Archive for March 15th, 2019

IDBI Bank re-categorised as private sector bank..

March 15, 2019

I had written on this interesting history of IDBI as a Development Financial Institution which started in 1964.

In 1990s, IDBI started a new bank as part of Govt/RBI policy to open new private banks. Then in 2005, IDBI Bank merged into IDBI and became a commercial bank. Thus, it came back into public sector.

Post LIC’s acquisition of IDBI Bank, it is back into private sector.

 

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Independent monetary policy versus a common currency: case of Czech Republic

March 15, 2019

Interesting research by Jan Br˚uha and Jaromír Tonner of Czech National Bank.

The Czech Republic joined the EU in 2004, i.e. after 1993, and it is therefore obliged to adopt the euro sometime in the future. Obviously, euro adoption would have its benefits and costs. This paper aims to contribute to the macroeconomic analysis of the costs and benefits. By “macroeconomic”, we mean those costs and benefits which are related to business cycle fluctuations, to positive trade effects and to the nominal convergence of the Czech economy. We therefore do not investigate other costs and benefits, such as the change of legal tender, the change in the country’s credibility after adopting the euro and the costs of potential fiscal free riding by other member countries. This is not to say that these other aspects are not important, but this paper concentrates on the above-mentioned well-defined aspects of euro adoption.

The main macroeconomic benefit of adopting the euro is the elimination of exchange rate risk, which should be beneficial to trade, as the euro area countries are dominant trading partners for the Czech Republic. The macroeconomic costs include a reduction in the effectiveness of domestic macroeconomic policies and the risk of greater volatility in economic activity and consumption due to the loss of independent interest rate and exchange rate policy. This is because the common  monetary policy of the ECB cannot respond sufficiently to shocks which affect only a small part
of the euro area economy. The relative importance of the costs and benefits of adopting the common currency is ex ante unclear and the literature offers conflicting results. Therefore, it is worth investigating the macroeconomic costs of joining the euro area.

To contribute to this research agenda, we use simulations performed using the CNB’s official “g3” macroeconomic forecasting model, which is a typical small open economy new Keynesian model. As a counterfactual, we build a modified version of the g3 model with a fixed nominal exchange
rate and with the monetary policy rate equal to the ECB rate.

To evaluate the effects of euro adoption on the Czech economy, we employ two approaches. We compare the unconditional volatilities of important macro variables implied by the two macroeconomic models. The volatility of nominal variables increases after joining the common currency, as the common monetary policy does not react to purely domestic shocks.

We also simulate the counterfactual outcomes of macroeconomic variables that would have happened if the euro had been adopted in the past. We find that euro adoption would have meant an increase in the volatility of macroeconomic variables, while the effects on the levels of real output and consumption would have been positive. These positive effects on the real economy are due  mainly to the trade effect, but temporarily lower real interest rates would also have contributed. Nominal exchange rate appreciation during the ERM II phase could partly alleviate the nominal volatility caused by euro adoption.

Hmm..

Airport anthropology and new behavioural patterns

March 15, 2019

Ramakant Bijapurkar in this interesting piece in Mint observes ongoing changes in Indian airports. No more are Indian airports clones of western airports but are having their own regional identities:

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Can Economics Shake Its Shibboleths and move to a bolder economics?

March 15, 2019

Two related pieces:

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Why Latin American central banks follow Fed closely?

March 15, 2019

Andres Velasco, currently Dean of School of Public Policy at the London School of Economics in this piece:

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Indian economists/social science researchers raise red flags over interference in data estimation…

March 15, 2019

108 Indian economists/social science researchers have issued this joint statement:

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