Archive for January, 2019

Case of ICICI Bank: Corporate whistleblowers are India’s newest heroes

January 31, 2019

Nice piece by Sudeep Khanna:

From Satyendra Dubey to Arvind Gupta, a few brave men and women have over the years striven to expose the stinking caverns within Indian companies even as agencies and executives charged with that task failed to do their duty. Dubey was an Indian Engineering Services officer working as a project director for the National Highways Authority of India in which capacity he exposed serious financial irregularities by contractors of the project. For that brave deed he had to pay with his life, murdered in cold blood on the night of 27 November 2003.

His sacrifice though was not in vain as the uproar over his death led to the Public Interest Disclosure and Protection of Informers Resolution (PIDPIR) in 2004. Gupta, in the news now, blew the lid on the alleged loan fraud and the quid-pro-quo between Chanda Kochhar and her family and the Videocon group, a case which is now being probed by the Central Bureau of Investigation.

Dubey and Gupta and a handful of others like them, given the honorific label of whistleblowers, are only now coming out of the shadows and serving as models for others to emulate. Figures show that the number of complaints Indian companies are receiving from whistleblowers is increasing at a rapid pace.

Whether it is in the infamous Satyam fraud in 2009 or in the more recent case of the Zee group, it has been a missive from a whistleblower that has precipitated the crisis.

We clearly need to protect whisteblowers across spectrums.


Revisiting Taylor Rule in this era of low inflation and low unemployment…

January 31, 2019

A two-part series by  Kevin L. Kliesen of St Louis Fed.

The first part presents the original Taylor Rule which shows that Fed Funds rate should be much higher than it is today:


MIT Faculty Skit: Robert Solow as the 2000 year old economist

January 31, 2019

Fun bit from Irwin Collier who continues to dig into archives of economics departments:

A skit in economics typically involves a humor transplant of some sort. The following script from the faculty contribution to an annual M.I.T. economics skit party (ca.  late-1970s?) took its inspiration from  two greats in American comedy, Carl Reiner & Mel Brooks, who sometimes performed as interviewer and 2,000 year-old man, respectively.

While it is fairly clear that Robert Solow performed and probably wrote the entire skit, the identity of the interviewer still needs to be established. Hint: there is a comment box at the bottom of this post. 

The script comes from a file of such Solovian skits that Roger Backhouse has copied during his archival research and has shared with Economics in the Rear-View Mirror.

Sample this:

Q: Let’s come to your recent impressions. What do you see as the most important recent development in economics?

A: That’s easy – the increase in the mandatory retirement age to 70. Of course it’s got a long way to go before it does me any good, but I underestimate the DRI Mandatory Retirement Age Monitor estimates the retirement age to be rising at 1.73 years per year, so time is on my side.

Q: Apart from its effects on you personally, why do you think this is an important development?

A: It saves a lot of time at department meetings never to have to make a tenure appointment again. And you know what department meetings are like – even worse than skit parties.

Q: How do you think the change will affect students?

A: They’ll love it. Courses will be the same year after year. Reading lists will never change. Textbooks will go on and on and on. Can you imagine the 200th edition of Dornbusch and Fischer? I hope it’s printed on better paper than the low-grade papyrus of the first edition… I do wonder about Eckaus and that Sphinx…… Exams will be the same year after year. Students hate change. Look at what happened when you fellows tried to change 14.121 this year.

Q: Turning to economic theory, what has been the most important development you have witnessed in the last 2000 years?

A: The two-dimensional diagram.

Q: Be serious.

A: I am serious. Can you imagine Bhagwati, the Picasso of the Production Possibility Locus, trying to fit all those curves in a one-dimensional diagram, which was all we had in the old days? There wasn’t hardly room for anything besides the axis.

Q: Come, come. Bhagwati would find a solution for that little difficulty. Who needs an axis?

A: Maybe so, but can you imagine four-color one-dimensional diagrams? How could we have expensive textbooks without four-color diagrams? How could we have expensive professors without expensive textbooks? How could……

Q: OK, OK. What is the second most important development in economic theory in your lifetime?

A: The subscript.

Q: Don’t you know the difference between trivia and serious economic theory?

A: Sure. Trivia are worth remembering, but serious economics is OK to forget.

Q: Maybe we better stick to trivia…

A: I was just kidding. I really know the answer. There is no difference between trivia and serious economic theory.


