How the TRIPS agreement tripped in the vaccine lane

May 13, 2021

My new Moneycontrol article on the recent US waiver of TRIPS agreement


Long Live the US Imperial Presidency?

May 13, 2021

Eric Posner in this Proj Synd article:

Over time, the office of the US presidency has grown only more powerful, despite perennial hand-wringing by commentators and the party that is out of power. Though there are a number of possible explanations for this trend, the most straightforward is that it is what the public wants.

The policymaker’s fiscal trilemma: increase spending, lower taxes and reduce debt

May 13, 2021


Abebe Aemro Selassie and Andrew Tiffin of IMF in this new post:

Imagine you’re a policymaker in sub-Saharan Africa. You’ve been charged with lifting your country out of the worst health crisis in living memory, and nobody around you knows when it will end—the second wave that gripped the region earlier in the year has eased, but many countries are nonetheless bracing for further waves as winter approaches.

One piece of good news is that a global recovery is well underway. Key economies are rebounding sharply, global trade has improved, commodity prices are higher, and investment flows have resumed.

The bad news is that, for sub-Saharan Africa, at least, near-term growth prospects are somewhat more subdued. And as long as widespread vaccination remains out of reach, you will face the unenviable task of trying to boost your economy while simultaneously dealing with repeated COVID-19 outbreaks as they arise.

This is the situation facing many finance ministers in sub-Saharan Africa today. And they face three immediate challenges: Firstly, to meet increased spending needs; secondly, to contain a pronounced increase in public debt, and finally, to mobilize more tax revenues.

How policymakers navigate this trilemma will have a huge bearing on economic and social outcomes in the coming years.

An incredibly difficult balancing act is needed as efforts to address one element will inevitably come at the expense of the other two. Higher spending, for example, will require that the authorities either take on more debt or increase taxes. Or both. On the other hand, efforts to boost tax revenues—although politically and socially challenging—would provide much-needed resources to either increase spending or contain debt. Or both.

Obviously MMTers will disagree to this trilemma.

History of Financial Repression: Will it make a comeback?

May 12, 2021

John Mullin in this Richmond Fed article traces history of financial repression and whether it will comeback:

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Collapse of Greensill Capital has strong historical parallels with fall of the medieval Medici bank

May 11, 2021

Superb article by Prof Harold James in Proj Syndicate:

The collapse of Greensill Capital has a strong historical parallel in the decline and fall of the medieval Medici bank after it went too far with the financial innovations of its own day. The lessons from both failures are clear, but most likely will be forgotten until the next financial meltdown.

FinTech, BigTech and Cryptos – will new technology render banks obsolete?

May 11, 2021

Norges Bank Deputy Governor Ida Wolden Bache in this speech:

Not many years ago, it was inconceivable that Facebook would launch its own means of payment or that large international banks would offer cryptocurrency investments. The landscape is evolving quickly.

The extent to which new solutions are adopted does not only depend on their features, but also on the alternatives. In Norway, banks have made great headway in terms of digitalisation. We have an efficient and secure payment system, and the value of the Norwegian krone commands trust and confidence. As such, I do not believe we are facing a fundamental transformation of the financial system in the near future. As long as the means of payment we use is based on Norwegian kroner, we will have money created by banks and payments that must ultimately be settled by banks. Monetary policy will still have a channel into the wider economy, and even though banks may look different in the future than they do today, they will not become obsolete.

But we cannot sit still. Going forward, it will be even more important for banks to develop their services in pace with technological advances and the public’s wishes. And I can promise, on behalf of Norges Bank, that we will do our part to ensure that paying in Norwegian kroner will continue to be an attractive and safe alternative in the future. This is a task we do not take lightly.

LIC IPO: An Empirical Study

May 11, 2021

Students of IIT Delhi -Asim Rajvanshi, Yash Garg, Suhani Jain, Nehal Chanchan and Himanshu Rajput analyse LIC”s IPO case.

The motivation of the leadership behind the IPO and its lack of credibility should also be considered in the valuation process. When the motivation is just disinvestment and not a single mention of scaling up the business, it will have to be seen if it is able to attract the bigger investors. Critical thing is this time LIC would not be around to bail LIC out if it struggles to raise interest as was the case with GIC or New India. One of the most important things that the government should do is to take action on the role of LIC as its lender of last resort. One of the most basic things that it can do is to release a buyback scheme, wherein if LIC is used to bail out a company by the will of the government, and moving forward, the shares only lose value, then the government should buy back the shares at their original price. This will help boost the investor confidence.

