Archive for February, 2019

Drivers and Management of RBI’s Liquidity operations in 2018-19

February 15, 2019

In the earlier versions of India’s monetary policy, RBI used to release this useful Macroeconomic and Monetary Developments Report (MMDR).  This was discontinued after April-2014 policy, as RBI started releasing Monetary Policy Report. In the MMDR, the chapter on Monetary and Liquidity Conditions used to be very useful as it would tell us about ongoing changes in RBI’s liquidity management. This would tell us the drivers of market liquidity and how RBI managed the situation. Alongwith MMDR, this very useful input was also done away with.

In the recent RBI Bulletin (Feb-19), there is a nice research note bringing back both: memories and insights. The note is written by Indranil Bhattacharyya, Samir Ranjan Behera and Bhimappa Talwar of the Monetary and Liquidity Analysis Division, Monetary Policy Department, Reserve Bank of India.

They first summarise the broad history of RBI’s LAF framework since 1999 and changes which have happened overtime. Then they discuss the drivers and management of liquidity in Indian money markets in 2018-19.



40 years of Iran’s Revolution

February 14, 2019

As Iran is marking 40 years of its revolution, lots to be discussed and figured.

Prof Djavad Salehi-Isfahani (Virginia Tech) in this piece looks at whether Iran is worse-off in the last 40 years. It does not look as bad as imagined.


Central bank independence in a democracy: narrower the mandate easier to defend it..

February 14, 2019

Jens Weidmann of Bundesbank is one of those central bankers whose speeches are quite interesting to read. The last one was connecting beatles to central banking.

In a new speech, he looks at several things but this one caught my eye:

Central bank independence in a democracy


How Estonia appoints its central bank Governor?

February 13, 2019

Central banks appoint their Governors and Deputy Governors in multiple ways. There is no one standard way.

Came across this Press release by Estonia Central Bank (called Eesti Pank) where secret ballot is used to select the Governor:


For many in Dakshina Kannada, Vijaya Bank is an emotion…

February 13, 2019

I blogged about how people in Dkashina Kannada region (Mangalore and included Udupi earlier) are really upset with Vijaya Bank’s merger (Dena bank too) with Bank of Baroda.

Here are two articles which continue to point to sorrows and protests amidst the local people over their bank’s merger and loss of identity:

These are sentiments which have built up over the years. The kind of fondness people have for “their banks” is best seen in Mangalore and Udupi regions.

Once there was an IDBI..

February 13, 2019

My new piece in Bloomberg Quint.

It documents the glorious days of IDBI where the financial institution was set up by RBI. It is one of those few entities which led to changes in RBI as an organisation. Now we know IDBI as a bank has been sold off to LIC and it could even lose its name  to becoming LIC Bank.

How India’s financial institutions and banks are exiting one after the other. But we have barely cared for documenting and preserving their history.. And soon we will be creating new institutions which will be just like the old ones under a new name.

It is not so much about history alone but also understanding the present and possibilities for future..

Women in Economics: Elinor Ostrom

February 13, 2019

Tylwer Cowen (Marginal Revolution Univ) discusses Elinor’s work as part of MRU’s series on Women in Economics.

Some governments attacking central bank liabilities and other assets: Case of Italy wanting central bank gold..

February 13, 2019

Firstly, Italy’s politicians have begin attacking the central bank for failing to clean banks in the country.

Further, an Italian newspaper has reported that government wants to sell part of country’s gold to cover its expenses. The gold is not just managed but owned by the central bank. This will obviously lead to all kinds of frictions. From the bullionstar blog by Ronan Manly:

Italy’s unpredictable political situation continues to throw up surprises with a controversial claim in national newspaper La Stampa this week that the country’s coalition government wants to sell part of Italy’s gold reserves to cover spending plans and to prevent the need to increase VAT in a forthcoming Italian budget.

While the claims by La Stampa are not really based on anything new, they still managed to cause an international media frenzy as they came a few days after Italy’s governing coalition launched verbal attacks on Italy’s central bankers and financial regulators.

Note that Italy claims to be the world’s third largest sovereign gold holder behind the US and Germany, with claimed monetary gold holdings of 2451.8 tonnes. Interestingly, unlike most countries where sovereign gold is owned by the State but managed by the country’s central bank, the Italian gold is officially owned by Italy’s central bank, Banca d’Italia (Bank of Italy), and not owned by the Italian State.

The Banca d’Italia furthermore claims that 1199.4 tonnes of the gold (or roughly half), is stored in the Bank’s gold vaults under it’s Palazzo Koch headquarters building in Rome, with most of the other half stored in the vaults of the Federal Reserve Bank of New York (FRBNY), and a small balance kept the Bank of England in London, and in an account of the Bank for International Settlements (BIS) in the vaults of the Swiss National Bank (SNB) in Berne, Switzerland. But without any documentary evidence or independent auditing or verification of any of its gold, especially the foreign held gold, these claims are impossible to verify.

