RBI to transfer ₹30,307 crore surplus to government for 2021-22

May 20, 2022

From RBI’s press release:

The Board in its meeting reviewed the current economic situation, global and domestic challenges and the impact of recent geopolitical developments. The Board also discussed the working of the Reserve Bank during the year April 2021 – March 2022 and approved the Annual Report and accounts of the Reserve Bank for the accounting year 2021-22. The Board approved the transfer of ₹30,307 crore as surplus to the Central Government for the accounting year 2021-22, while deciding to maintain the Contingency Risk Buffer at 5.50%.

Last year the surplus was a whopping Rs 99112 cr. 

More to follow once the annual report is released..

Monetary policy and inflation in times of war (and How Eli Heckscher caused a bank run at the Riksbank in 1920)

May 20, 2022

Riksbank Deputy Governor Henry Ohlsson in this speech discusses inflation in Sweden in 4 wars: WWI, WWII, Korean War in 1960s and Middle East War in 1970s.

Inflation rose in all the four wars but overall outcomes etc were different:

“When major and unusual events such as the war in Ukraine occur, there is no ‘manual’ for how to act as an economic policy decision-maker. All wars are different – in terms of their scale and duration, their location and their impact on the world around them.”

This is how Henry Ohlsson began his speech at Uppsala University, where he described what research literature has to say about the connection between war and inflation. He also looked back at earlier episodes of war being associated with rising inflation in Sweden.

He highlighted four episodes: the First World War, the Second World War and the Korean War, and, starting in the mid-70s, a more prolonged episode of war in the Middle East. The first three wars were marked by a more short-term inflation, while inflation became more persistently high during the latter period, largely because economic policy became too expansionary.

What about inflation today:

Henry Ohlsson said that Sweden now has better conditions for coping with the balancing act that rising inflation entails for monetary policy, compared with when inflation began to rise in the 1970s. He highlighted three factors behind this: the inflation target, the wage-formation model and the fact that today there is a more robust fiscal policy framework in place.

So what can we learn from history with regard to our current situation? asked Mr Ohlsson. During many of the periods of high inflation in connection with war, the effects of monetary policy have been heavily dependent on the expectations of companies and households regarding future economic developments.

“The price increases we have seen in recent months are not something that monetary policy can affect. But the high inflation risks setting off a spiral of price increases, wage drift, price increases, wage drift and so on. It is essential to ward off these tendencies in time. It was therefore time to change the direction of monetary policy and start raising the repo rate” concluded Mr Ohlsson.

Ohlsson also discusses this interesting economic history episode in Sweden related to Eli Heckscher. The eminent economist of Heckscher-Ohline mode caused a run on the central bank in 1920s:

An interesting, but perhaps not so well-known, event during this period was that Eli Heckscher, professor at the Stockholm School of Economics and internationally renowned economist, actually caused a bank run at the Riksbank in 1920.  Although the inflation peak had passed, inflation at the beginning of 1920 was still so high that Heckscher thought that the Riksbank should raise the discount rate significantly. When the Riksbank did not want to do this, Heckscher decided to do something about it.

The right to exchange notes for gold had ceased in connection with the outbreak of the war in 1914, but was reintroduced in 1916. However, since an export ban on gold had been introduced in 1914, this did not mean in practice that the gold standard had been re-established. The export ban allowed the gold price to differ between countries and the value of the krona to change against other currencies. This was also the case as the krona depreciated against the dollar.

At the US Federal Reserve, the price of one kilogram of gold in the depreciated Swedish currency was SEK 3,600 at the beginning of 1920. At the Riksbank, the price of one kilo of gold was instead SEK 2,480. If the export ban were to be lifted, then a considerable arbitrage gain could be made.

