Archive for January, 2019

Does inflation targeting make the poor poorer?

January 23, 2019

Recently Prof Abhijit Banerjee said that RBI’s inflation targeting has made the agrarian crisis worse.

Nice bit…



Uproar over paintings at Iceland Central Bank

January 23, 2019

Reported in Iceland Review:


Strengthening the capacities of the system for fight against counterfeiting of the euro

January 23, 2019

Interesting speech by Ms Emilija Nacevska, Vice Governor of the National Bank of the Republic of Macedonia.

She talks about Twinning Project which is a European Union instrument for institutional cooperation between Public Administrations of EU Member States and of beneficiary or partner countries. The beneficiary countries could be those who want to be part of the Union and those who do not want to be part of the Union. One of the expertise is to build capacities to fight counterfeit of Euro:

It is my honor and pleasure to greet you on the behalf of the National Bank and to welcome you to today’s event held in our institution, marking together the beginning of this very important Twinning Light Project aimed at strengthening the capacities of the institutions involved in the system for fight against counterfeiting of euro. 

At the very beginning of my speech, I would like to express the gratitude of the National Bank to the European Union, because it has recognized the determination of our key institutions responsible for fighting money counterfeit to put their maximum in establishing a strong and efficient system for protection of the national, as well as the financial interests of the Union. Thank you, because the allocation of funds from the pre-accession funds for the implementation of this Project, means a trust that we are ready to work on strengthening the institutional capacity and on the mutual cooperation in order to implement the recommendations that will arise from the project activities. 

I am sure that we will justify the trust. Not only with the level of our commitment to the Project in the next eight months, but also with the willingness to implement all necessary activities for establishing a strong and efficient system for fight against counterfeiting of euro in the country. These activities are already outlined in the strategic commitments of our institutions, because our ultimate goal is to provide a system that, in all aspects, will be at the level of the system of a European Union member state. Only with full dedication, readiness and professionalism, the trust will be fully justified and we will prove that the Project was indeed successful – that the 250,000 Euros intended for its implementation were channeled in the right direction.

Expertise is to be built at multiple levels:

In the long run, this project will simultaneously be an investment for improving the operations not only of the National Bank and the Ministry of Interior, but indirectly also of other institutions that are actively involved in the system for fighting counterfeiting money: the Customs Administration, the Financial Police Office of the Ministry of Finance, the Public Prosecution Office and the judicial authorities. I believe that after the implementation of this Project, our interinstitutional cooperation in the field of monitoring and prevention of counterfeiting banknotes and coins will be further developed. I believe that very soon after the completion of the project activities, we will jointly state and announce that our national system for fighting counterfeit is at a higher level, compatible with the systems of the EU member states.  


Euro’s complexity is mindboggling…

India now faces its own version of Soviet Union’s scissors crisis

January 23, 2019

Mint newspaper and its website has done a makeover of sorts. Do take a look.

Anyways as long as columns from Niranjan of Cafe Economics continue in the paper, one is sure substance will continue as well.

In his recent piece, Niranjan compares the recent agri crisis to the one in Soviet Union 100 years ago:

Many who are interested in economic history may perhaps see the parallel between what is happening in India right now with what happened in a very different country around 100 years ago. This was the Soviet Union soon after the civil war that the communists eventually won. Political stability as well as the withdrawal of draconian controls over Russian agriculture led to a huge rise in food production. The weather also cooperated. Russia saw bumper harvests.

Food prices fell. The prices of industrial goods continued to rise. A graph of these two price trends resembled the two blades of a pair of scissors. Soviet commissars began to call it the scissors crisis. Farmers who were not getting enough for their output did not have money to buy what the factories were producing. Some farmers chose not to sell the crop at all. Soviet planners—in what Friedrich Hayek later described as a fatal conceit—tried to deal with this internal terms of trade problem with price controls on industrial goods.

The rest of the historical narrative is not important right now. What is important is the fact that India could now be facing its own variant of the scissors crisis—core inflation and food inflation are moving in different directions. Managing the relative price of food in terms of industrial goods will be one of the biggest policy challenges for the new government that will take charge of the country later this year.

One important response to the Indian scissors crisis will be to remove controls on Indian farmers—be it their ability to sell directly to consumers or the freedom to export. Modern rural supply chains could also help undermine the stranglehold of middlemen. Forward markets will reduce at least some of the price risk that farmers face. Data from recent years shows that Indian farmers facing high levels of uncertainty take cropping decisions based on past price trends rather than expectations of future prices, a pattern very similar to the cobweb model taught in introductory microeconomics courses.