Note also that the current Italian government is made up of a coalition of the right-wing League party (Lega), a party headed by Matteo Salvini, and the populist Five Star Movement (M5S), a party headed by Luigi Di Maio, but with the appointed Giuseppe Conte as prime minister (backed by Lega and M5S), and with Salvini and Di Maio as vice prime ministers.

Lots more in the piece on Italian politics and its economics…

It’s always a mistake to underestimate the strength of the European project..

February 13, 2019

Benoit  Coeuve, member of ECB in this interview on the European project:


Finland’s basic income experiment: self-perceived wellbeing improved but no effects on employment

February 13, 2019

Universal Basic Income is a much talked about idea these days.

Finland did an experimental study in 2017 to find the effect of basic income:

The basic income experiment was launched on 1 January 2017. During the experiment, a total of 2,000 unemployed persons between 25 and 58 years of age received a monthly payment of €560, unconditionally and without means testing. The experiment run for two years until 31.12.2018. 

The purpose of the basic income experiment was to find ways to reshape the social security system in response to changes in the labour market. The experiment also explored how to make the system more empowering and more effective in terms of providing incentives for work. Further objectives included the reduction of bureaucracy and the streamlining the complicated system for providing welfare benefits.

The preliminary results of the experiment have been released:

The effects of the basic income experiment on wellbeing was studied through a survey which was done by phone just before the experiment ended.

According to the survey, the recipients of a basic income perceived their wellbeing as being better than did the control group. 55% of the recipients of a basic income and 46% of the control group perceived their state of health as good or very good. 17% of the recipients of a basic income and 25% of the control group experienced quite a high degree or a very high degree of stress.

‘The recipients of a basic income had less stress symptoms as well as less difficulties to concentrate and less health problems than the control group. They were also more confident in their future and in their ability to influence societal issues’, says Minna Ylikännö, Lead Researcher at Kela.

The recipients of a basic income were also more confident in their possibilities of finding employment. In addition, they felt that there is less bureaucracy involved when claiming social security benefits and they were more often than the control group of the opinion that a basic income makes it easier to accept a job offer or set up a business.

‘The results of the register analysis and the survey are not contradictory. The basic income may have a positive effect on the wellbeing of the recipient even though it does not in the short term improve the person’s employment prospects’, says Ylikännö.

The response rate for the survey was 23% (31% for the recipients of a basic income and 20% for the control group).


The recipients of a basic income had on average 0.5 days more in employment than the control group. The average number of days in employment during the year was 49.64 days for the recipients of a basic income and 49.25 for the control group.

The proportion that had had earnings or income from self-employment was approximately one percentage point higher for the recipients of a basic income than for the control group (43.70% and 42.85%). Then again, the amount of earnings and income from self-employment was on average 21 euros lower for the recipients of a basic income than for the control group (€4,230 and €4,251).


Expect fair amount of discussion on this going forward…

Paul A. Volcker’s “Keeping at It:” Messages for Country and World

February 12, 2019

Edwin Truman of PIIE distills the main messages from Volcker’s memorial:

Why would Paul Volcker, who tamed inflation as chairman of the Fed in the 1980s, write a memoir in his 91st year rather than go fishing? Because he is deeply concerned and has a message about the direction of the country and the world. The message proclaims three verities drawn from his career of service in the public and private sectors: stable prices, sound finance, and good government.

How will we transition to a LIBOR free world?

February 12, 2019

Nice speech by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA of UK.

There is now wide recognition that LIBOR will come to an end. Thanks to the agreement reached with 20 panel banks to continue submitting until end 2021, LIBOR is not expected to cease before that point. But, when I spoke at the International Swaps and Derivatives Association’s (ISDA’s) annual Europe conference in September last year, on this same stage, an audience poll found just over 50% thought LIBOR would stop before end-2022. Today, I would like to explore in a bit more detail not whether LIBOR will end, but how it will end.

This has important implications for contractual design. It is relevant in particular to how ’fallback‘ language in outstanding contracts that continue to reference LIBOR will and should work. Understanding the way in which the end of LIBOR will play out is key to choosing the right trigger point for moving to a new or replacement ‘fallback‘ rate.  

It will be quite something to forget LIBOR in our minds as well…

How central bank boards/committees are different from private ones?

February 12, 2019

A nice speech by outgoing Bank of England’s FPC (not MPC) external member: Martin Taylor.