Heckscher decided to draw the general public’s attention to this fact and did so through an article entitled “The new price revolution” (Den nya prisrevolutionen), published in the daily newspaper Stockholms Dagblad on 11 March 1920. The article was more or less an explicit encouragement to readers to withdraw their money from the bank and go to the Riksbank to redeem it for gold: “Anyone who brings SEK 1,000 in banknotes to the Riksbank has the legal right to receive 50 SEK 20 [gold coins] and these currently have a value of SEK 1,450 – 45%
profit on the most risk-free of investments”

The final results were indeed an onslaught of people who wanted to redeem their banknotes at the Riksbank, who were therefore forced to raise the discount rate in order to defend the gold reserve. In connection with this, the Riksbank requested release from the obligation to redeem banknotes for gold, which was subsequently also granted.


Prof JR Varma on RBI’s May-2022 meeting

May 20, 2022

Ever since RBI increased policy repo rate by 40 bps in May which was a meeting outside of MPC calendar, two questions have been asked:

  1. Why increase policy rates in May when you did not increase policy rates in April?
  2. How come a  consensus on 40 bps?

The RBI released the minutes of the meeting in which MPC member Prof JR Varma answers both the questions.

36. MPC meetings outside the annual calendar are at the sole discretion of the Governor based on his opinion that an additional meeting is required. Therefore, I confine my statement to the consideration of the action to be taken at this additional meeting.

37. In my statement in April, I stated that the principal reason for not taking immediate action on the policy rate at that time was that the forward guidance given in the February meeting effectively precluded such action. I also stated that the withdrawal of the forward guidance and the absence of any stance in April meant that in future meetings, the MPC would consider itself completely free to take any action on the policy rates that may be warranted. This meeting is taking place almost a month after the April meeting, and the MPC is now at liberty to consider the rate increase that it could have done in April itself in the absence of the February forward guidance.

38. Since April, inflation risks have become more pronounced both in terms of magnitude and in terms of persistence. On the other hand, the growth shock appears to be less severe than I feared initially, as most nowcast estimates suggest that the economy is coping reasonably well with the geopolitical tensions and the Chinese lockdown. In this context, the need for monetary tightening has become much more acute. Moreover, there is a lot of catching up to do because the MPC (a) rightly prioritized economic recovery at the height of the pandemic in 2020 and early 2021, and (b) delayed the normalization by continuing the forward guidance for far too long after the pandemic abated. This means that it is now imperative to front-load the rate action to the extent possible.

39. It appears to me that more than 100 basis points of rate increases needs to be carried out very soon. My preference therefore is for a 50 basis points increase in the repo rate in this meeting. The majority of the MPC is in favour of 40 basis points for reasons which are not very clear to me. Whatever symbolic or psychological benefit there may be from keeping the hike below 50 basis points is outweighed by the simplicity and clarity of moving in round multiples of 25 basis points. Also reducing the hike by 10 basis points now would require an extra 10 basis point hike at some point (and perhaps sooner rather than later). Nevertheless, I have thought it fit not to dissent on this issue as the optimal rate hike is not something that can be calculated with mathematical precision, and 40 basis points is not materially different from 50 basis points. I am thankful to the majority for not making my decision more difficult by choosing a 37.5 basis point hike (exactly mid-way between 25 and 50). In view of all this, I vote in favour of increasing the policy repo rate to 4.40 per cent.

40. The second resolution is identical to that in April, and my arguments in favour of this decision at that time remain valid. Monetary policy remains extremely accommodative despite the 40 basis point hike in this meeting. In fact, if the real policy rate is measured by subtracting the latest inflation print from the nominal rate, then the real policy rate after this meeting is lower than it was after the April meeting because the published headline CPI inflation has risen by much more than 40 basis points between the two meetings. Of course, it is more reasonable to calculate the real policy rate by subtracting the forecast inflation rate 3-4 quarters ahead, but even if one does that, it is obvious that the real policy rate continues to be sharply negative, and therefore highly accommodative. The first part of the second resolution is therefore simply a statement of fact, and the operative portion of the resolution is the second part which talks about withdrawal of accommodation. I have already explained why an expeditious withdrawal of accommodation is warranted.

41. However, most of the analyst commentary on the April meeting seemed to interpret the phrase “remain accommodative” as a stance despite the conscious decision to drop the word “stance”. I hope that this time around, the MPC’s intent will be more clearly understood, but if that does not happen, the MPC must consider rephrasing this resolution. It would not be wise for the MPC to persist with language that is pedantically correct, but falls short in communicative efficacy. But such rephrasing is a matter for a future meeting, and this time around, I vote in favour of the decision to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

AS frank as it can get..

Dutch National Bank’s history is closely intertwined with slavery: Central Bank starts a process of reflection

May 19, 2022

Missed this Feb-22 news development. DNB history is closely intertwined with slavery:

As DNB’s Executive Board, we realised some time ago that we needed to gain a more objective understanding of DNB’s links to slavery. This was triggered by the growing historical awareness about slavery and the ongoing fight against racism in society,  combined with a desire from within our own organisation to gain a better insight into this matter. We do not wish to ignore this part of our own history, which is linked to the Netherlands’ history of slavery. This is why we decided to commission an independent historical study, which was conducted by Leiden University’s Karwan Fatah-Black, Lauren Lauret and Joris van den Tol.

The study shows that DNB was involved in three ways.

    1. Part of DNB’s start-up capital came from business owners with direct interests in plantation slavery in the Atlantic region, for example in Suriname. Of the 16 initial major capital providers, 11 have now been linked to slavery.
    1. As an institution, DNB was indirectly involved in Dutch colonial slavery and slavery in non-Dutch areas, such as British Guiana. Having no branches in the colonies, it did not play a role in the day-to-day slavery-related financial transactions there. However, DNB did support the Ministry of Colonies in its day-to-day payment transfers and provided services to trading houses involved in slavery.
    1. To a greater extent than their contemporaries, several prominent DNB officials were personally involved in colonial slavery. Several of them had direct links with slavery-related businesses and some were also involved in the management of plantations. A number of prominent DNB officials organised themselves to represent the interests of slave owners in the political arena. Only one or two were involved in organisations working to abolish slavery.

Central bank reflecting:

Our first step is to disclose and acknowledge our links to slavery. We believe it is important that everyone in the Netherlands and everyone in the Caribbean and Suriname has access to the study through our website. The facts that emerged from the study and the deeply racist beliefs that underlie them affect us deeply. DNB as it is in 2022 does not wish to disregard its past. The suffering of the enslaved people in the past is indescribable. DNB’s Executive Board deeply regrets this. While we cannot undo the suffering that has been caused, we can, as DNB, try to contribute to healing by making this history visible, and by acknowledging the facts and the suffering they have caused.

Secondly, we will soon be talking to our employees and representatives of civil society organisations, in particular with those who are especially affected by this history and the impact it has to this day. To this end, an external focus group will be set up, to be headed by Freek Ossel, former alderman of Amsterdam, former mayor of two municipalities including Beverwijk, and chairperson of the Steering Group for the National Transatlantic Museum of Slavery.

The study is here.

‘People should be more aware’: the business dynasties who benefited from Nazis

May 18, 2022

A new book has been released which looks at some companies which benefited from Nazi connections.

TheGuardian profiles the book and the author:

Colonial and Confederate statues toppled. Looted objects returned by contrite museums. Tainted family names such as Sackler expunged from buildings. A worldwide reckoning with the past crimes of great powers is under way. But is there a glaring omission?

A new book, Nazi Billionaires, investigates how Germany’s richest business dynasties made fortunes by aiding and abetting Adolf Hitler’s Third Reich. It also examines how, eight decades later, they still escape close scrutiny and a nation that has done so much to confront its catastrophic past still suffers a very particular blind spot.

“What struck me was this is a country that’s so cognisant of its history in many ways but seemingly the most economically powerful actors do not engage with that,” says author David de Jong, a 35-year-old Dutchman. “That was the reason why I wrote the book. It’s an argument in favour of historical transparency.”

The former reporter for Bloomberg News examines German companies that own beer brewers and wine producers as well as famous US brands such as Krispy Kreme and Pret A Manger. But he casts an especially harsh light on car makers led by household names such as BMW and Porsche, which powered the postwar economic miracle and contribute about a 10th of the nation’s gross domestic product.


Irrigation Management for Sustainable Agriculture

May 18, 2022

Rishabh Kumar, Jobin Sebastian and Arun Vishnu Kumar in RBI’s May-22 Bulletin analyse irrigation in 19 States:

In the backdrop of recurrent episodes of drought and declining ground water table, ensuring irrigation efficiency is of paramount importance for sustainable agriculture. This article analyses the trends in the area-weighted cost and efficiency of irrigation across 19 agriculturally important Indian states using the Comprehensive Cost of Cultivation data published by the Ministry of Agriculture and Farmers’ Welfare, Government of India for the period from 2002-03 to 2017-18.


    • The area-weighted cost of irrigation declined during the study period perhaps reflecting the impact of increased access to subsidised power in most of the states. However, the costs are still high in some states.
    • The estimated technical efficiency of irrigation suggests that majority of the states lie far from the efficiency frontier and have also recorded declining trends over the study period.
    • The inefficiency appears to be driven by the energy consumption in the farm sector and ground water accessibility.
    • The findings call for policy focus on energy and water efficient irrigation technologies, particularly in states where irrigation efficiency is declining.

How Economics Found Science …and Lost its Subject Matter

May 18, 2022

Nicholas Gruen in this INET article questions the often quoted trade off between efficiency and equality by economics:

My point has simply been to show one theoretical framing of the relationship between efficiency and equality that proceeds from careful, critical observation of and abstraction from reality. If this is well-judged, our understanding of reality improves as do our prospects of improving it. The textbook approach couldn’t be more different. Turns out that it is metaphysical fairy-floss. The “efficiency-equality” trade-off exists as a particular case of the general one that if you wish to achieve one thing, doing something else could get in your way. That applies whether the things in question are apples, oranges, efficiency, spelling prowess, bananas, Nobel Prizes, stop signs, or fortune cookies. Oh — I nearly forgot — and equality. Who knew?

Disciplines like economics can be worse than useless without proper attention to what Mary Midgely called their ‘philosophical plumbing’ — the way their organizing ideas are brought into relation to get us closer to reality — like the philosophical plumbing I’ve offered in this essay. Without it, the ideas and techniques economists use are unmoored from any wider accountability for actually helping us understand the world. Yet that kind of close-grained reflectiveness about the way ideas are used in situ is completely absent, both from learned journal literature and from the core economics curriculum. (Indeed, in my experience, it barely makes its way into the “philosophy/methodology of economics” literature and pedagogy preoccupied as they have been with various more ponderous set pieces — for instance, Popper’s falsificationism and Milton Friedman’s call to judge theory by the quality of its predictions rather than the realism of its assumptions).

Finally, note how frequently the kind of thinking I’ve been critiquing in this essay perpetrates the fallacy of the excluded middle — and how much damage this has done to the fabric of economic and political debate, and therefore to our economy and polity. Thus, Friedrich Hayek compellingly demonstrated the impracticability of managing a complex economy entirely from the center. But he took this demonstration of the impracticality of one extreme to justify a lurch towards the other and the general principle that less government was in principle preferable to more. This piece of motivated impatience in going from arguments to practical conclusions — so typical of intellectuals — was a spectacular non-sequitur from which many economists have still not freed themselves and from which the world has still not recovered.


NSDL@25: Ushering India’s stock market through the digital era for 25 years

May 18, 2022

National Securities Depository Limited (NSDL) recently celebrated its 25th anniversary.

My article in Moneycontrol on how this organisation silently paved way for digitalisation of equity markets.

Differences between foreign state-owned banks and foreign private-owned banks..

May 17, 2022

Marcin Borsuk, Oskar Kowalewski and Pawel Pisany in this ECB paper study differences in foreign state-owned banks vs foreign private owned banks:

In this study, we reassess the links between commercial bank ownership and lending growth during the 1996–2019 period. We !nd evidence that the lending activities of foreign state-controlled and foreign privately owned banks differ, particularly during different crisis type periods and origins. Foreign state-controlled banks’ loan growth rates are higher than those of foreign private owned banks during host banking crises. By contrast, foreign state-controlled banks reduce their credit growth during a home banking crisis, while foreign private-owned banks increase lending in the host countries. Moreover, we find evidence that bank-specific characteristics were more important determinants of credit growth than ownership structure during the global financial crisis of 2008 and gain in importance in the post-crisis period.

How easy is it to understand central bank publications?

May 17, 2022

I wrote about RBI’s communications last week asking whether people/markets understand what RBI says?

Timothy Munday of Bank of England in this Bank Underground post asks similar question related to Bank of England:

How easy is it to understand this sentence you are currently reading? How easy it is to understand this sentence that has dependency arcs that are longer that make it more difficult to read? How about if my writing is magniloquent? Or what if I use normal words? Writing style matters for how easy it is to read text. This post asks if writing style can influence how long markets take to digest Bank of England monetary policy information. I find that Bank of England publications that summarise their content in the first sentence, and use less unexpected vocabulary, are associated with a faster time for swap markets to reach a new equilibrium price following the publication release.

The Monetary Policy Report (MPR), Minutes and other publications have material effects on asset prices (Hansen, McMahon and Tong (2019). But these moves in asset prices may take hours (or days) to materialise. The November 2021 MPR was 56 pages long. That publication was released simultaneously with the Minutes, which was 15 pages long. Subsequently, there was an hour long Q&A, the text of which was 14 pages long when transcribed. In other words, markets received a deluge of information. That information will only be fully reflected in asset prices when market participants have had time to read and digest the publications.

A discussion of what the Bank of England’s Monetary Policy Committee (MPC) chooses to say in these documents is well above this author’s pay grade. It is the result of a long process of deliberation by the MPC and staff. The content of that discussion, the outcome of the MPC’s decision, and the reasons behind it, are taken as fixed.

How the MPC chooses to communicate is a different issue (and indeed has been discussed on this blog before). This post asks if writing style can influence how long markets take to digest Bank of England monetary policy information. In other words, if the Bank of England writes more clearly, does that lead to a faster time for market prices to move to a new equilibrium?

His analysis shows simpler communications do help:

There are two features that are significant at the 5% level and two at the 10% level.

Documents with higher contextual expectancy, first lines that summarise the entire document, words that are more prevalent, and are published on days without a monetary policy decision are associated with a shorter time for the market to reach a new equilibrium.

The length of dependency arcs, the initial market reaction, and, interestingly, the length of the document, do not display any association with the time taken for the market to digest the Bank’s information.


The above analysis comes with several caveats, and so our results should be read in with them in mind.

Only correlations between some (handpicked) textual features and how long it takes for the market to settle have been presented. And, of course, correlation doesn’t imply causation. Indeed, there are plausible omitted variables: one could argue that if the Bank of England has a more complicated message to convey, it must write in a more complicated style.

Furthermore, the estimates of how long it takes the market to digest communication are simple, and influenced by news releases that occur after the publications (although these should only add noise to the estimates, not bias them).

Finally, the small sample does mean that the regression lacks power. Coefficients that just dip under a 5% or 10% significant level should not be over-interpreted.

These caveats notwithstanding this is initial evidence that writing style matters, adding to the existing body of work on this topic from the Bank of England (Haldane and McMahon (2018)Bholat et al (2018). Of course content matters, and the Bank of England’s message is of paramount concern when drafting communication. But, at the margin, when that message’s substance has been formed, the style it is presented in can help the market to understand it quicker.

There is one central lesson behind writing: write as simply as possible. This lesson applies to central banks too.

25 years of Telecom Regulatory Authority of India

May 17, 2022

The Telecom Regulatory Authority of India (TRAI) was established in 1997 and completes 25 years in 2022. The authority celebrated its 25th anniversary and one can watch the ceremony on this youtube link.

On its 20th and 10th anniversary, TRAI released useful documents to reflect on its history.

Hope they upload one on the 25th anniversary as well.

Bridging regulatory gaps for NBFCs

May 17, 2022

My new article in Financial Express on the recent policies by RBI to bridge regulatory gaps between NBFCs and Banks.


Joan Robinson on Karl Marx: “His Sense of Reality Is Far Stronger”

May 16, 2022

Carolina Alves in the recent issue Journal of Economic Perspectives on Joan Robinson’s turn to Marxism:

Robinson’s essay on Marxism here


The digital economy, privacy, and CBDC

May 16, 2022

Toni Ahnert, Peter Hoffmann and Cyril Monnet in this ECB paper ask the question of privacy issues with rising digital economy and how CBDC can help:

We study a model of financial intermediation, payment choice, and privacy in the digital economy. Cash preserves anonymity but cannot be
used for more efficient online transactions. By contrast, bank deposits can be used online but do not preserve anonymity. Banks use the information contained in deposit flows to extract rents from merchants in need of financing. Payment tokens issued by digital platforms allow
merchants to hide from banks but enable platforms to stifle competition. An independent digital payment instrument (a CBDC) that
allows agents to share their payment data with selected parties can overcome all frictions and achieves the efficient allocation.

It is interesting to think of several scenarios around payments between players and types of transactions. Then see how cash, bank deposits and CBDC help in these transactions.

The Demand for Money, Near-Money, and Treasury Bonds

May 16, 2022

Capital Flow management measures in the digital age

May 16, 2022

Group of IMF economists (Dong He, Annamaria Kokenyne, Xavier Lavayssière, Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto and Jeanne Verrier) in this IMF FinTech notes raise concerns about cryptos and capital flow management:

Capital flow management measures (CFMs) can be part of the broader policy toolkit to help countries reap the benefits of capital flows while managing the associated risks. Their implementation typically requires that financial intermediaries verify the nature of transactions and the identities of transacting parties but is facing the rising challenge of crypto assets.

Indeed, crypto assets have become a significant instrument for payments and speculative investments in some countries. They can be traded pseudonymously and held without identification of the residency of the asset holder. Many crypto service providers operate across borders, making supervision and enforcement by national authorities more difficult. The challenges posed by the attributes of crypto assets are compounded by gaps in the legal and regulatory frameworks.

This paper aims to discuss how crypto assets could impact the effectiveness of CFMs from a structural and longer-term perspective. To preserve the effectiveness of CFMs against crypto-related challenges, policymakers need to consider a multifaceted strategy whose essential elements include clarifying the legal status of crypto assets and ensuring that CFM laws and regulations cover them; devising a comprehensive, consistent, and coordinated regulatory approach to crypto assets and applying it effectively to CFMs; establishing international collaborative arrangements for supervision of crypto assets; addressing data gaps and leveraging technology (regtech and suptech) to create anomaly-detection models and red-flag indicators that will allow for timely risk monitoring and CFM implementation.

India’s inflation at 7.8%: Few links

May 13, 2022

India’s CPI inflation touched 7.8% highest since May-2014 when it touched 8.33%. The sharp rise in inflation has led to fair bit of discussion. Here are some of the articles I read and found interesting:

Jahangir Aziz of JP Morgan argues in Indian Express that RBI’s monetary policy alone will not help contain inflation.  His point is RBI’s policy brings inflation via three channels: lowering inflationary expectations, exchange rate appreciation and lowering credit growth. OF these three, lowering credit growth is the most effective but is not going to do much as credit growth has been subdued.