The Hindu In Focus Podcast: Understanding banking reforms in India after the Narasimham era

May 11, 2021

I discuss M. Narasimham’s stellar contributions to Indian banking with G Sampath in this Hindu Podcast.


ECB’s Young PHD in economics/finance competition

May 10, 2021

ECB’s young economists competition for PhDs in Economics/Finance. Students of any nationality can apply:

The theme of the 2021 ECB Forum on Central Banking is “Beyond the pandemic: the future of monetary policy”. Accordingly, PhD students are invited to submit papers on the following topics:

    • the consequences of corporate, public and household indebtedness for macroeconomic stabilisation after the coronavirus (COVID-19) pandemic
    • the heterogeneous impact of the coronavirus pandemic in terms of business dynamics, productivity and wages and its implications for the relative importance of different sectors and firms
    • the implications of climate change and the carbon transition for monetary policy and central bank operations

Papers on other topics relevant to central banking (including monetary policy, the deepening of the European Economic and Monetary Union, the functioning of the euro area economy and financial system, financial stability, and banking regulation and supervision) will also be considered.

Impact of Micro Financial reforms vs Impact of Macro Financial reforms

May 10, 2021

Spyridon Boikos, Ioannis Bournakis, Dimitris Christopoulos and Peter McAdam in this working paper differentiate between micro and macro financial reforms:

We develop a horizontal R&D growth model that allows us to investigate the different channels through which financial reforms affect R&D investment and patent activity.

First, a “micro” reform that abolishes barriers to entry in the banking sector produces a straightforward result: a decrease in lending rates which stimulates R&D investment and economic growth.

Second, a “macro” reform that removes restrictions on banks’ reserves and credit controls. While this reform increases liquidity, it also increases the risk of default, potentially raising the cost of borrowing. This we dub the “reserves paradox” – this makes banks offset the rise in the default rate with a higher spread between loans and deposit rates.

Thus our model suggests that whilst micro reforms boost innovation, macro reforms may appear negative. We test and find empirical support for these propositions using a sample of 21 OECD countries.


The Battle Over Patents: Why US-style patent system has come to dominate other methods of encouraging inventive activity?

May 10, 2021

Stephen H. Haber & Naomi R. Lamoreaux in this timely NBER paper which is first chapter of their upcoming book:

The Practice of Flexible Inflation Targeting in India – A Preliminary Assessment

May 10, 2021

Niranjan Rajadhyaksha and Prakhan Misra in this new IPPRI paper:

This paper examines how the new flexible inflation targeting framework has worked in practice in India, five years after it was introduced. The policy decisions taken by the Reserve Bank of India are analysed on four fronts — the trajectory of inflation, the inflation forecasting record, the voting behaviour of the monetary policy committee, and the ability to keep the weighted average call money rate within the policy corridor. These four themes represent the formal nominal anchor, the intermediate target, the central bank response function and the operating target of monetary policy. Each is a building block of the flexible inflation targeting framework. The paper then offers some suggestions on the road ahead for monetary policy practice in India, both given the experience of the past five years as well as the Covid-19 shock to the Indian economy.

The conflict between CBDC goals and design choices

May 7, 2021

Prof Antonio Fatas of INSEAD in this voxeu research:

Book Review: The Conjuror’s Trick – An interpretive history of Paper Money in India by Bazil Shaikh

May 6, 2021

I review this superb “visual delight” book by Bazil Shaikh: The Conjuror’s Trick – An interpretive history of Paper Money in India. The book is published by Marg Publications in December 2020.

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What Shanghai’s dynamic art scene reveals about the city’s middle class

May 5, 2021

As of 2019, Shanghai had 770 art galleries, more than Tokyo, London, Rome, Brussels, and Los Angeles.

In a Brookings photo essay adapted from his new book, Cheng Li explores Shanghai’s art scene and explains how it reflects the evolving cultural dynamics and aesthetic interests of the city’s growing middle class.

Among the many forces shaping China’s domestic transformation and its role on the world stage, none may prove more significant than the rapid emergence and explosive growth of the Chinese middle class. At the center of this story in China is the city of Shanghai.