However, the most potent solution to rural distress continues to be outside of agriculture. India needs to create jobs in productive enterprises so as to create opportunities for millions who seek to escape farming, where they are condemned to deal with the vagaries of the weather as well as wild fluctuations in prices.


How California stayed with gold when the rest of the U.S. adopted fiat money?

January 23, 2019

Brilliant JP Koning in this brilliant post looks at this 1861 US monetary history. In this case, California refused to adopt greenbacks which were used in other states and continued to accept gold payments.

We are ten years into the age of bitcoin. But people are still using national currencies like yen, dollars, and pounds to buy things. What does history have to say about switches from one type of monetary system to another? In this post I’ll dig for lessons from California’s successful resistance to a fiat standard that was imposed on it in the 1860s by the rest of the U.S.

Not long after the war American Civil War broke out in 1861, a run on New York banks forced most of the country’s banks to stop redeeming their banknotes with gold. A few months later Abraham Lincoln’s Union government began to issue inconvertible paper money in order to finance the war. These notes were popularly known as Greenbacks.

$1 legal tender note, or greenback

Thus the 19 states in the Union shifted from a commodity monetary standard onto a fiat monetary standard. But Californians, who had been using gold as a payments medium for the previous decade-and-a-half, chose not to cooperate and continued to keep accounts in terms of gold. As a result, California stayed on a gold standard while the rest of the Union grappled with fiat money.

This had very different repercussions for prices in each region. As the Union issued ever more greenbacks to finance the war, the perceived quality of these IOUs deteriorated. Through much of 1863 and 1864, their price fell relative to gold. Because prices in the Union were set in terms of greenbacks, consumer and wholesale prices rose rapidly.

U.S. Index of Wholesale Prices (NBER)

In California, on the other hand, prices continued to be set in gold. Thus Californians did not experience significant inflation during the Civil War.


Why so?

Why did the east so easily switch onto a fiat dollar standard whereas California continued to define the dollar in terms of gold? By the 1860s, most Americans who lived east of the Rockies dealt primarily in banknotes. These notes, which were issued by private banks and convertible into gold on demand, circulated widely. Gold coins, which were heavy and prone to wear, were largely confined to bank vaults.

But Californians had never been fond of banknotes. The 1849 First State Constitutional Convention had prohibited the chartering of banks and issuing of bank notes:

but no such association shall make, issue, or put in circulation
any bill, check, ticket, certificate, promissory note, or other
paper, or the paper of any bank, to circulate as money
[California, 1853 #64, Article IV, Section 34]

Suspicion of banknotes ran so strong in California that when businessman Samuel Brannan tried to establish a note-issuing bank in 1857, the following was printed in the Evening Bulletin:

Mr. Brannan, attempts to violate the Constitution of the State, and to fasten upon the community that most pernicious of all evils, a shin-plaster currency….The evils of shin-plaster currency are so great, and the wishes of nine-tenths of our people are so bitterly opposed to its introduction, that we call upon every individual who has any regard for the interest of our State financially or otherwise, to repudiate Mr. Brannan and his shin plasters. (Cross, 1944)

According to Cross (1944), people referred to banknotes as shin-plasters because they were about the size of the plasters put on the injured shins of farmers and other outdoor workers.

Needless to say, Brannan’s notes never took hold. In place of banknotes, Californians had always preferred to pay each other with physical gold. With the discovery of the yellow metal in 1848 in California, the state had plenty of the stuff. Gold dust, despite its inconvenience (see below) was a popular early medium of exchange. Later on, private and government-issued gold coins also became important. Non-chartered private banks existed, but they issued only deposits, not notes.


He says same thing goes for bitcoin as well.

Californians rejected the greenback because they had long adhered to gold as a form of payments. Any given merchant expected the rest of the mercantile community to continue paying with gold coin, which made it costly to adopt greenbacks. The reverse happened in the east, the monetary system tipping towards the more familiar banknote. Even as the greenback inflated, easterners still preferred to set prices in terms of paper. It was too costly for an individual merchant to shift onto gold given that every one else already accepted paper.

This same stickiness explains why new technologies like bitcoin haven’t got much usage as a way to pay. It also accounts for why Venezuelans have been slow to shift away from a bolivar monetary system to a dollar-based one despite the collapse of the bolivar. When groups of people collectively adopt a habit, this habit is very difficult to change.


100 years of Wagh Bakari Tea

January 23, 2019

Yesterday’s Times of India Ahmedabad edition had a full 2-page spread celebrating 100th anniversary of the city’s famous brand: Wagh Bakari Tea.


