Archive for March, 2019

Interview of Deirdre McCloskey

March 22, 2019

This interview of Prof McCloskey appeared a month earlier:

She says liberalism should not be adopted selectively but comprehensively:

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Eastern Carribean central bank to launch blockchain-based digital currency..

March 20, 2019

ECCB conducts monetary policy for eight island economies:

 Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, Saint Lucia, and St Vincent and the Grenadines.

Apart from Sweden, ECCB is now looking to issue its own digital currency:

The Eastern Caribbean Central Bank (ECCB) and the Barbados-based fintech company, Bitt Inc. (Bitt) have signed a contract to conduct a blockchain-issued Central Bank Digital Currency (CBDC) pilot within the Eastern Caribbean Currency Union (ECCU).

The watershed contract was signed on 21 February at the ECCB’s Headquarters in Basseterre, St Kitts and Nevis.

This ECCB CBDC pilot is the first of its kind and will involve a securely minted and issued digital version of the EC dollar (DXCD). The digital EC dollar will be distributed and used by Licensed Financial Institutions and Non-Bank Financial Institutions in the ECCU. The DXCD will be used for financial transactions between consumers and merchants, including peer-to-peer transactions, all using smart devices. For example, an individual in St Kitts and Nevis will be able to send DXCD securely from his/her smartphone to a friend in Grenada in seconds – and at no cost to either party.

The Governor of the ECCB, Timothy N. J. Antoine, emphasised that in contrast to previous CBDC research and experimentsthe ECCB is going a step further.

“This is not an academic exercise. Not only will the digital EC Dollar be the world’s first digital legal tender currency to be issued by a central bank on blockchain but this pilot is also a live CBDC deployment with a view to an eventual phased public rollout. The pilot is part of the ECCB’s Strategic Plan 2017-2021 which aims to help reduce cash usage within the ECCU by 50 per cent, promote greater financial sector stability, and expedite the growth and development of our member countries. It would be a game-changer for the way we do business”.

CEO of Bitt Inc., Rawdon Adams, said, “I thank the ECCB for choosing Bitt. Our mission is the practical application of cutting edge technology to solve persistent financial problems. It is about a successful currency union building on its impressive record of financial stability, development and integration to deliver a quantum improvement to the lives of all its 630,000 citizens. Enhancing economic growth and the quality of life of ordinary people is the aim.”

The ECCB is now poised to embark on the DXCD pilot from March 2019. The pilot will be executed in two phases: development and testing, for about twelve months, followed by rollout and implementation in pilot countries for about six months. As part of pilot implementation, the ECCB will ramp up its sensitisation and education initiatives to facilitate active public engagement throughout all member countries.

The ECCB is being technically supported on this Project by Pinaka Consulting Ltd. 

The Governor in a later speech explained the motivation:

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Brazil central bank seeks formal autonomy to do its job…

March 20, 2019

Brazil’s new right-wing President Jair Bolsonaro had promised central bank autonomy in 100 days, if elected. Now after being elected, the talks are on to give the central bank formal autonomy. They have also appointed a new Governor – Campos Neto.

Appointed by Economy Minister Paulo Guedes in November, Campos Neto did not take office until late in February because he had to be questioned by the Senate in order to have his appointment approved. In the ceremony of transfer of position, he said he is proud to work with Guedes. “The meetings in Leblon [during the electoral campaign] will not be forgotten. We are really in a well-tuned orchestra being led by conductor Paulo Guedes,” he said.

Campos Neto pointed out he will work to have the Central Bank fulfill its two main missions: to preserve the purchasing power of the country’s currency through low inflation and solidity in the financial system. Next week, the president of the Central Bank will chair the first meeting of the Monetary Policy Committee (Copom), the agency that sets the Selic, Brazil’s benchmark interest rate, currently fixed at 6.5 percent a year.

In the first address, Campos Neto also said that the government will seek to expand the funds raised by major projects in the private enterprise, increase the access to the financial system, improve the population’s financial education, stimulate everybody’s participation in the market, and boost savings.

The autonomy of the Brazilian Central Bank is currently being considered by Congress. The idea is to prevent the president from interfering in the monetary policy, with the institution free to make decisions on interest and take the measures as it sees fit.

Hmm..

