Demographic changes and their macroeconomic ramifications in India

July 16, 2019

Nice short paper in RBI’s Monthly Bulletin of July-2019. It is written by Atri Mukherjee, Priyanka Bajaj and Sarthak Gulati:

This study examines the influence of demographic changes on macroeconomic outcomes in India using generalized method of moments. The estimation results show that population growth and age dependency ratio have inverse relation with the growth in real GDP and
per capita income, and positive relation with inflation. Increase in working age population, on the other hand, contributes to higher economic growth. An aging population is deflationary in nature though improves the current account balance. While the declining age dependency ratio offers a demographic dividend for India, the realisation of the same would require an environment empowering the labour force with right skills and enabling their gainful employment in productive uses.




Ironically, Alan Turing to be the face of GBP 50 banknote (Ramanujan was in shortlist too!)

July 16, 2019

Bank of England announced that Alan Turing would be the new face of their GBP 50 banknotes.

Alan Turing was chosen following the Bank’s character selection process including advice from scientific experts. In 2018, the Banknote Character Advisory Committee chose to celebrate the field of science on the £50 note and this was followed by a six week public nomination period. The Bank received a total of 227,299 nominations, covering 989 eligible characters. The Committee considered all the nominations before deciding on a shortlist of 12 options, which were put to the Governor for him to make the final decision. 

Mark Carney, Governor of the Bank of England, commented: “Alan Turing was an outstanding mathematician whose work has had an enormous impact on how we live today. As the father of computer science and artificial intelligence, as well as war hero, Alan Turing’s contributions were far ranging and path breaking. Turing is a giant on whose shoulders so many now stand.” 

Alan Turing provided the theoretical underpinnings for the modern computer. While best known for his work devising code-breaking machines during WWII, Turing played a pivotal role in the development of early computers first at the National Physical Laboratory and later at the University of Manchester. He set the foundations for work on artificial intelligence by considering the question of whether machines could think. Turing was homosexual and was posthumously pardoned by the Queen having been convicted of gross indecency for his relationship with a man. His legacy continues to have an impact on both science and society today. 

This is quite ironic. Turing’s work laid the foundations for not just computers science but also today’s digital world. The digital world has spread its tentacles to the world of money with cryptocurrencies and digital payments challenging physical banknotes. And we have Turing as  the face of the GBP 50 banknote!

Turing was chosen from a list which included Ramanujan too:

Read the rest of this entry »

How to Keep Central Banks Independent

July 16, 2019

Group of economists in the piece say central banks should go back to their original mandate of financial stability:

Some observers say central banks can best mitigate risks to their independence by returning to the narrow price-stability mandate that served them so well prior to the global financial crisis. But this advice is misguided: central banks must revive their original role as guardians of financial stability.


Protecting central-bank independence requires adaptation. In the post-crisis world, governments and citizens will continue to delegate increasingly broad policymaking powers to an unelected independent institution. Central banks must therefore become increasingly accountable in order to maintain their legitimacy. We need a public debate to forge agreement on a framework for central banks’ objectives, tools, and communication mechanisms. Failure to have such a discussion would pose a risk not only to central-bank independence, but also to financial stability and overall social welfare.
I doubt this will help. Take the case of European central bankers which are part of the Eurosystem. As monetary policy is given to ECB. most of these central banks look at financial stability. Yet are under pressure from Governments.
Unless, we have better rules to prevent firing of the central bankers autonomy would always be in the hands of the government.

Corporate Governance in Banks in India: Designing a new benchmark index

July 16, 2019

Rekha Mishra and Anwesha Das of RBI in this new EPW paper:

While several committees have examined and suggested ways to improve corporate governance in banks in India, this study makes an attempt to prepare a benchmark index for the board composition aspect of corporate governance. A comparison between the indices for public sector banks with private sector banks reveals that differences in governance structures cannot be explained fully in terms of ownership only. This is a welcome feature, as with some efforts on the part of the majority shareholder, corporate governance in all the banks can be brought on par with the best-performing bank, by ensuring greater compliance with corporate governance benchmarks.

Taking Malthus seriously

July 15, 2019

Jakob Brøchner Madsen, Peter Robertson and Longfeng Ye present new evidence showing Malthus was right:

The econometric evidence for the Malthusian trap in pre-industrial Europe has been weak. The column presents a new Malthusian model that, combined with new historical data for 17 countries, provides evidence of a much stronger Malthusian trap than the one found by previous research. This helps to explain the economic stagnation from the dark ages to the industrial revolution.