Lessons from East Asia’s Human-Capital Development

January 30, 2019

Prof Lee Jong-Wha of Korea University in this piece writes about human capital development at East Asian economies:


Why Italian Government is supporting French Yellow Protests (and a long history of rivlary between the two)

January 30, 2019

Nice piece by Dominique Mossi on the French-Italy rivalry:

Franco-Italian relations have always been complex. As the heir to the Roman Empire, Renaissance and Baroque Italy felt culturally superior to France and more refined. For Italians, the demonstrative way in which France exhibited its greatness and glory from the time of the Sun King (Louis XIV) to Napoleon made it appear “nouveau riche.” Even French support for Italian unification in the second half of the nineteenth century contributed to further misunderstanding, because France “received” Savoy and Nice in exchange for its precious help.

In more recent times, there had at least been some signs of mutual admiration. Italians looked enviously at France’s well-functioning state, while the French nodded approvingly at northern Italy’s dynamic network of small and medium-size companies. Today, however, this kind of reciprocal praise seems like the stuff of nostalgia.

The view from Rome these days is that France gives lectures on budgetary rigor but no longer practices it, as when French President Emmanuel Macron canceled his planned fuel-tax increase in the face of the Yellow Vest protests. But Italy’s current negative perception of France is above all emotional. From the crisis in Libya (a country Italy knows well) to the migrant crisis (which has hit Italy disproportionally hard), Italians feel deliberately ignored, if not abandoned, by the French – who, to make matters worse, also give the impression of looking down on their neighbors.

It is tempting to compare Italy’s criticism of France to the Yellow Vests’ hostility toward French elites. Both sentiments, after all, draw their strength from a feeling of humiliation in the face of perceived arrogance and privilege. The big question now is whether Italy’s populist present will be France’s future.

Clearly, this scenario is no longer inconceivable. Defenders of liberal democracy in France and elsewhere must, therefore, adopt and adapt the Yellow Vest motto and refuse to give in.


The ideas of Harold Demsetz, 1930-2019

January 30, 2019

Nice Tribute by Prof Thomas N. Hubbard of Kellogg’s School at Northwestern Univ:

The 15 women who enriched making of the Indian constitution

January 30, 2019

Interesting piece by K Vijayakrishnan. Its tells us about the 15 women who participated in making of Indian constitution and enriched it by debating on certain points…

Canadian legalisation of cannabis reduces both cash usage and the ‘black’ economy

January 29, 2019

Charles Goodhart and Jonathan Ashworth in this interesting research:

South Africa’s central bank – ownership, mandate and independence

January 28, 2019

Discussions over independence of South Africa’s central bank continue.

Prof Jannie Rossouw of the University of the Witwatersrand in this piece looks at the issues.

In recent months, various debates about the South African Reserve Bank have focused broadly on three aspects – its shareholding, its mandate and its independence.

The three debates are somewhat convoluted. They are indeed three different issues, but they are interlinked.

Let’s turn to the issue of ownership first.

The South African Reserve Bank is one of only eight central banks in the world with private shareholders. The others are in Belgium, Greece, Italy, Japan, San Marino, Switzerland and Turkey.

The debate about shareholding in South Africa’s Reserve Bank centres around the issue of nationalisation. Some political players, such as the third largest party – the Economic Freedom Fighters – are calling for the ownership of the Bank to be transferred from current private shareholders to the South African government and has tabled a bill in Parliament to achieve this objective.

The issue is very charged. But it’s also confused and not very well understood. There’s an assumption that a change of ownership would automatically mean a change in the role the Bank plays. This isn’t the case because in fact the Bank’s shareholders play no role in its mandate. In that sense it doesn’t matter who the shareholders are. Because they can’t affect its mandate, nationalisation won’t affect the independence of the central bank.

But there are other ways in which the Bank’s ability to do its job can be undermined. This is where the Bank’s primary mandate comes in.


The Founding of the Federal Reserve, the Great Depression and the Evolution of the U.S. Interbank Network

January 28, 2019

Interesting paper by Matthew Jaremski and David C. Wheelock:

Financial network structure is an important determinant of systemic risk. This paper examines how the establishment of the Federal Reserve and Great Depression affected U.S. interbank network structure. Seeking liquidity sources, banks generally preferred to connect to Federal Reserve member banks in cities with Fed offices or clearinghouses. Overall network concentration declined initially as banks connected to Federal Reserve cities other than New York, but increased in the Depression. Banks that survived the Depression generally had higher percentages of connections to Federal Reserve cities and to correspondent banks that also survived.