Hold those hagiographies of Mario Draghi as ECB chief

March 19, 2019

V Anantha Nageshwaran in his new piece cautions against praising Mario Draghi, who would soon retire as ECB head:

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Kazakhstan will get rid of the Russian language on their money

March 19, 2019

Nice bit on currency and language which has a long history:

The Kazakh authorities have changed the design of coins and banknotes of the national currency — tenge. Now they will not be inscriptions in Russian language. The corresponding decree of the President Nursultan Nazarbayev published on the website of the legal information system “Adilet”.

“The text used in the design of banknotes and coins, issued in the state language. In the design of investment and collection coins allowed the use of inscriptions in foreign languages”, — the document says.

While Russian language can be used in the design of investment and collection coins, issued by the National Bank of Kazakhstan.

The old rules allowed the use of Russian along with Kazakh in the design of banknotes and coins.

Russian has the status official, but not a state language in Kazakhstan, and in accordance with the Constitution, can be used in public organizations. The authorities have carried out a policy of “trilingualism”, encouraging the population to study, in addition to Kazakh, Russian and English.

In 2016, President Nursultan Nazarbaev demanded significant to dismiss officials who refuse to talk to people in Russian. However, in February last year, he said that the authorities — the Parliament and the government should go in its work in the Kazakh language.

 

The rage called Modern Monetary Theory (MMT)

March 19, 2019

My piece in moneycontrol on MMT.

How failing banks paved Hitler’s path to power: Financial crisis and right-wing extremism in Germany, 1931-33

March 19, 2019

Sebastian Doerr, José-Luis Peydró and Hans-Joachim Voth in their research:

The 10 greatest cricket world cup matches….

March 19, 2019

ESPNcricnfo.com has been running a series of 10 best world cup matches. Here they go:

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RIP Prof Alan Krueger

March 19, 2019

Really sad to receive the news. Prof Alan Kruger passed away at just 58.

His paper on minimum wages is legendary and was on future Nobel lists for many economists. That he took how own life adds so much more to the tragedy.

The Fed should buy recession insurance…

March 18, 2019

Brad DeLong in this article says Fed should buy recession insurance:

…if the next downturn is looming, North Atlantic central banks do not have the policy room to fight it effectively. Should a recession arrive, the US Federal Reserve would ideally be able to cut interest rates by five percentage points, as is customary in such situations. But with short-term safe interest rates currently at 2.4%, it cannot. And with euro and yen interest rates still around zero, the European Central Bank and the Bank of Japan would be unable to help much, either. 

Looking ahead, therefore, the big risk is not that inflation will start spiraling upward, with the Fed unable to raise interest rates fast enough to stabilize the economy. Rather, it is the downside risk that a year from now, the North Atlantic will be in recession, governments will not provide enough fiscal stimulus, and the Fed won’t be able to reduce interest rates enough – leaving it nearly helpless to even try to stabilize the economy.

The logical response to such an asymmetric risk is – or ought to be – to buy insurance to cover it. Worryingly, however, the Fed is not taking out any policy insurance at all against a possible recession, despite having at least three possible options from which to choose.

Three options are: raise policy rates today, cut interest rates today to try to compensate for its inability to reduce rates enough in a future downturn and leave interest rates unchanged for now. It is doing the third option but is not explaining what happens if a recession occurs.

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Changing gears: about cycling and the future of banking

March 18, 2019

Frank Elderson, Executive Director of Supervision at Dutch Central Bank in this speech connects cycling and banking regulation:

When I took up this job as chief supervisor for the Dutch banking sector, summer last year, I realized again how much better shape the Dutch banks are in, than the last time I was actively involved in prudential banking supervision.

You see, I was leading the DNB team responsible for supervising ABN Amro back in 2006. I remember going to the Zuidas by bike, parking it right in front of that huge entrance of the ABN Amro building – which wasn’t allowed by the way. That solitary black bicycle, against the sheer backdrop of one of the tallest sky-scrapers of Amsterdam at that time, in a way that bicycle formed an early example of transparent supervision: since everybody knew it was my bike, every time they saw it they knew the supervisor was in the building.

