Archive for June 20th, 2019

India’s GDP growth controversy points to deeper problems over economic advisory in the country..

June 20, 2019

One expected lots of analysis post Subramaniam’s paper but the choice of words is appalling. After accusing his research of intellectual treason, another economist wrote the following:

The Indian statistical process is robust, independent and continually improving. More can and should be done to strengthen it and its advisory committees but bringing in outside experts who do not understand the economy can be counter-productive.


What is even more worrisome is how the two authors are part of economic advisory. One is part of PM’s Economic Advisory Council and another is one of the several co-authors of PM EAC’ report questioning the analysis. And for all you know, PM’s EAC has people who would be considered as foreign experts. Infact, that is one of the most important criteria for getting economic policy positions in India!

This should not be acceptable. I really do not know why the established media houses agreed to publish such words. Moreover, one expects better judgement for those holding offices of power. Criticise something threadbare but one has to maintain some decorum.

Though, it points to even a larger point. One is increasingly seeing how economic advice is getting politicised. Anyone who becomes an economic adviser to the government is seen as being accountable to the government at power and not to the country at large. The job of the adviser is not seen as providing any economic advice but stand-up for the government at all costs.

Infact, it is fine if governments think that way. What becomes a bigger problem is when advisers also think and signal in the same direction.

Let us imagine that Arvind Subramaniam actually said the opposite using similar analysis: India’s GDP growth rate is underestimated by 2.5%. One is wondering whether EAC and its members would write similar articles criticising the approach? Most likely not and they would have celebrated the paper. But then that is the role of the adviser. To keep guiding on the right path. If AS’s paper follows poor methodology, it should be criticised either way.

Somehow the contract between Principal and Agent has weakened and does not inspire any confidence. This does not augur well for Indian economy at all.

20 Years of European Economic and Monetary Union

June 20, 2019

The Annual European Central Bank Forum at Sintra, Portugal was held recently. The papers and videos are all on the website.

In particular, this speech by EC President Jean Claude Junker is interesting. He points to “six moments in time, six lessons in history that have shaped the euro and the European Union as we know it.”

Lesson 1: The euro is a political project for our grandchildren
Exchange Rate Mechanism Crisis 1992

Lesson 2: The rules do not need to be stupid
The Stability and Growth Pact crisis 2003

Lesson 3: The euro is a matter of common interest
Greece 2010

Lesson 4: The euro requires resolve
Mario Draghi’s ‘whatever it takes

Lesson 5: The euro is irreversible
Greece crisis July 2015

Lesson 6: The euro is a strategic asset in today’s world
The Iran nuclear deal and the international role of the euro


The experts we need..

June 20, 2019

Andres Velasco has a timely piece on the topic.

Worldwide experts are disliked and trolled. But does that mean we don’t need experts. Of course not. Just that we need more grounded and humbled ones:

In an ideal world, experts would present a menu of policy choices from which citizens wisely choose. But in the real world, citizens have neither the time nor the inclination to sift through complex and tedious policy alternatives. Nor, sadly, do most politicians. Policy wonks are seldom asked for a menu of options; more often, they are asked a simple question: what should we do? And in answering that question, wonks inevitably bring their own values and preferences to bear.

So, as with so many political issues nowadays, it comes down to a matter of identity: can voters identify with the expert or the politician whom the expert advises? Can voters sense that they belong to the same tribe and uphold the same values?

Typically, the answer is no. And there lies the root of the problem. Policy gurus and politicians probably spend too much time with others like them – top civil servants, high-flying journalists, successful businesspeople – and too little time with ordinary voters. This undoubtedly shapes their worldview. As a Spanish-language saying goes, “Dime con quién andas y te dire quién eres”: “Tell me who your friends are and I’ll tell you who you are.”

So how can experts regain citizens’ trust? The answer is paradoxical: by becoming intellectually more modest, less beholden to the rarified ways of the ivory tower and the lecture hall, and likelier to listen to people who do not have a PhD. If they could become “humble, competent people on a level with dentists,” as John Maynard Keynes once suggested, then there is at least a chance that voters will identify with the nerdy pointy-heads and find them trustworthy.

The task is urgent, because the world needs credible experts. After all, if a tooth aches, we turn not to a pleasant and well-meaning friend, but to the frightening syringes and drills of the most competent dentist we can find.


The Paradox of India’s Green Revolution

June 20, 2019

Marshall Bouton in this article:

More than five decades after India launched the Green Revolution, its war on hunger is far from won.

The impetus for the Green Revolution came from harvest failures and famine conditions in the mid-1960s. But its main goal was to ensure India’s national food security, more precisely its self-reliance in food grain production. We can see now that the policies adopted then, and left largely unchanged since, have not only failed to eliminate hunger but also made more intractable the challenge of providing adequate and appropriate nutrition for all of India’s people. These policies have included subsidies for fertilizer and groundwater extraction, minimum support prices for food grains (especially rice and wheat), and procurement and public distribution of grains (also mostly rice and wheat).