Can a tiger change its stripes? Reform of Chinese state-owned enterprises…

January 23, 2019

Profs. Ann Harrison, Marshall Meyer, Peichun Wang, Linda Zhao, and Minyuan Zhao in this paper:

The majority of state-owned enterprises (SOEs) in China were privatized through ownership reforms over the last two decades. Using a comprehensive dataset of all medium and large enterprises in China between 1998 and 2013, we show that privatized SOEs continue to benefit from government support relative to private enterprises. Compared to private firms that were never state-owned, privatized SOEs are favored by low interest loans and government subsidies. These differences are more salient with the Chinese government’s trillion-dollar stimulus package introduced after the 2008 global financial crisis. Moreover, both SOEs and privatized SOEs significantly under-perform in profitability compared to private firms. Nevertheless there are clear improvements in performance post-privatization. The tiger can change its stripes; however, the government’s behavior seems to be sticky.


Why we need to be wary of narratives of economic catastrophe?

January 22, 2019

Thoughtful piece by Prof Jeremy Adleman of Princeton Univ:

It’s important to recognise one of the catastrophist’s rhetorical moves. Stories of doom thrive on turning a tension into an incompatibility. A tension implies two forces at odds – like hot and cold, like price stability and jobs, like helping strangers and assisting neighbours; while they pull in different directions, they can be mixed. Earlier big narratives used to explain choices in terms of tension and unstable compromise. In the 1950s and ’60s, debates focused on how much the developing world could advance while being part of a wider global economy. A decade later, the tension was how to co-manage a troubled global commons.

Nowadays, the chorus of catastrophe presents differences as intractable and incompatible, the choice between them zero-sum. It’s globalism or ‘nation first’, jobs or climate, friend or foe. The model is simple: earlier leaders muddled, dithered, compromised and mixed. In their efforts to avoid hard decisions, they led the nation to the edge of disaster.

Pessimism helped exorcise post-1989 triumphalism; Piketty and Tooze are right about structural features of inequality and how the makers of catastrophe became its beneficiaries. But we also need to see how the consensus of catastrophe that straddles the ideological spectrum – but grows more dire and menacing as one approaches the extremes – favours the politics of the strong man glaring down the nation-doubters.

The alternative is not to be wistful about flat-world narratives that find solace in technical panaceas and market fundamentalisms; the last thing we need is a return to the comforts of lean-in fairy tales that rely on facile responses to a complicated world. To learn from collapses and extinctions, and prevent more of them, we need to recover our command over complex storytelling, to think of tensions instead of incompatibilities, to allow choices and alternatives, mixtures and ambiguities, instability and learning, to counter the false certainties of the abyss. If we don’t, it really will be too late for many people and species.


The Effect of Superstition on Health: Evidence from the Taiwanese Ghost Month

January 22, 2019

Martin Halla, Chia-Lun Liu and Jin-Tan Liu in this interesting research paper:

Superstition is a widespread phenomenon. We empirically examine its impact on health-related behavior and health outcomes. We study the case of the Taiwanese Ghost Month.

During this period, which is believed to increase the likelihood of bad outcomes, we observe substantial adaptions in health-related behavior. Our identification exploits idiosyncratic variation in the timing of the Ghost Month across Gregorian calendar years.

Using high-quality administrative data, we document for the period of the Ghost Months reductions in mortality, hospital admissions, and births. While the effect on mortality is a quantum effect, the latter two effects reflect changes in the timing of events. These findings suggest potential benefits of including emotional and cultural factors in public health policy.


The past, present and future of farm loan waivers in India

January 22, 2019

My new piece (and also debut piece in CNBCTV18) on the topic.

It is co-written with my colleague Tana Trivedi who brought the very useful case of Prabhashankar Patni, Prime Minister of Bhavnagar State, to my attention. Mr Patni passed a farm loan waiver in his Princely State in early 20th century, perhaps the first time in India.


RBNZ wins award for its excellent financial dashboard (example for other central banks to follow…)

January 22, 2019

Central announced the winners for the year 2019. In the initiaitive of the year category, it gave the award to RBNZ for its financial dashboard:

While adherence by central banks and regulators to the Basel Accord provides important levels of bank transparency in addition to stock exchange and company account disclosures, information can be hard to pull together in a meaningful manner. And very few central banks have opened up their financial system to public scrutiny to quite the same level as the Reserve Bank of New Zealand.

Public disclosure plays a particularly important role in New Zealand because of the central bank’s ‘light touch’ and comparatively ‘lower-intensity’ approach to prudential supervision, and because there is no explicit government guarantee for deposits, Tobias Irrcher, a policy adviser for the financial system policy and analysis department at the RBNZ, tells Central Banking.

