RBI’s “whatever is necessary” moment arrives…

March 27, 2020

What a tough time Mr Shaktikanta Das is having! He has been dealing with so many crises ever since his appointment in Dec-2018. But the latest one of dealing with Covid19 crisis will surpass all challenges.

There was criticism that RBI has not cut policy rates where other central banks have thrown whatever possible at the crisis. As per RBI Act, only the MPC can take the interest rate decision. The Act specifies the following:

45ZI. Meetings of Monetary Policy Committee.
(1) The Bank shall organise at least four meetings of the Monetary Policy Committee in a
(2) The meeting schedule of the Monetary Policy Committee for a year shall be published by the Bank at least one week before the first meeting in that year.
(3) The meeting schedule may be changed only––
(a) by way of a decision taken at a prior meeting of the Monetary Policy Committee; or
(b) if, in the opinion of the Governor, an additional meeting is required, or a meeting is required to be rescheduled due to administrative exigencies.
(4) Any change in meeting schedule shall be published by the Bank as soon as practicable

This was clearly a call taken by the RBI Governor. Perhaps he could have taken the decision a little earlier.

In this meeting under exigencies, RBI has lowered policy repo rate by 75 bps to 4.4%. It has also taken several measures to support the banking and financial markets.

I am surprised that the MPC members did not agree to a deeper cut of 100 bps. Infact, there was a split with 4 members voting to cut rates by 75 bps and 2 members by 50 bps.

All members voted for a reduction in the policy repo rate and maintaining the accommodative stance as long as it is necessary to revive
growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.

Dr. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted for a 75 bps reduction in the policy repo rate.
Dr. Chetan Ghate and Dr. Pami Dua voted for a 50 bps reduction in the policy repo rate.

The MPC also stated it will do “whatever is necessary”:

The MPC is of the view that macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. The need of
the hour is to do whatever is necessary to shield the domestic economy from the pandemic. Central banks across the world have responded with monetary
and regulatory measures – both conventional and unconventional.  

Governments across the world have unleashed massive fiscal measures, including targeted health services support, to protect economic activity from
the impact of the virus.

The virus has just changed so many things. It questions whatever edifice and protection humans have built over centuries…

Europe is at last channeling Alexander Hamilton..

March 26, 2020

Jacob Funk Kirkegaard of PIIE in this piece says Europe has finally found its Hamilton. Hamilton had rescued US in 1790 and Europe is doing the same. Just that Lagarde as a central bank head has to play the role:

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Will the pandemic crisis lead to multidisciplinary economics?

March 26, 2020

Mohammed El Erian in Proj Sync piece:

Given how extensive government interventions are likely to be this time around, it is critical that policymakers also recognize the limits of their interventions. No tax rebate, low-interest loan, or cheap mortgage refinancing will convince people to resume normal economic activity if they still fear for their own health. Besides, as long as the public-health emphasis is on social distancing as a means of quashing community transmission, governments won’t want people venturing out anyway.

All the issues raised above are ripe for more economic research. In pursuing these avenues of inquiry, many researchers in advanced economies will find themselves inevitably rubbing up against development economics – from crisis management and market failures to overcoming adjustment fatigue and putting in place better foundations for structurally sound, sustainable, and inclusive growth. Insofar as they adopt insights from both domains, economics will be better for it. Until recently, the profession has been far too resistant to eliminating artificial distinctions, let alone embracing a more multidisciplinary approach.

These self-imposed limits have persisted despite abundant evidence that, particularly since the early 2000s, advanced economies are saddled with structural and institutional impediments that have stifled growth in a manner quite familiar to developing economies. In the years since the global financial crisis in 2008, these problems have deepened political and societal divisions, undermined financial stability, and made it more difficult to confront the unprecedented crisis that is now knocking down our door.

Will there be a uniform currency in a cashless economy?

March 26, 2020

Walter Engert and Ben S. C. Fung of Bank of Canada in this short paper

Is cash necessary for a uniform currency? Consider the following transaction: a person could exchange a bank deposit for cash at face value and then deposit that cash at face value in another bank, thereby forcing a deposit transfer at face value via cash.1 In this way, cash could be used to establish a fixed one-to-one exchange rate between different bank deposit monies. In the absence of cash, obviously, it would not be possible to conduct this kind of transaction. So, without cash, would our uniform currency break down? In this note, we consider whether a uniform Canadian currency would continue in a cashless economy.

The next section provides some historical background, briefly recounting the experience of establishing a uniform Canadian currency in the 19th century. As will be seen, the institutional environment was very different than it is today. Section 3 then explains how a uniform currency is maintained in a contemporary setting and shows that cash is not important to achieve this outcome. As a result, a uniform currency would be maintained in Canada even if a cashless economy were to develop.