More specifically, Federal Reserve was key to Depression in many ways:

The Federal Reserve was intended to reduce the banking system’s reliance on the interbank network, and especially the concentration of the system’s reserves in New York City. Although the share of interbank deposits held by major New York City banks did fall after the Fed was established, previous studies have not examined how the interbank network changed with the introduction of the Fed. Using newly digitized data on the interbank relationships of every U.S. depository institutions in 1900, 1910, 1919, 1929 and 1940, we quantify changes in network concentration and other aspects of network structure over four decades.

We show that while the banks most central to the network remained those located in New York City and other major centers, the regional Federal Reserve cities took on a more important role in the network after the Fed was established and again during the Great Depression. Ironically, by pushing the
network toward the regional Fed cities, the System’s founders may have inadvertently made the banking system more vulnerable to regional liquidity shocks and to the responsiveness of local Federal Reserve Bank officials to those events.17

Interbank connections were a conduit for bank distress during the Great Depression. Banks with correspondents that failed or otherwise closed were themselves more likely to close during the Depression. Banks apparently responded to the Depression by linking even more to correspondents in cities with Federal Reserve offices, especially to banks in New York City, which saw a relative increase in correspondent links between 1929 and 1940. Thus, while the establishment of the Federal Reserve altered the structure of the interbank network, the Fed’s presence neither eliminated the network nor prevent it from transmitting shocks across the banking system. Moreover, the amplification of distress through the network in turn contributed to events that further altered the network’s structure while at the same time having even more profound long-term impacts on the regulation of the U.S. banking system.



Hindu Business Line celebrates 25th anniversary

January 28, 2019

As the paper celebrates its 25th anniversary today, the editor R Srinivasan writes on taking fresh guard:

The peerless Sunil Gavaskar always took fresh guard after scoring a hundred. Milestones were important to Gavaskar — in his long career, he was out in the 90s only five times, while scoring 34 test match centuries — but more important was the task at hand. Hence the fresh guard.

Today, as The Hindu BusinessLine reaches a significant milestone of its own, completing 25 years of credible, unbiased journalism — we too are taking guard afresh. The world around us has changed enormously over the past quarter of a century; but in many ways, the challenges we face haven’t.

In our very first editorial, we wrote that the raison d’etre of our existence was to serve as “a pathfinder, a consultant facilitating economic and business decision-making” and to provide “insight and analyses that will let readers sense and grasp opportunities that are all so transient.”

That mission hasn’t changed. The Hindu BusinessLine has, over the years, built up a well-deserved reputation for sober and factual reporting, neutral and insightful analysis, and a sustained focus on news and information that is important, not merely attention-grabbing. These qualities will continue to underpin everything we do.

The challenges we face, however, have changed enormously. In the post-truth world of fake news and false flags, where algorithms and feed filters strive to envelop us in a comforting but unreal echo chamber, it is all the more vital that the independent media sticks to its purpose of speaking truth to power, to put public interest above all else, to serve as a vehicle for credible news and as an enabler of informed debate and informed public discourse.

At The Hindu BusinessLine, these values continue to drive us. We are a national newspaper, with editions spread from New Delhi in the north to Thiruvananthapuram in the southern end of the subcontinent, from Ahmedabad in the west to Kolkata in the east, but we have always had, and will continue to have, a nationalistic heart. For us, our readers and our nation’s interest will always come first.

In this, we are inspired by our group’s rich experience and track record of quality journalism. The Hindu, the group’s flagship publication, has, over the 140 years of its existence earned that which cannot be acquired at any price – the trust of its readers. It is a daunting legacy to live up to, but we have found there is a simple way to do it – by sticking steadfastly to our group’s codes of journalistic ethics and business values, by doing what The Hindu set out to do in 1878 – the fearless pursuit of ‘fairness and justice.’

Yes, India has changed. In the 25 years that we have been reporting on the Indian economy, per capita GDP (in PPP terms) has gone up eight-fold; we have moved from low-income to middle-income status, the number of people living in poverty has fallen by more than half, foreign direct investment has jumped 22 times, while the Sensex has climbed from 4,000 to 36,000 levels.

