give it to, and what for.

In addition, Yapese factor oral history into each stone’s value, as there’s no written record of what belongs to who. Families rarely move from their villages, and the tribal elders from the around 150 villages pass down information of each piece, meaning they act as a reminder of the past and help to reinforce relationships and transactions that date back to times of warriors and clans. In some cases, the stones have engravings marking battles from more than 200 years ago.

Superb bit..

How game theory explains the leaks in the Trump White House

May 17, 2018

John Cassidy in this piece explains how Prisoner’s dilemma can be used to understand White House leaks:

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What can business owners learn from Austrian Economics?

May 17, 2018

Fernando Monteiro D’Andrea says there are 7 lessons:

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Milton Friedman’s 1968 lecture and RBNZ adding employment to mandate: Monetary policy comes full circle in 2018..

May 17, 2018

Here is my recent Mint piece where I argue how the year 2018 is significant for two developments in monetary economics.  First is the 50th anniversary of much celebrated Milton Friedman’s lecture titled “The role of monetary policy”. Second is the Reserve Bank of NZ adding employment to its price stability mandate.

Both the events are obviously connected as I explain in the piece. How RBNZ adding employment to its price stability objective is against Friedman’s advice given in 1968. Friedman argued a central bank should only focus on price stability and leave other objectives to polity.  So just like life, monetary policy and central banking also keeps going in circles…

Intelligent Economist: Top 100 economics blogs for 2018

May 15, 2018

A new ranking has been released by intelligent economist:

Mostly Economics continues to feature in the list. It is highly humbling and thanks to all the visotors and supporters for their encouragement.

Meanwhile, blogging has been absent for past few days as one is traveling. Hope to resume soon.

Do send in comments and suggestions to make the blog better and be relevant in 2019 as well.

How free was banking in Canada?

May 11, 2018

Brilliant post by Prof George Selgin:

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Financing reindustrialization: bring back development banks

May 11, 2018

Prof Deepak Nayyar argues to bring back Development banks or Development Financial Institutions (DFIs):

Until the early 2000s, development finance institutions (DFIs) had done much of the lending to corporate entities for investment in the manufacturing or services sectors. These began winding down in 2000 and were closed down in 2005. For a while, companies used retained profits or cash reserves, before turning to external commercial borrowing, the domestic bond market, or equity markets as sources of finance. It was not long before borrowing from commercial banks emerged as an important alternative source of corporate financing. Apart from behest, corrupt or inept lending, some systemic problems arose. Commercial banks simply did not have the capability to assess credit risk on long-term investment lending because they have always been engaged in advancing short-term working capital. Moreover, commercial banks were caught in a maturity mismatch, because they borrowed short from depositors but had to lend long to investors.

In countries that are latecomers to industrialization, this role has always been performed by development banks, which meet the investment financing needs of new firms in underdeveloped manufacturing sectors that are not met by capital markets or commercial banks because, in their calculus, the risk is too great. Starting around 1950, this model was adopted not only by several underdeveloped countries in Asia and Latin America seeking to industrialize, but also by Germany and Japan, which were seeking to reconstruct their economies. India was a pioneer in establishing DFIs, its equivalent of development banks elsewhere, to kick-start industrialization.


In retrospect, it is clear that these DFIs made a significant contribution to the provision of industrial finance in India. As a proportion of gross fixed capital formation in the manufacturing sector, their total disbursements rose from one-tenth in 1970-71 to half in 2000-01. The public sector relied on resources allocated by the government to finance its investment. Hence, this lending was almost entirely to the private sector. Total disbursements, as a proportion of gross fixed capital formation in the private sector, rose from one-fourth in 1970-71 to three-fourths in 2000-01. In the absence of these institutions, such levels of private investment in the industrial sector would have been difficult to finance from alternative sources. The counterfactual is important. It shows that their contribution was essential. Some of it served a strategic purpose in kick-starting manufacturing sector activities and supporting innovative lending to an emerging services sector.

There were limitations too. Sometimes, the process of due diligence for extending loans was limited or incomplete. On occasions, even the debt servicing capacity of the borrower was not reviewed or monitored after the loan had been provided. Similarly, where the lending or investment institutions acquired equity in manufacturing firms, which entitled them to place their nominees on boards of directors, their role was often that of silent partners, essentially preserving the status quo rather than protecting the interests of the institutions they represented.

In addition, there were errors of omission. Infrastructure was excluded from their portfolios. By the time this was corrected, it was too little, too late. There was almost no coordination between their lending and industrial policy objectives or priorities, so there was no preferred access for pharmaceuticals, clothing, two-wheelers, auto components or information technology.

There were errors of commission as well. DFIs provided preferential access to some entrepreneurs, firms or business houses, so that the allocation of resources was shaped by the borrowers rather than the lenders. The DFIs and the government were both responsible for the behest lending that often led to bad loans. The most serious error of commission by the government was the deliberate winding down and premature closure of DFIs. ICICI and IDBI were turned into commercial banks. SFCs and SIDCs stopped such lending. Investment institutions never had this formal mandate, and, except for LIC, withdrew from such lending.

I had raised the same points when the idea of so named Wholesale banks was floated recently. First you close DFIs and then you bring back the old wine in a new bottle.

The time has come to establish a National Development Bank (NDB) in India. Such a new institution would start with a clean slate, without any baggage from the past. It must incorporate lessons from our past experience with DFIs to eliminate errors of omission and commission. It is just as important to introduce institutional control mechanisms that were missing from the conception and design of the erstwhile DFIs. Thus, it is essential to have an institutionalized system of checks and balances that can prevent collusion between governments and firms, or between development banks and firms, to capture rents by imposing discipline on the self-seeking behaviour of any one stakeholder, or even two stakeholders who wish to collude, by other stakeholders. The design and blueprint will need careful thought.

At this juncture, an NDB is both necessary and desirable. It would help reindustrialize India. It would also de-stress commercial banks.

Well, well..

How Italian mayors hoard parking penalties ahead of elections..

May 11, 2018

Whichever the election, expect politicos to behave in similar manner. When elections appear near, they become more liberal with taxes and fines.

Prof. Emanuele Bracco of  Lancaster University has a piece arguing the same. Italian Mayors become more liberal towards parking fines around election time:

Mayors elected with a small margin of victory issue almost one euro per capita less in fines, and cash in about 50 euro cents less than those who won elections with a wide margin. Mayors who barely won their seat don’t seem to want to disappoint those precious marginal voters and put their own re-election at risk.

Mayors in their second (and last) term in office are slightly more strict. By law they cannot run for a third term, so perhaps they feel more free to charge drivers. They know they won’t pay an electoral cost as a result.

Last, we look into the third way to pinpoint political budget cycles, by comparing mayors nearing the end of their term in office with those who have just been elected. The former issue roughly the same amount of fines as colleagues at the beginning of their term, but they cash on average 18 euro cents per capita fewer per year. This may not seem very much, but would account for about 1.5m Euros in a year for municipalities such as Milan or Rome. The closer the elections, the more lenient they get in chasing undisciplined drivers. They seem to be trying not to bother drivers just as they are deciding how to cast their vote.

The moral of the story is that if your mayor fears for their re-election you’re less likely to get a ticket for your parking indiscretions. You’re also less likely to be chased for payment if you do get one. But of course, you’d never park where you shouldn’t anyway, regardless of when the next election is. Would you?

Trust voters especially Italians to fully take advantage of these election liberties..

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