Archive for July, 2019

Night-time Luminosity: Does it Brighten Understanding of Economic Activity in India?

July 31, 2019

RBI released its Occasional Paper Series Vol. 40.  It has this paper by Anupam Prakash, Avdhesh Kumar Shukla, Chaitali Bhowmick and Robert Carl Michael Beyer on using night-time luminosity as an economic variable:

In view of the growing popularity of night-time luminosity as a measure of economic activity, this study explores the scope for using such data as a supplement
for gross domestic product (GDP) in the Indian context. We found that night-light data exhibit reasonably robust correlataion with GDP and other important
macroeconomic indicators like industrial production and credit growth at the national level.

Quarter-on-quarter growth of night lights tracks growth of GDP reasonably well. Even after controlling for seasonal factors, the relationship of night lights with value-added in agriculture and private consumption expenditure turns out to be statistically significant.

In addition, night lights are strongly correlated with gross state domestic product (GSDP). The elasticity of night lights with respect to GSDP (i.e., the so-called inverse Henderson elasticity) is found to be statistically significant, though relatively smaller in magnitude than similar estimates available at the global level.


Notwithstanding the presence of a statistically significant relationship between night lights and GDP, there are certain limitations of using nightlight data for economic measurement. First, given that it is just a rough approximation of economic activity, it should be considered at best as an
additional indicator and not a substitute.

Second, although night lights correlate strongly with GDP, the correlation weakens substantially when growth rates are considered, which suggests that one needs to be careful while using night-light data for analysing short-term events. The existing literature finds similar result for other countries as well (World Bank, 2017).

Third, night lights as a proxy for economic activity do not distinguish between value added in different sectors.




Happy Birthday Milton Friedman

July 31, 2019

Milton Friedman would have turned 107 years today.

Chicago Booth School has some of his articles and others’ articles who use his work/insights.

Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy

July 31, 2019

Superb new paper by Michael Bordo and Edward Prescott. They document how Regional Feds have contributed to ideas in US mon policy:

The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented.

Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s.

Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.

I actually think you see far better research in regional Feds than Washington Fed…

How Heera Gold scammed 1.75 lakh people and Rs 3000 crore using faith and web of deception

July 30, 2019

Story of another Ponzi scheme in Hyderabad..

From Market to Exchange: Early regulation and social organisation on the Johannesburg Stock Exchange, 1887-1892

July 30, 2019

Mariusz Lukasiewicz (Lecturer in African History at the Institute of African Studies, University of Leipzig) writes a fab post:

This investigation provides new insights on the early local, regional and global development of Africa’s oldest existing stock exchange. Founded in November 1887, the Johannesburg Stock Exchange (JSE) was not an isolated stock exchange in the South African Republic (ZAR), but an increasingly global financial institution attracting members and capital from beyond southern Africa’s expanding colonial frontier. Confronted by an uncertain political environment, the JSE’s first five years of operation tested the institution’s ability to balance the needs of regulation and promoting access to its international capital market.
Although the basic structure of the JSE’s corporate organisation resembled the LSE in many ways and principles, the early JSE pioneers did not intend to replicate London’s stock exchange system in an understandably very different financial climate. Unlike in London, where the powers of the proprietors were already separated from the powers of the subscribers in the early 1830s, the development of the JSE was guided by the rivalry for influence over governance between the General Committee and the JSE’s landlords, the Johannesburg Estate Company. The division between ownership and operation, facilitated the emergence of the JSE’s regulatory sub-committees, investigating disputes and controversies over the rights and obligations of members. Woollan’s JECC was the owner, operator and regulator of the JSE until the formal takeover by Barney Barnato’s Johannesburg Estate Company in April 1889, unleashing a new era of ownership and regulation. Despite having its own General Committee, the JSE was fully dependent on the fixed assets and capital of the Estate Company, leaving it exposed to the regulatory dictatorship of Barney Barnato. Far more interested in membership fees and rent income from offices inside the JSE building, Barnato’s dominance came in direct conflict with the General Committee’s vision of growing the market for JSE-listed securities.
With different stakeholders advocating competing visions of institutional development, the first five years of the JSE’s existence tested the financial institution’s ability to balance the needs of regulation and promoting access to Africa’s largest capital market. Although a number of stock exchanges were already in operation on the African continent in the final quarter of the 19th century, the JSE emerged as a financial industry leader in what soon became the largest and wealthiest city in southern Africa. For all the eagerness and enthusiasm displayed by many Johannesburg-based speculators in expanding the volume and value of securities on the Official List, the development of the Exchange was constrained by the power struggle between the JSE’s General Committee and the Estate Company. By analyzing the JSE’s early rules and social organization, this study contributes to the better understanding of early stock exchange operation and organization in colonial South Africa.

How did the world’s two most venerable and influential democracies – UK and US – end up with Donald Trump and Boris Johnson at the helm?

July 30, 2019

Jeffry Sachs ponders over the question:

There is an obvious answer to the question of how two venerable democracies installed disordered minds in power and enabled them to pursue unpopular policies. But there is also a deeper one.

The obvious answer is that both Trump and Johnson won support among older voters who have felt left behind in recent decades. Trump appeals especially to older white male conservatives displaced by trade and technology, and, in the view of some, by America’s movements for civil rights, women’s rights, and sexual rights. Johnson appeals to older voters hit hard by deindustrialization and to those who pine for Britain’s glory days of global power.

Yet this is not a sufficient explanation. The rise of Trump and Johnson also reflects a deeper political failure. The parties that opposed them, the Democrats and Labour respectively, failed to address the needs of workers displaced by globalization, who then migrated to the right. Yet Trump and Johnson pursue policies – tax cuts for the rich in the US, a no-deal Brexit in the UK – that run counter to the interests of their base.2

The common political flaw lies in the mechanics of political representation, notably both countries’ first-past-the-post voting systems. Electing representatives by a simple plurality in single-member districts has fostered the emergence of two dominant parties in both countries, rather than the multiplicity of parties elected in the proportional representation systems of Western Europe. The two-party system, which then leads to a winner-take-all politics, fails to represent voter interests as well as coalition governments, which must negotiate and formulate policies that are acceptable to two or more parties.

Consider the US situation. Trump dominates the Republican Party, but only 29% of Americans identify themselves as Republicans, with 27% identifying as Democrats and 38% as independents, not comfortable with either party but unrepresented by an alternative. By winning power within the Republican Party, Trump scraped into office with fewer votes than rival Hillary Clinton but with more Electoral College delegates. Given that only 56% of eligible Americans voted in 2016 (partly owing to deliberate Republican efforts to make voting difficult), Trump received the support of just 27% of eligible voters.

Trump controls a party that represents less than one-third of the electorate, and governs mostly by decree. In the case of Johnson, fewer than 100,000 Conservative Party members elected him as their leader, thus making him prime minister, despite his approval rating of just 31% (compared to 47% who disapprove).

Political scientists predict that a two-party system will represent the “median voter,” because each party moves to the political center in order to capture half the votes plus one. In practice, campaign financing has dominated US party calculations in recent decades, so the parties and candidates have gravitated to the right to curry favor with rich donors. (Senator Bernie Sanders is trying to break the chokehold of big money by raising large sums from small donors).

In the UK, neither major party represents the majority who oppose Brexit. Yet the UK political system may nonetheless enable one faction of one party to make historic and lasting choices for the country that most voters oppose. Most ominously, winner-take-all politics has enabled two dangerous personalities to win national power despite widespread public opposition to them.

No political system can perfectly translate the public will into policy, and the public will is often confused, misinformed, or swayed by dangerous passions. The design of political institutions is an ever-evolving challenge. Yet today, owing to their antiquated winner-take-all-rules, the world’s two oldest and most venerated democracies are performing poorly – dangerously so.


Explaining Unusual Cash Patterns in Canada in 2018

July 30, 2019

In an earlier post, one had pointed how cash usage had declined suddenly in Canada which was attributed to legalisation of cannabis.

Walter Engert, Ben S. C. Fung, Jozsef Molnar and Gradon Nicholls of Bank of Canada in this note do not agree. The decline of cash was in Toronto and not across other regions. Even in Toronto it was due to a specific event:


Odisha rasagola gets own ‘Geographical Indication’ tag

July 30, 2019

Last year we saw a bitter battle between West Bengal and Odisha over who first discovered rasogulla. WB walked away with the honors getting the Geographical indications.

Odisha not willing to give up filed its own GI and has the tag as well.

Happy ending?



Are some dictators more attractive to foreign investors?

July 29, 2019

Abel François, Sophie Panel and Laurent Weill in this Bank of Finland working paper:

Since political uncertainty is greater in dictatorships than in democracies, we test the hypothesis that foreign investors scrutinize public information on dictators to assess this risk. In particular, we assume they use five suitable dictators’ characteristics: age, political experience, education level, education in economics, and prior experience in business. We perform fixed effects estimations on an unbalanced panel of 100 dictatorial countries from 1973 to 2008 to explain foreign direct investment (FDI) inflows.

We find that educated dictators are more attractive to foreign investors. We obtain strong evidence that greater educational attainment of the leader is associated with higher FDI. We also find evidence that the leader having received education in economics and prior experience in business is associated with greater FDI. By contrast, the leader’s age, and political experience have no relationship with FDI. Our results are robust to several tests and checks, including a comparison with democracies.



Who are you going to believe, experts or the evidence of your own eyes?

July 29, 2019

What happens when experts such as Joseph Stiglitz begin doubt experts?