When central bankers speak about cloud services instead of the usual monetary policy stuff..

July 15, 2019

Central bankers/policymakers use the metaphor of looking up to clouds/skies for saying how economic growth is likely to be in future. Some say dark, some say blue and so on. In India (and South Asia), policymakers actually look at skies to figure state of monsoons.

With technology, using the word cloud means something much more. Mr Burkhard Balz of Bundesbank in this speech looks at how digitisation means central banks also have to change and look at their cloud services:

Read the rest of this entry »

Kane and Eoin: Could Jeffry Archer script a better World Cup Final match?

July 15, 2019

It is just quite unbelievable to run your mind through the scenes of last night. I mean what a match! It seemed to have taken inspiration from the semi-final of 1999 played between Aus and South Africa and take it couple of levels higher.

Hearts weep for NZ which fought and fought despite not being most people’s favorites. Before the match, most experts said heart says NZ but mind says England as latter is a better team. And what a shame that they lost in such a fashion despite being a better team on the day with limited resources and challenging England on all fronts which had superior resources.

In a way NZ did not lose to England but to ICC whose stupid rule that in case of a tie in Super over, the team that scores more boundaries wins?! One can say, no one imagined that any match could be stretched this far, but you cannot have a more stupid rule than this. It is like these two tennis players who tie the scores in the last set, and the rulebook says in such a case the player who hit more aces will win. Or two sprinters with same timing seperated based on someone taking less steps than the other. Incidentally, if tennis had such a rule, Federer would have won yesterday’s iconic match against Djokovic.

The rule was so unjust that is difficult to digest. Loss and win is part of sports and one always sulks for the team which loses despite playing like a champion. Think about South Africa all these years whoch loses as somehow it chokes when it comes to crunch matches. But there is no injustice there. So, if NZ had lost either in terms of runs or wickets one would be fine. This is how all cricket matches are won or lost.

But NZ lost because they scored 17 boundaries compared to England’s 25. I mean what kind of a rule is this? Is ICC saying that those who run all these runs did a worse job than those who just hit fours? How unfair is that for a rule?

I mean football, hockey, tennis etc all have tie-breakers to sort out the winner in such even matches. Cricket has a super-over but just like tie-breakers it should continue till we do not have a winner.

In the end, all one can say is NZ fought against all odds and even Gods. It is as if Gods had decided that come what may, England will win. NZ challenged this saying how can you decide this without playing and challenged this in all possible ways. So many things went against them: Ross Taylor given out when he was not, Jason Roy was out first ball but was not, Stokes was caught but Boult stepped on the line and finally that last over throw which deflected from Stokes bat to give additional four runs to England! In all of these, they could not do anything but just move on with the game.

In Super over, they were given a steep target of 16 runs. Even then, NZ did not give up, surprised by sending Neesham who almost pulled off scoring 14 of those (including 1 wide) runs.

If there was one thing ICC got right it was awarding NZ captain Kane Williamson, the player of the tournament. I mean what a player. To be he is the best captain I have seen, as he just marshaled his limited resources like no one else could. He scored most runs as a captain in all World Cups, he scored 30% of team totals which was again highest and never complained. His press conferences are a delight and he is such an amazing ambassador for both NZ and the game.

Kane defies the usual thing that captains should be aggressive and show it on the field. He always does things quietly but with lots of mental aggression and strategy. He made both India and England which had top batters earn ever run. Those who thought Semi Final was a fluke, Williamson made them chew their words.

Kane is even an economist’s delight as he shows how one can optimally utilise the limited resources, the definition most commonly used by economists to define economics.

The ending of the drama made me recall a novel written by Jeffry Archer: Kane and Abel. In the book, the two protagonists named Kane and Abel fight for the supremacy in the corporate world. Abel always thought Kane as a villain whose bank denied the early funds to Abel’s hotel leading to bitter frictions between the two. Abel was saved by an anonymous benefactor. In the end, Abel learns that Kane was that anonymous benefactor who seeing passion of Abel decided to fund the hotel from his own pockets. Abel wins the corporate battle at the end yet ends like a loser.

I had a similar feeling watching yesterday’s matches. Infact, the name of Kane in the novel was Kane Lovell Williams not very different from Kane Williamson of NZ. The WC Final mattered to both the captains but perhaps a bit more to Eoin Morgan, the English captain.