He speaks about how central bank boards/committees are different from the ones in private sector. He also discusses several others things:

  • Role of FPC
  • Role of external members vis a vis internal members
  • central bank independence
  • central bank neutrality: he rightly says that central banks should strive to be neutral but should not be neutered in the process
  • Brexit

On the differences between private board and public ones:


History and evolution of RBI’s different reserves

February 11, 2019

The question of Government demanding part of RBI Reserves was again one of the main questions in Fev-2018 policy.

However, when you look at RBI balance sheet, you see many types of reserves:

  • Reserve Fund
  • Other Reserves
    • This includes National Industrial Credit (Long Term Operations) Fund and National Housing Credit (Long Term Operations) Fund.
    • a) National Industrial Credit (Long Term Operations) Fund
    • b) National Housing Credit (Long Term Operations) Fund
  • Other Liabilities and Provisions
    • Contingency Fund
    • Asset Development Fund (ADF)
    • Currency and Gold Revaluation Account (CGRA)
    • Investment Revaluation Account (IRA) – Rupee Securities
    • Investment Revaluation Account (IRA) – Foreign Securities
    • Foreign Exchange Forward Contracts Valuation Account (FCVA)
    • Provision for Forward Contracts Valuation Account (PFCVA)

What is the origin of these reserves and what do they mean? My article in moneycontrol explains the history and evolution of these reserves.

Why India needs an independent fiscal council?

February 11, 2019

Pramit Bhattacharya of MInt argues for an independent fiscal council in India.

More interestingly, he points to this study which shows how interim budgets since 1991 (barring 2014 one) underestimate deficits and overestimate revenues:

Historically, interim budgets in India have consistently overestimated revenue growth and underestimated expenditure growth. An analysis of the projected, revised, and actual budget figures since 1991 by Deepa Vaidya and K. Kangasabapathy of the EPW Research Foundation showed that deviations from budget estimates tend to be extraordinarily high for budget estimates presented in interim budgets .

With the exception of the 2014 interim budget presented by P. Chidambaram, these estimates undergo sharp revisions in the next budget (when revised estimates are presented) and the deviation from budget estimates persists in the actual (and final) figures.

Hmm..This time is never really different when it comes to interim budgets…


Interview of PC Mohanan member National Statistics Commission: On Controversies around India’s unemployment data..

February 11, 2019

PC Mohanan gives a no holds barred interview on Indian unemployment report and many other things:

India’s statistics minister Sadananda Gowda told Parliament last week that reports of the unemployment rate touching 6.1% in the NSSO survey is fake. Having headed the survey, how do you react?

I personally cannot agree. The NITI Aayog (a government think tank) was the first to say that it’s a draft report. Once I approve it, how is it a draft report? The NITI Aayog CEO (Amitabh Kant) gave some reason why this is not comparable, which is also misleading. When we approve a report, I am not going to give a figure which is not comparable with the other ones. Second, the concept of employment and unemployment are universally accepted. International Labour Organization prescribes the standards, we all follow it.

The government also keeps talking about collecting and processing the quarterly data from July to December 2018. Do you expect this to be much different from the annual survey’s findings?

I don’t expect much variation between the annual data and the quarterly data. All Western countries produce quarterly employment data. We have quarterly data on GDP, but no employment data. So, under a new system, we thought we will make an attempt to produce quarterly employment data. But in rural areas, quarter-to-quarter changes will hardly be any. So we thought, let’s try for the urban area at first. It is kind of a trial, for one or two years we will see. The annual reports are based on a first visit, the quarterly will depend on the second or third visit. They are two different surveys—in the sense that the quarterly reports you are readying are only for urban areas, whereas this 2017-18 NSSO survey is rural plus urban. In India, you don’t expect too many changes in annual employment from the quarter. Here we don’t give people unemployment allowance or security. And many of the people employed are in the government sector. So, quarter to quarter changes may not be that much and the annual data will have no relation with the quarterly.

He shares some wisdom on unemployment numbers. It is not as bad as we think:


Charting a course for the Financial Stability Board

February 11, 2019

Randal Quarles, Vice Chairman for Supervision at Federal Reserve gives a useful speech:

Let me begin with the principle of engagement, and let me lay the groundwork for this discussion by reviewing the way the FSB was established and its mandate, to see how we can continue to fulfill that mandate going forward. As we all know, the FSB was born out of the crucible of the 2007-09 Global Financial Crisis–a crisis that demonstrated in the starkest possible way the importance of global financial stability to the well-being of families and businesses around the world. In the months following the peak of the crisis, the world was struggling with financial market turmoil, and the resultant macroeconomic effects were felt by people everywhere around the world. It was clear that the response to this crisis needed to be global, and the G7 and G10, without any emerging market representation, were not the right bodies to organize a global response.