Most govt interventions have consequences both intended and unintended….

Bridging the textbook gaps on how the central banks implement monetary policy

June 20, 2019

Kellie Bellrose of RBA explains the difference between how textbooks explains central banks implementing monetary policy vs how central banks actually implements it.

Though the article is for Reserve Bank of Australia but applies to most central banks.

The RBA’s implementation of monetary policy is an area of confusion for professional economists, commentators and educators alike, particularly in reference to how closely the actual process aligns with the standard textbook explanations. T

he two main gaps in typical textbook explanations relate to:

    1. The omission of the policy interest rate corridor. The corridor is key to how the RBA implements monetary policy, particularly a change in monetary policy, as it encourages banks to trade ES balances at the target cash rate.
    2. The use of open market operations. Textbooks often link OMOs with achieving a change in the cash rate when, in practice, the RBA uses OMOs to manage the supply of cash to keep the cash rate at its target.

In summary, the market automatically trades at the new cash rate target following a change to monetary policy. This is achieved by the policy interest rate corridor, which resets around the new cash rate target, and banks have no incentive to trade outside of this corridor. Given the automatic adjustment to the cash rate target, there is no need for additional OMOs. OMOs are instead used by the RBA to manage the supply of cash (liquidity) in the market on a daily basis as part of its liquidity management practices.

This information can be viewed at a glance in the accompanying table ‘The Reality of Monetary Policy Implementation’.

Nice bit.


The future of cash in New Zealand

June 20, 2019

Reserve Bak of NZ issued a report on future of cash in the country:

The future of cash1 in New Zealand is uncertain. The Reserve Bank of New Zealand (Reserve Bank) is in the middle of a multi-year programme to establish The Future of Cash — Te Moni Anamata. This programme has identified that, despite an increasing trend in the overall cash in circulation (CIC), New Zealand is becoming a society that uses little cash.

New Zealanders are using cash less and less for transactions. As the transactional demand for cash falls, the per transaction cost of providing cash infrastructure increases. Commercial operators have natural incentives to reduce their costs and reduction in cash demand and use could lead them to reduce their provision of cash infrastructure, or to stop accepting and issuing cash. Such decisions — driven by commercial considerations — would in turn further increase the per-transaction costs of providing cash and lead to further reductions in the cash network.

The benefits of having cash become greater and greater as more and more people use it. This so-called ‘network effect’ of cash, also declines as fewer people use it. For example, if fewer consumers, businesses, and banks dealt with cash, the ability for people to use cash for transactions in stores and between individuals would decline. If this occurred, some of the unique roles of cash could be lost. The legal tender status of cash does not oblige anyone to accept cash as a means of payment except for debt.

A contraction in the cash network without regard to the wider benefits of cash in society might significantly disadvantage people who rely on the unique role that cash plays in their lives. This would be considered a market failure2 to the extent that commercial operators did not fully incorporate the wider network benefits of cash. As a result, government action could be warranted following the completion of this review.

The Reserve Bank is the sole issuer of cash in New Zealand and is required to issue currency that meets the needs of the public.3 There is no agency responsible for over-seeing the usability of cash by the public or stability of the cash system in New Zealand. Therefore, the Reserve Bank is taking a leadership position to assess the future of cash.

This issues paper outlines our4 preliminary analysis of the role of cash in society and the trends in cash use and supply. It sets out the key issues to consider – both positive and negative – if less cash were being used in New Zealand accepted that:

    1. People who are financially or digitally excluded could be severely negatively affected. These include:
      1. People who are not banked or have limitations to accessing the banking system, such as people without identification and proof of address, people with convictions, people with disabilities, illegal immigrants and children.
      2. People who face barriers to digital inclusion, such as people with disabilities, senior citizens, people with low socio-economic status, people that live in rural communities with low internet service, migrants and refugees with English as a second language, Pasifika, and Māori.
    2. Tourists, people in some Pacific islands, and people who use cash for cultural customs might be negatively affected if they cannot use cash substitutes.
    3. All members of society would lose the freedom and autonomy that cash provides and the ability to use cash as a back-up form of payment, and might be more exposed to national and personal cyber threats.
    4. There would be limited or balanced effects for people’s ability to budget, New Zealand’s financial stability, and government revenue.
    5. Cash infrastructure is costly. Moving to a society with less cash could increase efficiency and reduce the overall transaction costs of payments.

The issues arising from a society with less cash have a broad reach. This issues paper invites your feedback on whether we have correctly identified the most important issues and whether there any other significant issues that should be taken into account. It also seeks initial views on the roles of government and Reserve Bank are regarding these main issues.

The Reserve Bank will publish an analysis of the feedback received, as well as further research. A formal policy consultation may follow depending upon what emerges from feedback on this paper and further research and analysis.


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