After being humiliated in 2015, English under Morgan completely changed plans and became the number one side. They wanted to play a game which brings English pride back in the game and inspire the nextgen of English cricketers. They started the World Cup as favorites only to come to a stage where they could be knocked off before semis, fought back like champions and thrashed Australia in a semi-final. Only to meet NZ in a final which just competed and competed and gave nothing.

Just like the novel, the gracious Kane Williamson like the gracious Kane Lovell William, was like an anonymous benefactor of the prized trophy to Eoin Morgan.

He saw how Eoin Morgan and his team have fought all kinds of demons to emerge as number one team. NZ will still pick up from here but England would have been more devastated with the loss given how much they have wanted this result. But then just like Abel, Eoin will know and remember the gracious Kane who saw life beyond cricket and gave Eion a chance without telling him about it! He owes as much to Kane as to anybody.

How else does one explain this result?


Should the Bank of Japan issue a Digital Currency?

July 12, 2019

Masayoshi Amamiya, Deputy Governor of the Bank of Japan, in this speech says BoJ has no such plans. However, it is studying these ideas for two reasons:

Today, I have had the pleasure of sharing with you my understanding on retail payments in the digital age, focusing on the relationship between central bank money and private money.

Now, I would like to give you my own answer to the question I posed at the beginning: “Why are many central banks, including the Bank of Japan, committed to researching and studying into CBDCs even though they have no plan to issue them in the near future?” I have two reasons. First, since technological innovation evolves rapidly, the retail payments market structure could suddenly change dramatically, pushing us toward a cashless society.

In some cases, the need for CBDC issuance may suddenly increase. To be able to adapt to such a situation, central banks need to deepen their understanding on the latest developments in information technologies and their applicability to CBDC. Second, as I have discussed in the latter half of my speech, through research into CBDC — or through the CBDC lens — central banks examine more fundamental questions such as: “What are the required functions of money?”; “What ways do we have of improving the complementary relationship between central bank money and private money?”; or “What ways do we have of enhancing the functionality of private digital currency?” This process can offer clues for ways in which payment and settlement systems as a whole can be improved.

The Bank will continue to examine CBDC with these two aspects in mind. In this respect, allow me to introduce two of our recent initiatives. On the technological front, the Bank is continuing research into distributed ledger technology — DLT. Project Stella, a joint research project with the European Central Bank is part of these initiatives.5 This project has resulted in three reports so far, exploring, for example, the applicability of DLT to payments using central bank deposits — that is, wholesale CBDC.

On the legal front, the Bank’s Institute for Monetary and Economic Studies set up a study group on legal issues regarding CBDC in November 2018. It identifies potential legal issues that would arise if the Bank were to issue CBDC in response to rapid developments in technology and their possible interpretations. The report will be released in due course.

The Bank will continue to work to improve the efficiency and safety of payment and settlement systems. It will examine, from various perspectives, the desirable nature of these systems, including the issue of CBDC. And this brings me to the end of my speech.


50 years of Bank Nationalisaton: Why Indira Gandhi Nationalised India’s Banks

July 12, 2019

It was 50 years ago on July 19, 1969 that then PM Indira Gandhi nationalised 14 of the largest private sector banks.

Bloomberg Quint is doing a series on 50 years of bank nationalisation. Mr DN Ghosh, one of the main persons who wrote the nationalisation legislation wrote the first piece saying: Bank Nationalisation the original sin?

In the second article,  yours truly explores the political economy of several factors which led to nationalisation.


England and NZ: trying to be best in ODI cricket and central banking

July 12, 2019

Reflecting on my recent piece in Business Standard where I argued how England is trying to revive fortunes in One Day International Cricket and Central banking.

I wrote the piece when England was struggling to make it to semi-finals having lost to Pakistan, Australia and Sri Lanka. Somehow, England figured a way out and won the next matches against India and NZ to qualify for Semifinals.They also beat their arch rivals Australia in semis, in a manner Australia will always remember. It was as if firtunes had reversed as Aussies gave that kind of treatment to Englisy be it Test matches or ODIs. England were tested and proved critics wrong and showed their reign to top was not a fluke but years of preparation.

It is interesting that they will be playing the final against NZ which somehow puffed into semis and beat favorites India to enter the final. It has to be seen whether NZ which were favorites to win in 1992 and 2015 but lost both, win the cup without being favorites at all. They will take lot of inspiration from India’s own win against WI in 1983 final against all odds.

In the BS piece, I also argued how Bank of England is trying to regain its top position as well. For long, it was seen as a role model for central banks but stopped being one. Now it is trying to pick the tempo by ushering in several policy changes and innovations.