Any comprehensive study of the middle class in Shanghai must include an exploration of the cultural discourse and dynamic activity of its artistic community. Shanghai historically has been a cradle for Chinese contemporary art, and the city’s art scene has enjoyed longstanding exposure to Western culture.

This does not just stem from Shanghai’s colo­nial legacy or the interaction and influence of the throngs of foreign visitors to the city; it also relates to the large proportion of students from Shanghai who have studied Western and foreign art abroad. Artists from Shanghai were among the first group of Chinese students to study abroad in the 1980s, and most of them later returned to live and work in Shanghai.

United States of Europe vs United States of America

May 5, 2021

Keith Head and Thierry Mayer in the new edition of Journal of Economic Perspectives analyse whether United States of Europe is getting any closer to United States of America. They compare progress across four freedoms: goods, services, persons, and capital. There has been progress in goods, services and capital. Persons is where there are issues:

In terms of formal institutions, the European Union is not on the verge of becoming a “United States of Europe.” But on multiple fronts, EU economic integration now matches or even beats the equivalent measure for the 50 American states. This is remarkable. The United States has more than 230 years as a federal state with a constitutional prohibition on barriers to interstate commerce.

Of course, all comparisons with the United States require caution since the last two additions for the United States occurred in 1959, whereas 22 countries have joined the European Union since that year, with the most recent entrant (Croatia) joining in 2013. Perhaps the most useful comparison across the US states is with the EU15, which includes the entry of some lower-income states but has had constant membership since 1995. The border tax equivalents implied by flows of goods and merger and acquisition transactions within the EU15 have reached the levels estimated for US states. When measuring integration as convergence in price levels the EU15 is quite similar to the American states. Focusing on a product for which we have detailed and comparable measures across all countries—compact, massmarket cars—we confirm the finding for the aggregate price index: the American states and the EU15 are again very similar.

Regarding what may be the most politically sensitive of the four movements, migration, our estimates suggest that barriers remain considerably higher in Europe. Despite the absence of formal restrictions on movement, Europeans act as if their human capital is very heavily taxed by moving countries. This lack of mobility across European borders likely reflects a variety of labor market frictions and cultural differences. On the other hand, the incentives to move have fallen substantially within the EU6, with dispersion in real incomes now essentially the same as that in core eastern states of the United States. Real income variation is three times as high in the European Union as a whole, but enlargement has been followed by a trend towards equalization, so there is little reason to think the EU28 has reached a steady state in terms of income disparities across its members.


Greening Monetary Policy: Evidence from the People’s Bank of China

May 5, 2021

Macaire Camille and Naef Alain in this Banque De France research:

In June 2018, the People’s Bank of China (PBoC) decided to include green financial bonds into the pool of assets eligible as collateral for its Medium Term Lending Facility. The PBoC also gave green financial bonds a “first-among-equals” status. We measure the impact of the policy on the yield spread between green and non-green bonds.

We show that pre-reform trends are minor, meaning that both green and non-green bonds yields evolved similarily at the time of the reform.

Using a difference-in-differences approach, we show that the policy increased the spread by 46 basis points.

Our approach differs from the literature in that we match bonds under review with non-green bonds with similar characteristics and issued by the same firm, which improves the relevance of firm fixed-effects. We also specifically investigate the impact on green bonds. The granularity of the data (daily) also allows us to conduct a dynamic analysis by dividing the sample into weekly, monthly and quarterly observations.

Our results also show that the impact of the reform starts to materialize after three weeks, has a maximum effect after three months, and has a persistent effect over six months.

Impacts of interest rate cap on financial inclusion in Cambodia

May 5, 2021

Dyna Heng, Serey Chea and Bomakara Heng in this IMF paper:

Interest rate caps, despite their intended objective of broadening financial inclusion, can have undesirable effects on financial inclusion under certain conditions. This paper examines the effect of microfinance-loan interest rate caps on financial inclusion in Cambodia. Based on a difference-in-difference analysis on bank and microfinance supervisory data, results show some unintended impact on financial inclusion.

The cap led to a significant increase in non-interest fees charged on new loans following the introduction of an annual cap. Microfinance borrowers declined immediately, amid an increase in credit growth, as microfinance institutions targeted larger borrowers at the expense of smaller ones.