The perils of compounding come to fore during the Covid19 crisis

March 25, 2020

Economists live the concept of compounding especially for growth and finance matters. If your economy grows by 5% for 5 years, the overall growth is not 25% but 31.25% as one also has to multiply the incremental growth.

Prof Gernot Wagner who teaches climate economics at New York University says compounding runs both ways. Just like we look at its positives we should be weary of its negatives as well:

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South African Reserve Bank warns the public that it is not withdrawing banknotes and coin

March 24, 2020

Trust human beings to do anything. When humanity is facing one of its worst crisis, we still see some people tying to find a way to cheat people.

See this case in South Africa:

The South African Reserve Bank (SARB) has been made aware of fake news that involve a scam claiming that it is “recalling” money from the public. It is believed that criminal elements are visiting the homes of members of the public telling them to hand over banknotes in their possession because the banknotes have been contaminated with the Corona virus. These criminal elements carry fake SARB identification and provide false receipts in lieu of the banknotes “collected” which they purport can be collected from any of the banks.

The SARB has neither withdrawn any banknotes or coins nor issued any instruction to hand in banknotes or coins that may be contaminated with the COVID-19 virus. The SARB will NOT, under any circumstances, send employees or representatives to collect cash from the public. If members of the public are approached by individuals purporting to be SARB employees or representatives, to hand in their cash, they should refuse and contact local police.


A Greater Depression?

March 24, 2020

Dr Doom Nouriel Roubini in the Proj Synd piece:

With the COVID-19 pandemic still spiraling out of control, the best economic outcome that anyone can hope for is a recession deeper than that following the 2008 financial crisis. But given the flailing policy response so far, the chances of a far worse outcome are increasing by the day.


Unless the pandemic is stopped, economies and markets around the world will continue their free fall. But even if the pandemic is more or less contained, overall growth still might not return by the end of 2020. After all, by then, another virus season is very likely to start with new mutations; therapeutic interventions that many are counting on may turn out to be less effective than hoped. So, economies will contract again and markets will crash again.

Moreover, the fiscal response could hit a wall if the monetization of massive deficits starts to produce high inflation, especially if a series of virus-related negative supply shocks reduces potential growth. And many countries simply cannot undertake such borrowing in their own currency. Who will bail out governments, corporations, banks, and households in emerging markets?

In any case, even if the pandemic and the economic fallout were brought under control, the global economy could still be subject to a number of “” tail risks. With the US presidential election approaching, the COVID-19 crisis will give way to renewed conflicts between the West and at least four revisionist powers: China, Russia, Iran, and North Korea, all of which are already using asymmetric cyberwarfare to undermine the US from within. The inevitable cyber attacks on the US election process may lead to a contested final result, with charges of “rigging” and the possibility of outright violence and civil disorder.

Similarly, as I have  previously, markets are vastly underestimating the risk of a war between the US and Iran this year; the  of Sino-American relations is accelerating as each side blames the other for the scale of the COVID-19 pandemic. The current crisis is likely to accelerate the ongoing balkanization and unraveling of the global economy in the months and years ahead.

This trifecta of risks – uncontained pandemics, insufficient economic-policy arsenals, and geopolitical white swans – will be enough to tip the global economy into persistent depression and a runaway financial-market meltdown. After the 2008 crash, a forceful (though delayed) response pulled the global economy back from the abyss. We may not be so lucky this time.

Terrible news all around..

Gulzar has a round up of more such depressing articles

Could MMT rescue us from the Covid19 crisis?

March 23, 2020

My new piece in MC.

I must admit am no expert on MMT. This was just an attempt to understand what MMT folks are saying on the crisis and whether their ideas deserve a hearing this time around.

Pandemics and social capital: From the Spanish flu of 1918-19 to COVID-19

March 23, 2020

Research on covid19 is flowing thick and fast. This piece on voxeu says the impact on social capital/trust is going to last much longer than imagined. (by Arnstein Aassve, Guido Alfani, Francesco Gandolfi, Marco Le Moglie)

Covid19: What would Roosevelt do? What would Keynes say?

March 23, 2020

Prof Pavlina R. Tchernev of Bard College in this Proj Synd piece wonders what would FDR do if faced with the Covid19 crisis?

The US government should pull out all the stops in mitigating the economic fallout from COVID-19, not just by disbursing cash to all households, but also by implementing a federal job guarantee and many other long-overdue policies. After all, for a self-financing government, money is no object.

Prof Robert Skiledesky asks What will Keynes say:
One hopes that governments will not have to choose between higher prices and increased taxes to finance efforts to combat the COVID-19 pandemic. But it’s not too early for policymakers to start thinking about how to pay for this particular war.
Mind is buzzing with all kinds of possibilities…

Essay Competition: Going viral – how coronavirus affects the world economy?