What is interesting is that Bank of England is also competing with its counterpart in NZ for becoming this “role model for other central banks” title. RBNZ was the first to start inflation targeting in 1989 and has pioneered quite a few things since 1989. I wrote about RBNZ here.

RBNZ no intends to become the best central bank. Its Governor Adrian Orr in a speech highlighted this statement of intent:

Over the recent period we have committed to our vision to be ‘a great team and the best central bank’, and we have embedded our new Monetary Policy Committee and policy mandate. In addition, we have reorganised our operating structure, and have been investing in our people, our stakeholder relationships home and abroad, our supervision capability and activities, our digital capability, and our payment systems and the future of cash.

Change is now business as usual for the Reserve Bank and I sincerely thank my colleagues for managing through this period of renewal. There is of course more change to come.

Just over two weeks ago, the Prime Minister and the Minister of Finance made some important announcements about progress with the government’s review of our statutory framework for financial system regulation. They announced some in-principle decisions – including introducing a deposit insurance scheme – and set out further questions for a consultation, which is going on now.

So this is a good time discuss the future of the Reserve Bank, and how the changes under consideration might promote the prosperity and wellbeing of New Zealanders and contribute to a sustainable and productive economy. Those phrases, by the way, are not my own. They come from the Reserve Bank Act and express the overarching purpose of the Reserve Bank’s many functions.


Interesting how the competition between the two is in both the fields, cricket and central banking!

Inflation Co-Movement in Emerging and Developing Asia: The Monsoon Effect

July 12, 2019

Patrick Blagrave of IMF in this paper looks at the monsoon effect on inflation in developing Asia:

Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement.

By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation.

In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.


Download Handbook of Cliometrics for free!

July 12, 2019

Just fascinating resource for students of all kinds of economics history.

Springer allows you to download Handbook of Cliometrics for free! Crazy stuff. Download all before they decide against it and drown in the fascinating chapters…



What drives demand for banknotes? Swiss edition

July 11, 2019

Interesting paper by Katrin Assenmacher, Franz Seitz and Jorn Tenhofen:

Knowing the part of currency in circulation that is used for transactions is important information for a central bank. For several countries, the share of banknotes that is hoarded or circulates abroad is sizeable, which may be particularly relevant for largedenomination banknotes. We analyse the demand for Swiss banknotes over a period starting in 1950 to 2017 and use different methods to derive the evolution of the amount that is hoarded.

Our findings indicate a sizeable amount of hoarding, in particular for large denominations. The hoarding shares increased around the break-up of the Bretton Woods system, were comparatively low in the mid-1990s and have increased significantly since the turn of the millennium and the recent financial and economic crises.

Well, the results are just opposite of what central bankers and government will tell you. They say people hoard money for all kinds of illegal transactions, black money and so on. They never tell you that most of the time common people hoard money for all the policy problems created by the government and central banks.

How NZ just upset India..

July 11, 2019

It is something about World Cup (WC) Semi Finals and NZ (or Black Caps) that we get such matches. Whether it was 92 against Pak (which NZ lost) or 2015 against South Africa (NZ won) or the 2019 against India (NZ won), all these matches have been absolute classics. Though the one between Aus and  South Africa in 1999 is going to take something to beat.

NZ comes across as an interesting team, a team which usually punches above its weight. It had played 758 matches on the even of the 2019 World Cup and won 343 and lost 370 of them (6 ties and 40 no result). It has a win-loss ratio of 0.924 which is 9th in the list of countries that have played ODI cricket since 1971. Infact, it has lower Win/Loss ratio than Afghanistan! Even Nepal which has played 6 ODIs, has a better W/L ratio of 1 (3 won and 3 lost).

But come to WC, NZ is a different ball game.

Read the rest of this entry »

Cost-benefit Analysis of Leaning against the Wind

July 11, 2019

Should central banks increase policy rates to mitigate financial instability?

Trent Saunders and Peter Tulip of RBA look at the evidence from Australia:

Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial instability is called ‘leaning against the wind’. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia.

The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.


Bank of England completes 325 years: An anniversary exhibition showing 325 objects

July 10, 2019

Bank of England formed on 27 July 1694, will soon be celebrating its 325 years!

Jennifer Adam, Curator of the Bank of England Museum in this article points how the museum plans to celebrate the event:

The Bank of England officially came into being on the 27 July 1694, with the signing of its Royal Charter. Over 300 years later the Bank of England is the United Kingdom’s central bank, at the centre of a complex financial system, with well‑established roles in maintaining financial and monetary stability and regulating other parts of the banking system. It is also an employer, a body of staff, a workplace, and a building that has evolved through periods of industrial, technological and social revolution.