Of course, it’s a story with a tragic undertone. The years 2006 and 2007 have a fateful ring to them. We were witnessing the tearing apart of the largest bank in the Netherlands. Less than a year after the consortium took over ABN Amro, on a sunny day people were leaving the Lehman head offices
carrying cardboard boxes. The rest is history.

How totally different to the picture we observe today! Today I see a banking sector that has weathered the storm, and has emerged stronger. Smaller perhaps, but more resilient, more focused and better capitalized.

Hmm.. It is quite transparent really, Usually, the banks do not want any sign whatsoever of a regulator parking their vehicles at their offices . It could lead to a signal that bank is under trouble and build expecations for a run..

Then he points to three challenges ahead for banks and their supervisors:

  • Anti-Money Laundering and Countering Financing of Terrorism
  • restoring trust in banking sector
  • forward looking risk management

He concludes by looking at ECB’s Single Supervisory mechanism:

Of course, and this is perhaps one of the greatest changes of all over the past twelve years, we are not going about this alone. Today, if you are entering your head offices, you may see not one bicycle, but two. Or a whole lot, if an on-site inspection is taking place. (Actually, this is a figure of speech. We have not yet completely succeeded in transferring our love for cycling to all our good colleagues within the SSM.)

Because I am talking about the SSM of course. I think the SSM has been a great improvement in the way we exercise supervision. If I only think back at the situation we were in, back in 2012, when the European Council’s decision about the banking union was taken. And in November 2013 the SSM was
formally established.It is hard to believe how much progress we’ve made in just a few years.

Many highly qualified staff had to be recruited. A complete supervisory framework had to be designed and be made operational, incorporating the best elements of each nation’s approach to supervision. And a close collaborative relationship with national supervisory authorities developed. It was an
astounding achievement, and the ECB deserves much credit for this.

We are now in a transitional phase. A phase in which the banking union is steadily taking shape, and the SSM is consolidating into a truly harmonized European supervisor. Based on past experience, I look forward to this new phase with confidence and I am eager to take part in it. That’s how we are continuing, safeguarding a sound banking sector in the interest of depositors and a prosperous economy.

Only one last thing: I would love to see more supervisors taking the bicycle when moving around in Frankfurt…

Typical Dutch ending..

131 CAs debunk allegations of India’s ‘shambolic economic statistics’

March 18, 2019

One would imagine another set of economists debunking claims by 108 economists that state of Indian macro data is not in order.

But, the debunk has come from Chartered economists!

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Reflections of an economics textbook author: Greg Mankiw

March 18, 2019

Nice essay by Prof Greg Mankiw. He recently stepped down as the instructor of Harvard’s EC10 course (introductory economics). This is a huge moment in economic teaching as people believe this would give an opportunity for other textbooks such as Core economics to get their dues.

In the essay, Mankiw takes one through what led him to write a book on economics. Also how should one write write a book and the changes brought to the books world by digital technologies:

In this essay I reflect on textbook writing after three decades participating in the activity. I address the following questions: What perspective should textbooks take? What is the best approach to teaching microeconomics? What is the best approach to teaching macroeconomics? How does the content of the introductory course evolve? How much material should textbooks include? Are textbooks too expensive? How is digital technology changing the market for
textbooks? Who should become a textbook author?

Some more from Prof Tim Taylor on Mankiw’s essay and his own experiences..

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.

 

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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James Watt: The 18th-Century Scotsman Who Became a Hero of Human Progress

March 14, 2019

Brilliant article by Alex Hammond on James Watt.

This one takes the key:

Watt’s first profitable dual-cylinder steam engine entered the market on March 8, 1776, a day before Adam Smith’s Wealth of Nations was first published. Little did the two Scotsmen know that they were about to change the world forever.

Hammond runs a series of people who have made an extraordinary contribution to the wellbeing of humanity. Watt is 13th in the series:

Today marks the 13th installment in a series of articles by HumanProgress.org titled Heroes of Progress. This bi-weekly column provides a short introduction to heroes who have made an extraordinary contribution to the wellbeing of humanity. You can find the 12th part of this series here.

Our 13th Hero of Progress is James Watt, the 18th-century Scottish engineer and inventor who enhanced the design of the steam engine. Watt’s steam engine made energy supply more efficient and reliable than ever before. It was fundamental to kick-starting the Industrial Revolution.

 


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