“The sheer volume of disclosure had become very large, and there were some issues about how comprehensible it all was and the fact that it was all in different places. It was difficult to compare one bank with another, and thus banks didn’t come under widespread scrutiny,” adds his colleague Toby Fiennes, head of the financial system policy and analysis department. “We wanted to invent something that was accessible.”

In May 2018, the central bank launched its Financial Strength Dashboard to increase the accessibility of the disclosure information by banks to the public. The dashboard offers a graphical overview of all major banks’ capital positions, liquidity, asset quality, profitability, balance sheet composition and credit concentration. In all, it contains more than 100 individual metrics on the financial strength of New Zealand’s banks.

Along with graphic representations, the central bank provides simple descriptions of the data available to support financial literacy. The data is also provided in an Excel file for researchers to analyse in greater depth. “We had an internal mantra of ‘insights over information’. It’s not good enough to just put numbers in a table on a website and expect users to make sense of that,” says Irrcher.


For the dashboard to be effective, people need to access and use the information. If this includes professional investors, retail depositors and rating agencies, its effectiveness as a disciplinary force will be greater still.

The dashboard currently receives more than 11,000 visits a quarter – a large increase compared with its predecessor, which typically received about six users a day and 500 in a quarter. More than 30% of the current users are repeat visitors, which suggests a number of people are using the dashboard as a reference tool. “Based on the user statistics to date, the dashboard has successfully broadened the audience for prudential disclosures far beyond the point where it was at before. This is probably the single best indication that the dashboard is having the desired impact,” says Irrcher.

Retail depositors can access this information either directly or through “super-users”, those who use the information for their own purposes or to help others understand risks, such as rating agencies, banking academics and financial journalists, says Fiennes. This improves their ability to make informed decisions on which they bank use.

“When you look at a graphical presentation, some relationships stand out that maybe you were not fully aware of before. For example, the extent of concentration in the banking sector or interesting variations in the opinions of credit rating agencies,” explains Irrcher.

The banks can also use the dashboard to benchmark themselves within the market. “We can now see more about our competitors,” Annis O’Brien, head of external reporting at ANZ New Zealand, tells Central Banking.

Increased usage should also ensure less errors are made, and if they are, they are quickly corrected.

I just saw the dashboard website. It is indeed excellent and worthy of an award. One can look at most of the indicators across the NZ based banks. Interesting to note that two Indian banks -Bank of Baroda and Bank of India – have very high capital ratios.

All other central banks should emulate RBNZ…once again the pioneer…

20 years of Euro: a glass half-full or half-empty?

January 21, 2019

My new piece in moneycontrol.


Examining the trade-off between price and financial stability in India

January 21, 2019

Ila Patnaik, Shalini Mittal and Radhika Pandey of NIPFP in this recent paper find trade off between price and fin stability:

In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis,
there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical
approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and
financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial
stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging
economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with
monetary policy instrument.


Turkey’s central bank pays early interim dividend…

January 21, 2019

Turkey’s central bank pays an early dividend worth 33.7 billion Lira (HT:

Apparently, the dividends are paid annually in April as per the law. But the law was amended to allow an interim dividend..



How and why did we start collecting economics statistics (such as inflation, GDP etc.): Case of US

January 21, 2019

A really nice paper by Prof Hugh Rockoff of Rutgers Univ.

He discusses an area which is seldom discussed in economic research which is origins of statistics/data which help us understand the trends in an economy. How and why did we start collecting data on things like inflation, employment and output? He discusses the US case:

Although attempts to measure trends in prices, output, and employment can be traced back for centuries, in the main the origins of the U.S. federal statistics are to be found in bitter debates over economic policy, ultimately debates over the distribution of income, at the end of the nineteenth century and during the world wars and Great Depression. Participants in those debates hoped that statistics that were widely accepted as nonpolitical and accurate would prove that their grievances were just and provide support for the policies they advocated.

Economists – including luminaries such as Irving Fisher, Wesley C. Mitchell, and Simon Kuznets – responded by developing the methodology for computing index numbers and estimates of national income. Initially, individuals and private organizations provided these statistics, but by the end of WWII the federal government had taken over the role. Here I briefly describe the cases of prices, GDP, and unemployment.

Most of the time the origins of these stats was due to some or the other crisis. How some people (economists/statisticians) responded to calls from the polity to develop these numbers is quite a story…

Central Bank of Brazil looks through its 54 year histiry

January 21, 2019

Nice bit from the Central Bank. It is all in Portuguese so do press the translate option.

The Central Bank of Brazil is more than 50 years old. The conduct of oral interviews with personalities who contributed to its construction is part of the memory of this institution, which is so closely linked to the economic trajectory of the country.