But in an increasingly volatile and uncertain world, the challenge of providing authentic and unbiased information remains unchanged. That is why we take fresh guard today.

Hope there are many more anniversaries…

From Julius Baer to MBaer: Long history of one family in banking…

January 25, 2019

Interesting piece which again shows history and families matter in banking. Michael Baer, great grandson of Julius Baer is to start his own bank. He separated from the Julius Baer group in 2005 over differences:

Michael Baer, a great-grandson of Julius Baer — who founded the Swiss bank of the same name over a hundred years ago — is about to start accepting clients for his MBaer Merchant Bank AG. After receiving a banking license from the Swiss Financial Market Supervisory Authority at the end of 2018, the final preparations are now under way.

We hope to be operational by March,” Baer said in an interview. “We are still looking for suitable offices in Zurich,” said Baer, who himself worked at Julius Baer Group Ltd. for many years.

Can the family name help him to win customers? “I can provide an answer to this question in two or three years,” Baer said. “I’m proud that I can look back on such a long history in banking.”

His great-grandfather started what is today known as Julius Baer Group as a small currency exchange in Zurich in the 1890s. It later became a wealth management firm with international expansion starting in 1940, becoming the first Swiss private bank to go public in 1980. The majority of the voting rights from the initial public offering remained within the Baer family, ensuring full control of the Group. That only changed at the beginning of 2005 with the introduction of the ‘one share, one vote’ principle.

Such stories are so interesting…

New rule will give surplus reserves of Sebi, pension regulator to govt

January 25, 2019

It is not just about RBI’s reserves, but about other regulators too.

Shrimi Choudhary reports in BS:


Towards India’s new fiscal federalism

January 25, 2019

Vijay Kelkar gave Prof. Sukhamoy Chakravarty Memorial Lecture at the 55th Annual Conference of The Indian Econometric Society (TIES). TIES was organised by Mumbai School of Economics and NISM. The program looks quite interesting and hopefully they also put up papers overtime.

Good to see NIPFP put up Mr Kelkar’s talk as a working paper where he talks about India’s new fiscal federalism. He argues to bring back Planning Commission’s role to address state imbalances (horizontal) in development in today’s Niti Aayog. He also argues for a single GST rate of 12% with 2% of the resources marked for the third tier of oue governance: elected local bodies.


In conclusion, I have discussed the issue of the need to revisit the fiscal federal architecture in contemporary India. Briefly tracing the origin of arrangement in
contemporary history, I have attempted to point out the changing political- economic parametric environment calling for commensurate change in the way our fiscal federal setup ought to be conceptualised, here and now. In doing this, I have identified some of the important issues that arise as we move forward. I have also suggested innovative reform proposals towards creating Four Pillars- based architecture for India’s new Fiscal Federalism. While the final resolution of these matters will be attained through a dialectic that will play out in the domain of realpolitik, it is important that such a process be helped along by evidence based analysis and debate. It is my strongest possible hope that this lecture will contribute to such a debate on the issues which are so vital to our country. I should say that  in these debates, this society and its members should play a fulsome role.

Useful stuff…

Principles of tax design, public policy and beyond: The ideas of James Mirrlees, 1936-2018

January 25, 2019

Nice tribute and review piece on Prof Mirrless work:

Sir James Mirrlees, co-recipient of the 1996 Nobel Memorial Prize in Economic Sciences, passed away in August 2018. This column outlines how his work has transformed economists’ understanding of their discipline – from the principles of tax design to the theory of contracts and beyond. By conceiving of policy questions in terms of information asymmetries between governments and taxpayers, Mirrlees demonstrated how to conduct convincing analysis of redistributive objectives together with incentive effects in the design of general tax systems and public policy more broadly. His ability to simplify complex problems in ways that reveal their tractable essence means that his work has yielded insights that have reverberated throughout the discipline. It has also proved highly fruitful for practical policy design.

I know very little of his work. Should read more and this piece is a start…

Federal Reserve marks the 100th anniversary of its data on industrial production

January 25, 2019

Nice to see Fed marking 100 anniversary of an economic data: industrial production.

The publication on Friday of the Federal Reserve Board’s monthly statistical release on industrial production and capacity utilization marks the 100th anniversary of Board data on industrial production. The index has kept pace with an ever-evolving industrial sector by providing information that spans from the rise of the modern factory through the digital age.