March 21, 2020

Meghnad Desai Academy of Economics is organising a competition for graduating students on the topic: Going viral – how coronavirus affects the world economy?

Pass on the word to interested students. Last date for submission is 31 March 2020.

Taking selfies with brands..

March 20, 2020

Interesting paper by Reto Hofstetter, Gabriela Kunath, and Leslie K. John:

Increasingly, consumers are taking self-photos and marketers, eager to capitalize on this trend, have been asking consumers to take self-photos with brands (i.e., brand selfies). We suggest that consumer compliance with such requests sparks a self-inferential process that leads the consumer to feel connected to the brand (e.g., “If I took the brand selfie, I must feel connected to this brand”), increasing brand preference. Eight studies support this account. In a dataset of 283,140 user reviews from Yelp, study 1 documented a positive association between a reviewer’s propensity to take a brand selfie and the star rating he gives the restaurant. Seven experiments point to causality.

Participants randomized to take brand selfies felt greater self-brand connection and exhibited heightened brand preference, relative to those randomized to take: no photo at all (study 2a); a selfie (without the brand, studies 2b–6); or a photo of the brand (without the self, study 3). Two studies point to process in convergent ways, via serial mediation (study 4) and moderated mediation (study 5).

A final study documented a crucial moderator: dissatisfaction with one’s appearance in the selfie triggers defensive processing, reducing self-inference and, thereby, the capacity for brand selfie-taking to increase brand preference.


Comparing Covid19 to GFC 2008 is not approporiate..

March 20, 2020

Stephen Roach in this Proj Synd piece:

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Popular governments may be a sign of future financial crises

March 20, 2020

A post on LSE blog. Summarises this paper which says popular governments can be a sign of future financial crisis mainly in emerging economies:

One well-documented predictor of financial crises are credit booms and capital flow bonanzas. Indeed, many banking and current account crises (sudden stops) have been preceded by unusual expansion of domestic and/or external credit (see for example Reinhart and Reinhart 2008Forbes and Warncock 2012Schularick and Taylor 2012Mendoza and Terrones 2012). To the best of our knowledge, however, not much research has focused on early warning indicators outside the realm of economic variables.

In this post, which is based on our research in Herrera et al. (2020), we discuss the role of political bonanzas (large increases of government popularity) in the run-up to financial crises, showing that this political variable can be helpful to predict crises. We propose new cross-country measures of government popularity, which covers more than 100 countries as far back as 1984. Specifically, we propose the use of the “International Country Risk Guide” (ICRG) sub-indicator of “government stability”, which measures “the government’s ability to carry out its declared program(s), and its ability to stay in office” and which we show is closely related to actual public opinion data for those countries and episodes for which actual government approval data is available (e.g. from Gallup)…..


Why do political booms precede financial crises only in emerging markets? We argue that governments with lower initial levels of popular support have more incentives to ride political booms simply because there is more margin for increasing their popularity than in advanced economies. Furthermore, if there is also high uncertainty about the government’s quality to begin with, then riding a boom also has more potential to change public opinion. Indeed, these preconditions are more typical in young democracies (including many emerging markets) rather than established ones – we show that government popularity in emerging markets is significantly lower than in advanced economies and also more volatile, meaning that the public is more uncertain about the quality of its politicians.

In our model, this implies that popularity is more responsive to the perceived economic environment and to governments’ actions and policies. To match this rationale, we further show empirically that governments with lower initial popularity levels are more likely to experience financial crises in the future. This result holds even in the subsample of emerging markets.

In sum, emerging markets may be more prone to crises than advanced economies because their governments, having on average a lower reputation and more uncertain quality, can gain more in popularity from riding credit booms that are doomed to fail.

Obviously the research is based on past data. Much of today’s developed world shows similar govts as emerging economies..


The Transportation‐​Communication Revolution: 50 Years of Dramatic Change in Economic Development

March 19, 2020

Paper in Cato Winter 2020 Journal:

The Industrial Revolution transformed subsistence living into sustained growth, but only for about 15 percent of the world’s population. Throughout the rest of the world, change was minimal. In 1950, the real per capita income for developing countries outside of Africa was slightly less than $4 per day, approximately the same as that of the high‐​income, developed countries at the onset of the Industrial Revolution. But income levels in the developing world have increased dramatically during the past half century, particularly for the 70 percent of the world’s population living in less geographically disadvantaged developing countries.

The huge reductions in transportation and communication costs over the past half century provided the foundation for the remarkable increases in economic development and worldwide income. The Transportation‐​Communication Revolution triggered four changes that have altered life in the developing world: gains from large increases in international trade; gains from higher rates of entrepreneurship and expanded opportunities to borrow successful technologies and business practices from high‐​income countries; improvement in economic freedom; and the virtuous cycle of development.