The interviews allowed not only a tour of history, but also to experience the crises, conflicts, choices made and the opinions of those who gave a period of their lives for the construction of Brazil. At the same time, they constitute complementary material to traditional historical sources.

The set of statements clearly demonstrates the process of building the Central Bank as a state institution, persistent in fulfilling its mission. The concern with the construction of an organization with technical profile pervades all the interviewees. At the same time that they were building the structure, they sought to adopt the necessary economic policy measures to achieve their mission.

Our expectation with the publication of these interviews is to contribute with a better understanding about the evolution of the Institution and its performance and stimulate the search for knowledge about the economic history of the country and about how the Central Bank pursues its objectives of guaranteeing the stability of the power of purchase of the currency and the soundness and efficiency of the financial system.

One just gets profiles of the interviewed personalities in English. The interviews remain in Portuguese and one hopes the central bank translates them to share it with the wider audience.



Gross National Happiness and Macroeconomic Indicators in the Kingdom of Bhutan

January 18, 2019

Sriram Balasubramanian (World Bank) and Paul Cashin (IMF) in this interesting paper:

This paper examines the origins and use of the concept of Gross National Happiness (or subjective well-being) in the Kingdom of Bhutan, and the relationship between measured well-being and macroeconomic indicators. While there are only a few national surveys of Gross National Happiness in Bhutan, the concept has been used to guide public policymaking for the country’s various Five-Year Plans. Consistent with the Easterlin Paradox, available evidence indicates that Bhutan’s rapid increase in national income is only weakly associated with increases in measured levels of well-being. It will be important for Bhutan to undertake more frequent Gross National Happiness surveys and evaluations, to better build evidence for comovement of well-being and macroeconomic concepts such as real national income.

Some history:

The most important element of the Bhutanese model of development has been the concept of Gross National Happiness (GNH), and the GNH index and tool which has been formulated alongside this philosophy. GNH was in Bhutan in 1972 by the Fourth King of Bhutan, Jigme Singhye Wangchuk, the father of the current king, Jigme Khesar Namgyel Wangchuck (see Government of Bhutan, 2015). He declared that “Gross National Happiness is more important than Gross Domestic Product”. The King had envisioned an economic development model which was based on the tenets of Buddhist philosophy and holistic development, which had its core functions preserving the environment and emphasizing the role of happiness and collective well-being in the lives of people.

This emphasis on happiness was to override the role of monetary incomes which was at the heart of the GDP driven global development model. With assistance from international organizations and bilateral development partners, the government also incorporated major development related
issues into its agenda such as sustainability, climate change and inequality. While GNH has evolved over time, in its quest to stay relevant, the role of GDP in Bhutan has also changed through the years. In the decades of the 1980s and 1990s, GDP was primarily used as a tool for Bhutan’s financial indicators and as a benchmark for access to international grants and loans from multilateral agencies. Even though publicly the primacy of GNH is being advocated by Bhutan, GDP measurements have thus also played a substantive role in the country’s development.

In this context, this paper will look at the relationship between the evolution of GNH and the evolution of GDP and other macroeconomic indicators.

Should read the whole thing..

India’s Corporate Bond Market: Issues in Market Microstructure

January 17, 2019

Nice piece by Shromona Ganguly of  RBI in the January Monthly Bulletin.

Development of corporate bond market in India remains crucial for meeting the financing requirement of industry and infrastructure sector. Despite various initiatives undertaken in the past, there is little change in the overall market microstructure of the corporate bond market in India. At this backdrop, this article explores the available statistics on corporate bond market in India during recent times (2010-18) to analyse the various demand and supply side factors, which impede the growth of corporate bond market in India. It is found that the gradual increase in proportion of market-based sources in total debt financing by non-financial companies is confined only to the larger-sized firms. Though finance and infrastructure companies dominate the corporate bond market, mutual funds are playing an important role in diversifying the issuance base of the market. Empirical analysis suggests significantly higher risk-premia associated with lower-rated bonds in the private placement market.

Economics helps explain why suicide is more common among Protestants…

January 16, 2019

Profs Sascha Becker (Univ of Warwick) and Ludger Woessmann (Univ of Munich) in this piece:


Brexit: Blame it on the 2008 banking crisis

January 16, 2019

Prof Nicholas Crafts of Univ of Warwick:

Brexit in 2019 and the banking crisis in 2007 to 2009 are usually seen as unrelated events. This column argues that they are in fact closely connected. The austerity policies embarked on in response to the fiscal damage resulting from the banking crisis triggered the protest votes of left-behind voters, which at the margin allowed Leave to win the referendum vote. The implication is that the economic costs of the banking crisis are much larger than is usually supposed.


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