In July 2019, the Bank of England Museum will mark this anniversary with a new temporary exhibition, 325 years, 325 objects. Each section of the exhibition will provide a glimpse into an era of the Bank’s work and its social history, featuring many objects that haven’t been displayed before. At the centre of the exhibition is a new and unique artwork commission, which will become a permanent part of the Bank of England’s collections.

This article looks at some of the exhibition’s key themes, including changes in the way payments are made and aspects of life at the Bank. It is not a comprehensive catalogue of what is on display but a selection of highlights from the social history of the Bank since its foundation.

One of the key aims for this exhibition was to show a more diverse cast of characters from the Bank’s history. In particular, we wanted to include stories that reflected the presence of women at the Bank as both investors and, later, as staff. Developing this exhibition has revealed some lesser known stories within our collections and has highlighted gaps that we hope to address in future.

Those in London, should make visiting BoE museum part of the itinerary…

SEBI employees oppose government’s involvement in its finances

July 10, 2019

I wrote about how the Budget has proposed that SEBI should transfer 75% of its surplus each year to the Government.

Hindu Business Line reports that SEBI’s employees are opposing the move:

SEBI employees are up in the arms against Finance Minister Nirmala Sitharaman. In a strongly worded letter to FM, the association of SEBI employees have opposed a proposal in the Budget that seeks to transfer 75 per cent of the regulator’s surplus funds to government coffers by terming it as additional tax on market participants.

Also, the letter calls FM’s proposal to subject Securities and Exchange Board of India (SEBI) to seek government approval for its annual expenditure as regressive. BusinessLine has the copy of the letter.


ECB’s new chief economist Philip Lane answers questions on Twitter

July 10, 2019

This is really cool stuff from ECB. Earlier chief economist Peter Praet also engaged in similar Twitter conversation, but I think the new chief economist Philip Lane does better at it.

May be RBI could try this as well…


Lagarde as ECB head: Germans are divided on the appointment..

July 10, 2019

Nice piece by David Marsch in OMFIF:

In the drawn-out annals of Franco-German wrangles over economic and monetary union, last week’s deal over top European posts, including the presidency of the European Central Bank, stands out as a landmark French triumph. President Emmanuel Macron has exploited Chancellor Angela Merkel’s political weakness by pushing through a solution that gives France strong levers of control over European money – and provides Germany with only scant rewards in return.

There are some constructive aspects. The nomination of Christine Lagarde, International Monetary Fund managing director, to succeed Mario Draghi on 1 November has been greeted by some in Germany as providing a much-needed boost to the ECB’s status.

A high-profile policy-maker with a brisk collegiate organisational style brings to Frankfurt a track record in handling crises. In contrast to Draghi, who has kept a low profile on the wider Frankfurt scene, Lagarde will install glamour and a touch of show business in the German financial capital. She will add to the city’s appeal to international financial firms after Britain’s departure from the European Union.

Other interpretations, for the Germans, are less positive. Officials point to the unbalanced nature of last week’s agreement. Lagarde’s appointment, scotching German hopes that the job would go to Bundesbank President Jens Weidmann, looks certain to go through the political approval process. The other important part of the deal, nomination as European Commission president of Ursula von der Leyen, the trouble-plagued German defence minister, is not secure, since she could fall victim to an increasingly strong-willed European Parliament.

Lagarde’s policy stance at the IMF, supporting both quantitative easing through ECB asset purchases and growth-boosting German fiscal activism, will now be enshrined and enhanced at the centre of European decision-making. The view from Frankfurt is that Lagarde will put on hold indefinitely much-heralded monetary ‘normalisation’. So there will be no end to ultra-easy policy and no interest rate rises to alleviate what German economists say are dangerous ECB-induced distortions in the financial system.

Safeguarding the euro in times of crisis: The inside story of the European Stability Mechanism (ESM)

July 10, 2019

In the backdrop of European sovereign debt crisis, the leaders first established European Financial Stability Facility in 2010 followed by European Stability Mechanism in 2012.

ESM has released a book (free pdf available) reflecting on the experiences of establishing the facility and so on:

Global financial leaders and ESM insiders provide a rich stock of perspectives and anecdotes that bring to life the urgency of the euro area crisis as well as the innovative solutions found to resolve it. As Europe strives to further strengthen its financial architecture, this books provides important lessons for future crisis management.
Should be a good read…

%d bloggers like this: