Archive for December 21st, 2016

RBI’s notice restricting deposits above Rs 5000 has been withdrawn (and its new name)….

December 21, 2016

The Twitter is trending with RBI’s new name: Reverse Bank of India.

This is because the central bank has again tweaked its notice. This time it has rolled back previous notice which said deposits above Rs 5000 will be allowed only once that too under some stiff restrictions. End result was banks stopped accepting deposits above Rs 5000 asking for clarity on the matter. With clock ticking fast towards 30 Dec 2016 there was panic amidst those who were waiting for crowds and queues to lessen before despsiting their monies.

Now RBI has rolled back the notice. Even here central bank prefers to go to the older skills of writing these amazing notices:

Withdrawal of Legal Tender Character of existing ₹ 500/- and ₹ 1000/- Bank Notes (Specified Bank Notes) – Deposit of Specified Bank Notes (SBNs) into bank accounts- Modification

1. Please refer to our circular DCM (Plg) No. 1859/10.27.00/2016-17 dated December 19, 2016. On a review of the above, we advise that the provisions of the above circular at sub para (i) and (ii) will not apply to fully KYC compliant accounts.

2. Please acknowledge receipt.

I mean that is it? One has to click on the previous circular to see details:

  1. Tenders of SBNs in excess of ₹ 5000 into a bank account will be received for credit only once during the remaining period till December 30, 2016. The credit in such cases shall be afforded only after questioning tenderer, on record, in the presence of at least two officials of the bank, as to why this could not be deposited earlier and receiving a satisfactory explanation. The explanation should be kept on record to facilitate an audit trail at a later stage. An appropriate flag also should be raised in CBS to that effect so that no more tenders are allowed.
  2. Tenders of SBNs up to ₹ 5000 in value received across the counter will allowed to be credited to bank accounts in the normal course until December 30, 2016. Even when tenders smaller than ₹ 5000 are made in an account and such tenders taken together on cumulative basis exceed ₹ 5000 they may be subject to the procedure to be followed in case of tenders above ₹ 5000, with no more tenders being allowed thereafter until December 30, 2016.

Phew!

Why central bank models failed and how to repair them?

December 21, 2016
John Muellbauer of Oxford University has a piece which says things which we knew but conveniently forgot:
The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions of finance and the real economy has been widely recognised since the Global Crisis. This column argues that the flaws in these models stem from unrealistic micro-foundations for household behaviour and from wrongly assuming that aggregate behaviour mimics a fully informed ‘representative agent’. Rather than ‘one-size-fits-all’ monetary and macroprudential policy, institutional differences between countries imply major differences for monetary policy transmission and policy.
….
To take into account all the feedbacks, a macroeconomic policy model needs to explain asset prices and the main components of household balance sheets, including debt and liquid assets. This is best done in a system of equations including consumption, in which shifts in credit conditions – which have system-wide consequences, sometimes interacting with other variables such as housing wealth – are extracted as a latent variable.7  The availability of home equity loans, which varies over time and between countries – hardly available in the US of the 1970s or in contemporary Germany, France or Japan – and the also the variable size of down-payments needed to obtain a mortgage, determine whether increases in house prices increase (US and UK) or reduce (Germany and Japan) aggregate consumer spending.  This is one of the findings of research I review in Muellbauer (2016).  Another important finding is that a rise in interest rates has different effects on aggregate consumer spending depending on the nature of household balance sheets.  Japan and Germany differ radically from the US and the UK, with far higher bank and saving deposits and lower household debt levels so that lower interest rates reduce consumer spending.  A crucial implication of these two findings is that monetary policy transmission via the household sector differs radically between countries – it is far more effective in the US and UK, and even counterproductive in Japan (see Muellbauer and Murata 2011).
I mean what can one even say to such issues?
 

Changing colors of Indian central bank: A picture worth 1000 words…

December 21, 2016

Manjul, cartoonist at DNA has a nice cartoon today:

(more…)


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