Microfinance institutions, responded differently to the cap, considering their own operation and funding costs, and client base. Two years after the cap, institutions resumed lending to a wider group of borrowers with lower funding and operation costs brought by mobile payment development.

An Unusual History of University of Chicago’s revered Economics Department

May 5, 2021

Profs Arnold Harberger and Sebastian Edwards (both at UCLA) have written a paper on the history of the University of Chicago’s Economics Department.

This paper is about the Department of Economics at the University of Chicago, between 1947 and 1982. The paper has the form of a conversation between the two authors and covers issues such as the existence of a “Chicago School,” the Department’s governance, the personalities of some well-known members such as Frank Knight, Milton Friedman, and Robert Mundell, teaching, and the “Chicago boys.” It also deals with the relation between members of the Department and those of other leading Schools.

The two authors discuss some of the core ideas in this interview:

SE: Maybe we should end with a peroration of sorts, with a summary of what you see as the great advantage of the Chicago Department during the years we have been talking about. How would you summarize this advantage?

ACH: A clear advantage was that, among the leading departments, it was smaller; it was only half, or less, than Harvard and Yale. Hence, just about every professor at Chicago was not a supernumerary, everyone was important in his or her own field. The range that we had, from Milton, Harry Johnson, Bob Mundell, T.W. Schultz, John U. Nef, Jim Heckman. Everybody was a real leading person. Because of the size, the number of people responsible for a field was small, and that allowed us, for instance, to have Harry Johnson and Mundell in international, at the same time. So, it was a great Department. Now, our small size had to do with the fact that the University of Chicago didn’t have the great mass of undergraduates that other schools had. At the end, I think that we go back to my three points discussed above. The Chicago School was about the connection between theory and applied analysis. Always test the implications of the theory, confront data with predictions, and do it again and again. Take both theory and data seriously.

How China Is Offering an Alternative to the IMF

May 5, 2021

CP Chandrashekhar in this new INET paper:

China seems poised to take leadership of regional efforts to forge a safety net that protects countries in East Asia from the fragility that cross-border financial flows engender. My new INET Working Paper analyses why: Leadership stems from China’s important role in production value chains spread across the region and the support provided to those networks by the massive investments facilitated by China in projects launched as part of the Belt and Road Initiative (BRI). The Council on Foreign Relations estimates that by early 2020 China had spent an estimated $200 billion on BRI projects. But aside from the capital flows associated with the BRI, the People’s Bank of China (PBoC) has put in place a network of bilateral, local currency central bank swap arrangements that provide countries a much-needed safety net. These swaps are less highlighted instruments that have contributed to China’s growing global influence in developing countries worldwide. Between January 2009 and January 2020, the PBoC entered into such arrangements with 41 countries, including many in Asia.

These bilateral swap arrangements (BSAs), denominated in RMB and the currency of the relevant partner central bank, allow the latter to access RMB liquidity for short periods at relatively low rates of interest, in return for its own currency as implicit collateral. Under a swap arrangement, while the borrowing central bank has access to the foreign currency liquidity line, it can lend it to institutions and agents in its own jurisdiction that face shortages of the relevant foreign currency, in this case the RMB. For partner countries, the greater the availability of RMB swap lines, the larger their leeway in using available dollar earnings and reserves to settle transactions with other countries. They can also, as Argentina and Pakistan did, use, or showcase their ability to use, the RMB accessed through the swap line, to acquire dollars and shore up their dollar reserves to meet commitments to third parties.

In principle, the bilateral swap network provides countries a means of addressing foreign currency shortages and tide over balance of payments difficulties resulting from boom-bust capital flow cycles, without having to turn to the US and the IMF for assistance. Access to such a regional, IMF-independent safety net has been a need felt in the region ever since the 1997 Southeast Asian financial crisis, in the aftermath of which leading Southeast Asian nations availed of bail-out packages, which, though funded substantially by governments in the region, were crafted by the IMF. The policy conditions that accompanied the bail-outs severely damaged Southeast Asian economies, leading to the conviction that the IMF “didn’t know Asia” and that “its remedies were likely to do great damage to the Asian economy”. This experience triggered a search for regional, IMF- and US- independent arrangements that could be accessed in times of financial difficulty, without having to implement policies detrimental to the economic interests of countries in the region.

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