Our empirical analysis of the annual growth rate of real per capita GDP since 1960 indicates that the expansion of international trade, higher rates of economic freedom, and increases in the share of the global population in the prime working‐​age category have exerted a strong and highly significant impact on economic growth. Due to the sharp reductions in transportation and communication costs, the volume of international trade has risen sharply in recent decades. The growth of trade in less geographically disadvantaged developing countries has been particularly remarkable. Measured in real dollars, the size of the international trade sector in these countries was 44 times higher in 2017 than it was in 1960. This astonishing rate of growth in international trade was approximately 2.5 times higher than it was in high‐​income and more geographically disadvantaged countries over the same time frame. Propelled by the growth of trade, the real per capita GDP of the five billion people living in the less geographically disadvantaged developing world has grown at nearly twice the rate of high‐​income countries in recent decades. The historically high rates of economic growth have transformed these developing countries even more rapidly than the Industrial Revolution transformed the West between 1820 and 1950.

While the Industrial and Transportation‐​Communication Revolutions exerted a similar impact on the lives of those most affected, they differ in three major respects. Compared to the earlier economic revolution, the more recent revolution has been broader, generated more rapid rates of economic growth, and reduced income inequality rather than enlarged it. Both the general populace and the academic literature show an appreciation of the human progress that accompanied the Industrial Revolution. It is now time for both groups to recognize the remarkable human progress brought about by the Transportation‐​Communication Revolution.


Yes Bank crisis: Why is a Financial Redressal Agency missing when it is needed most?

March 19, 2020

My new piece in moneycontrol.

The piece reflects on how AT1 bonds reached retail investors and they have nowhere to go to file their complaints. The FSLRC had argued for a Financial Redressal Agency and there was a Task Force which advocated starting FRA by late 2016/early 2017. However, the plan was shelved only for retial investors to face the heat in Yes Bank case.

I also connect the piece to Elizabeth Warren..:-)

Change in Yes Bank shareholding pattern

March 18, 2020

I have been wondering how Yes Bank shareholder pattern will look like. In Dec-2019, the shareholding pattern was like this. Yday, the Yes Bank released a new shareholding pattern

This is how it is:

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Central banks’ “whatever it takes” moment: Will it help?

March 18, 2020

Central banks are again trying to throw the sink at the financial markets. They are searching for  a comment similar to Mario Draghi’s “Whatever it takes” which helped save Euro (atleast that is what we are told).

Some comments on the central bank actions:

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Post Yes Bank: Increasing concern for small private banks

March 18, 2020

This news in Mint on how deposits have declined in one of the small private sector banks in the last one week.

The moratorium on Yes Bank is going to be lifted today at 6 PM. On opening Yes Bank website, pop comes this message:

We will find out soon how good is this new foundation. One of the leading business TV journalists appeals to Yes bank depositors and not panic. Moody’s has also upgraded the bank by a notch which should provide some relief.

Indian banking gets murkier. Private bankers who once laughed at miseries of public sector bankers would be getting a taste of their own medicine now.

RBI-Occasional Papers-Vol. 40, 2019

March 17, 2020

RBI has published its latest occasional paper series Vol 40:

1. Fiscal Rules and Cyclicality of Fiscal Policy: Evidence from Indian States

Dirghau Keshao Raut and Swati Raju examine the impact of fiscal rules on the cyclicality of fiscal policy of Indian states using data for the period from 1990 to 2018. The results suggest that fiscal rules have reduced pro-cyclicality of fiscal policy, particularly in terms of development expenditure, in the post-FRL period. Fiscal deficit also changed its nature from pro-cyclical in the pre-FRL period to acyclical in the post-FRL period. Capital outlay displayed acyclical behaviour in both pre-and post-FRL periods.

2. Payment Systems Innovation and Currency Demand in India: Some Applied Perspectives

Dipak R. Chaudhari, Sarat Dhal and Sonali M. Adki postulate currency demand for transaction purposes driven by income effect, and a payment technology induced substitution effect working through velocity of currency. Innovations in payment systems have shown a statistically significant long-run inverse relationship with currency demand in India. However, the magnitude of its coefficient indicates that the substitution effect of payment systems on currency demand is smaller than the dominant income effect.

3. Can Financial Markets Predict Banking Distress? Evidence from India

Snehal S. Herwadkar and Bhanu Pratap test whether equity markets provide any lead information about stress in the banking system before quarterly data become available to the supervisors. The authors find that markets are able to price-in the banking stress concurrently but not much in advance. As the supervisory data are available with a lag, there is some merit in incorporating market-based information to track banking distress. Interestingly, the findings suggest that markets are relatively less efficient in providing such lead information in the case of public sector banks vis-à-vis private sector banks.

The last paper is interesting. Did equity markets do better in indicating stress at Yes Bank given it is a private sector bank?

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