Prof Rajeshwari Sen Gupta of IGIDR in Times of India lines up a 4 point battle plan for RBI: Anchor inflation expectations, avoid sudden rate hikes, give credible data, restore MPC role.

Prof TT Rammohan in Business Standard says we should blame Ukraine war and not the central banks & RBI for the current spurt in inflation

Pranjul Bhandari of HSBC Securities and Capital Markets in Business Standard dissects the current inflation trend and says brace for more.



Cyberattacks and Financial Stability: Evidence from a Natural Experiment

May 13, 2022

Antonis Kotidis and Stacey L. Schreft in this Federal Reserve working paper use a natural experiment to study the impact of cyberattacks on financial stability:

This paper studies the effects of a unique multi-day cyberattack on a technology service provider (TSP). Using several confidential daily datasets, we identify and quantify first- and second-round effects of the event. For banks using relevant services of the TSP, the attack impaired their ability to send payments over Fedwire, even though the Federal Reserve extended the time they had to submit payments.

This impairment (first-round effect) caused other banks to receive fewer payments (second-round effect), leaving them at risk of having too few reserves to send their own payments (a potential third-round effect).

These innocent-bystander banks responded differently depending on their size and reserve holdings. Those with sufficient reserves drew down their reserves. Of the others, smaller banks borrowed from the discount window, while larger banks borrowed in the federal funds market.  These significant adjustments to operations and funding prevented the second-round effect from spilling over into third-round effect and broader financial instability.

These findings highlight the important role for bank contingency planning, liquidity buffers, and the Federal Reserve in supporting the financial system’s recovery from a cyberattack.

Instinctive versus reflective trust in the European Central Bank

May 11, 2022

Siria Angino and Stefania Secola in this research paper look at two kinds of trusts:

Political science research has established that trust in institutions, including central banks, is shaped by socio-economic and demographic factors, as well as by the assessment of institutional features and by slow-moving components such as culture. However, the role of cognitive processes has largely been neglected, especially in the analysis of central bank trust. In this paper we aim to address this gap focusing on the case of the European Central Bank (ECB).

We introduce the concepts of “instinctive trust”, which captures an on-the-spot judgement on the institution’s trustworthiness, and of “reflective trust”, which refers to a more pondered opinion on the matter. Using a survey experiment, we find that deeper consideration about the ECB promotes less trust in the institution compared to an on-the-spot judgement. This result is mainly driven by women, and in particular by those who say they possess a low understanding of the central bank’s policies.


Black swans and grey rhinos – lessons of crises on macroprudential policy

May 11, 2022

Marja Nykänen Deputy Governor at Finland Central Bank in this speech says policymakers should pay attention to grey rhinos:

Dear audience, in late January I gave a speech in a seminar, whose topic was black swans in financial markets. As you well know, black swans are unforeseen events with extreme consequences. At the time of the seminar in January, the black swan everyone had in mind was of course the Covid-19 pandemic.

In my speech back then, I discussed how the Covid-19 and another black swan – the Global Financial Crisis that started less than 15 years ago – have shaped our thinking of financial regulation, crisis response and macroprudential policies. I also talked about another concept from the natural world, the grey rhinos. A grey rhino can be defined as a well-known and slow-moving risk that can cause or amplify financial or other crises, if it´s ignored long enough. For example, high household indebtedness and climate change can become grey rhinos if we don´t act decisively to slow them.

Since black swans are, by definition, unforeseeable, neither I nor other participants of the seminar could foresee that the next black swan was about to emerge only one month later. Russia´s brutal assault on Ukraine has shocked the world, caused immeasurable human suffering, and is changing the way we see geopolitical risks, cyber security, national security and transition to green energy, among other things.


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