The Board began collecting information about industrial production to satisfy the Federal Reserve’s need for timely and relevant data on the U.S. economy. The Board’s measure of industrial production remains an important economic indicator today and is frequently used by academics, businesses, and policymakers.

The index originally divided output into 55 categories and now includes 300, reflecting an increased ability to track the diversity and changing composition of the industrial sector. For example, in 1919, textile manufacturing represented nearly a quarter of the index. Almost the same proportion is represented in 2019 by the combination of motor vehicles and parts, aircraft, and oil and gas extraction. Textiles now represent less than 1 percent of the index. A short history of the index that describes its introduction and tracks its changes and improvements over the past century is available on the Board’s website.


I had earlier pointed to history of other macro data in US such as output, inflation and unemployment. We now have some history of industrial production data as well:

Ever since the Federal Reserve was founded in 1913, understanding current business conditions has been a central focus in pursuing its mission of a stable and secure financial system. Less than a year after the first Board members took their oaths of office, the organization issued the inaugural monthly Federal Reserve Bulletin, which included narrative summaries of general business conditions in each of the 12 Federal Reserve Districts.

Over the next few years, the monthly reports from the Federal Reserve Districts became more statistically oriented. At the same time, private industry was in the process of reorganizing to supply the country’s effort in World War I and would soon thereafter transition to a postwar economy. In order to track the changes that were taking place, the Board in 1919 began publishing monthly tables containing data on the production of different goods, such as iron and steel, cotton and wool, and pulp and paper.2

By early 1922, the tables on the physical volume of trade had expanded to show a large number of items. To present this information in a “more compact and better coordinated form,” the Board developed three indexes of industrial activity: manufacturing, mining, and agriculture.3 These monthly indexes were published back to 1919, and they used the average of monthly activity in that year as a base. By the end of 1922, a second set of indexes—narrower in coverage but based on more refined methodology—was introduced.4 These new measures were made available by the 25th day following the reference month.

Nice stuff..

NZ to present a “well-being” budget from 2019

January 25, 2019

After pioneering monetary policy and financial regulation, New Zealand wants to change and pioneer fiscal policy too.

In World Economic Forum, NZ’s cool Prime Minister Jacinda Ardern spoke about a new approach to their fiscal policy:

Jacinda Ardern has unveiled a new approach to running New Zealand’s finances.

“We need to address the societal well-being of our nation, not just the economic well-being,” she said during a Davos discussion on More than GDP.

This means that from 2019, her government will present a “well-being budget” to gauge the long-term impact of policy on the quality of people’s lives.

In practical terms, child poverty figures will be presented at every budget. The onus will be on ministers to show how spending proposals will benefit people, and work with other ministers across party lines to ensure they have a positive, long-term impact, Ardern explained.

“Our people are telling us that politics are not delivering and meeting their expectations. This is not woolly, it’s critical,” she said.

The larger discussion in which she talked about the new approach budget along with other participants.

Looking forward NZ…

Friedman and Schwartz, Eichengreen and Temin, Hawtrey and Cassel on Great Depression

January 24, 2019

Fascinating post by David Glasner on how works of Hawtrey and Cassel on great depression have largely been ignored.

Glasner should clearly blog a lot more than he does. One of its kind blog…

Establishing viable capital markets

January 24, 2019

A new report by BIS:

Capital markets provide an important channel of financing for the real economy, they help allocate risk, and they support economic growth and financial stability. Moreover, capital markets have played an important part in financing the recovery from the Great Financial Crisis (GFC), a reminder of their “spare tyre” role in the financial system. This report examines recent trends in capital market development and identifies the factors that foster the development of robust capital markets.

The report finds that large differences persist in the size of capital markets across advanced and emerging economies. Emerging-economy markets have been catching up with their more advanced peers, but the gap has not yet been closed.

The analysis highlights the importance of macroeconomic stability, market autonomy, strong legal frameworks and effective regulatory regimes in supporting market development. Better disclosure standards, investor diversity, internationalisation, and deep hedging and funding markets, as well as efficient and robust market infrastructures, also play a key role.

The report’s recommendations across six broad areas outline practical ways to support the development of robust and efficient markets.

Should be an interesting read….

Measuring Utility: From the Marginal Revolution to Behavioral Economics

January 24, 2019

Ivan Moscati of University of Insubria in this paper (which is actually a prologue from his book by the same title):


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