As such, the Heads of State and Government of the G20 called for the Financial Stability Forum (FSF), a relatively small and unmuscular group, to expand its membership and to strengthen its institutional framework. The result was the Financial Stability Board, which was designed as a mechanism for national authorities, global standards-setting bodies, and international authorities to identify and address vulnerabilities in the global financial system and to develop stronger regulatory and supervisory policies to create a more resilient global financial system. This new group is more representative of the interconnected global economy and financial system and can more effectively mobilize to promote global financial stability than anything that existed before. Whereas the FSF included only 11 jurisdictions (all of which were advanced economies), the FSB includes 24 jurisdictions and 73 representatives, which include all the members of the G20 and of which 10 are emerging market economies.

In fostering global financial stability, the actions of the FSB have the potential to affect the global economy and financial system in important ways. Success in promoting global financial stability should benefit everybody, through more sustainable and stronger economic growth. At the same time, financial stability policy will also affect institutions and markets beyond the FSB’s membership. Recognizing the wide-reaching effects of its work, the FSB must seek input from a broad range of stakeholders, each of whom brings a different perspective to the issues under consideration. While we are directly accountable to the G20, we are, through the G20, accountable to all of the people affected by our actions. In my view, that means we must engage in genuine, substantial dialogue with all of these stakeholders, to a greater and more effective degree than we have in the past.

He is also the chair of FSB now.

Narratives about Technology-Induced Job Degradations: Then and Now

February 11, 2019

Prof Robert Shiller is making this whole idea of building narratives in economics as an important thing.

In his new paper, he writes on how people have reacted to technology impacting their work over the years:

Concerns that technological progress degrades job opportunities have been expressed over much of the last two centuries by both professional economists and the general public. These concerns  can be seen in narratives both in scholarly publications and in the news media. Part of the expressed concern about jobs has been about the potential for increased economic inequality. But another part of the concern has been about a perceived decline in job quality in terms of its effects on monotony vs creativity of work, individual sense of identity, power to act independently, and meaning of life.

Public policy should take account of both of these concerns, inequality and job quality.

Superb bit.

Why narratives?


20 years of Indo-Pak classic at Chennai

February 8, 2019

This column by Siddhartha Vaidyanathan takes one back to the classic test match between India and Pakistan at Chennai (28-31 Jan 1999). What a match it was and what quality of players on both sides.

Siddharth manages to get views of few special people who watched the test match.

Absolutely fascinating walk down the memory lane….

Distributed ledger technology and large value payments: a global game approach

February 8, 2019

Interesting lecture by Hyun Song Shin of BIS. Fairly technical as well.

Payment systems built around distributed ledger technology (DLT) operate by maintaining identical copies of the history of payments among the participant nodes in the payment system. Cryptocurrencies are perhaps the best-known example of the application of DLT, but the applicability of the technology is much broader. Payment systems based on DLT are compatible with oversight by the central bank, and several central banks have conducted successful trials of interbank payments. In these trials, payment system participants transfer digital tokens that are redeemable at the central bank and use DLT to transfer them to other system participants. Decentralised consensus is achieved through agreement of a supermajority of the participants (typically 75-80%) who collectively validate payments. 

Nevertheless, the technology by itself does not overcome the credit needs of the payment system to maintain settlement liquidity. In conventional real-time gross settlement (RTGS) payment systems, the value of daily payments can be over 100 times the deposit balance maintained by the system participant at the central bank. As such, incoming payments are recycled into outgoing payments, and credit provided by the central bank supplements private credit from outside the payment system for the smooth functioning of the system as a whole. 

We examine the liquidity properties of decentralised payment systems in an economic model of payments, in which the cost of credit to finance payments enters explicitly. 

First, in a two-bank example, we illustrate the conceptual distinction between consensus as distributed knowledge and consensus strong enough to sustain a cooperative outcome. In this example, when the cost of credit exceeds a modest threshold, no amount of exchange of messages can elicit the coordination of payments between the two banks. The example focuses attention on the coordination motives of system participants. The cost of credit turns out to be a key determinant of the equilibrium outcome of the game. 

We then proceed to examine a general N-bank game and cast the payment problem as a public good contribution game between N banks in a large-value payment system. The public good has two aspects. The first aspect of the public good is the availability of a clean, reconciled ledger that commands agreement from system participants. This part is where the technological innovation can contribute most. 

The second aspect of the public good is the provision of credit to clients which allows high volume of outgoing payments that sustains the coordination outcome with high flows. We solve for the unique, dominance-solvable equilibrium using global game techniques and provide an exact characterisation of the states of the world at which the coordination outcome is feasible. 

The solution shows that successful coordination is possible in a decentralised setting, but only within a narrow range of fundamentals. The solution is highly sensitive to the cost of credit, and the decentralised equilibrium outcome often fails to reproduce the high-volume payment outcomes that are more normal with central bank balance sheet backing.


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