He along with Martine Durand and Jean-Paul Fitoussi write in

Autumn of the matriarch: Women in their 90s and 100s are scripting stories of resilience and cheer in Kerala

July 29, 2019

One keeps hearing terrible stories regarding State of women and girl child in the country. There has to be zero tolerance towards this ongoing nonsense.

Given the doom there are some bloom stories as well. P. Anima has a piece in Hindu which raises goose-pimples and makes one so proud. It tells the stories of these women in 90s and 100s which will give today’s millennials a run for money:

From leading a political party at the age of 100 to learning to write at 97, Kerala’s nonagenarian and centenarian women are scripting plucky stories by doggedly keep pace with life despite crushing personal losses

Read the whole piece and say wow, Cheers to their spirit.
This story in particular of Karthiyayani Amma wanting to study at 97 is quite something:


Why did central banks continue to maintain gold reserves after Bretton Woods?

July 29, 2019

Interesting paper by Eric Monnet (Banque de France) and Damien Puy (IMF):

Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard.

The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected.

Even after radical institutional change, history still shapes the decisions of policymakers.

Lots of monetary history in the paper..

115th Birth Anniversary of JRD Tata

July 29, 2019

Madras Courier pays a tribute to Mr JRD Tata on hos 115th Birth Anniversary.

Beware of digital promise

July 29, 2019

My piece over the weekend in Business Standard.

Would macroprudential policies have saved Japanese from their financial crisis of 1990s?

July 26, 2019

What if Japanese had implemented macroprudential policies earlier? Would it have saves them from 1990s financial crisis?

Eric Rosengren, head of Boston Fed in this speech says it would have alleviated fallout of the crisis:

  1. Takeaway: The Japanese financial crisis of the late 1990s had significant implications for both the Japanese and global economies.

    Excerpt: “…Japan’s domestic economy was severely impacted, with lasting effects. In addition, because of the global reach of the largest Japanese banks, the problems were essentially exported, as Japanese banks pulled back on foreign lending in order to bring assets better in line with their shrunken capital. Essentially, Japanese banks reduced their global footprint.”

  2. Takeaway: Effective use of macroprudential tools – that is, banking regulations aimed at mitigating financial-system risk – could have lessened the crisis in Japan. Unfortunately, it wasn’t until the financial crisis of 2008 that countries began to work on improving macroprudential policies.

    Excerpt: “…my own view is that with effective implementation of macroprudential policies, many of the issues would have been substantially mitigated.”

  3. Takeaway: Bank stress tests and the use of a countercyclical capital buffer (or CCyB) are two macroprudential tools that emerged from the financial crisis which could have reduced the severity of the banking crisis in Japan.

    Excerpt: “Rigorous stress tests would have revealed emerging problems, required retention of more bank capital, and discouraged aggressive lending. A CCyB would similarly have brought about a larger capital cushion to absorb shocks, which would have reduced the need for such dramatic shrinkage of lending when asset prices declined.”

  4. Takeaway: The Japanese banking system is again being affected by adverse economic conditions. Like the U.S., Japan might benefit from considering an expanded set of macroprudential tools.

    Excerpt: “Despite the passage of time and adoption of better policies, one could argue that the Japanese banking system is now, once again, being threatened by adverse economic conditions. A shrinking population, aging demographics, and very low interest rates provide very little room for Japanese banks to operate profitably. This of course provides an incentive to reach for yield, potentially implying additional risk-taking. …All this raises questions about how resilient the banking system is, or could be, in the face of some future global downturn.”


I dont know but have a feeling that next source of crisis could be macropru policies. Each time policymakers become gungho about some policy/measure, it creates problems later…

Central bank of Turkey cuts policy rate by 425 bps!

July 26, 2019

After firing the Central Bank Governor, President Erdogan seems to be getting his way with the central bank under new Governor.

In the monetary policy meeting held yday (25-Jul-2019), the central bank cut rates by 425 bps in one go!:


Creation of Washington, D.C.: How war debts, states’ rights, and a dinner table bargain created the capital

July 26, 2019

Superb piece by Jessie Romero:

By the summer of 1783, soldiers in the Continental Army were fed up. The British army had surrendered at Yorktown, Va., two years earlier, effectively ending the Revolutionary War, but soldiers remained on duty while treaty negotiations dragged on in Paris. They hadn’t been paid in full for their service in years, and when the Continental Congress passed legislation furloughing them, they suspected they never would be. On June 21, around 400 angry members of the Pennsylvania militia surrounded the building in Philadelphia where the Congress met, scaring off so many delegates that legislators failed to achieve a quorum. Alexander Hamilton and other congressional leaders urged Pennsylvania’s government to send in friendlier troops for protection, but the state refused. The next day, the Congress announced it was abandoning Philadelphia in favor of Princeton, N.J.

Over the next few years, legislators would meet in Annapolis, Md., Trenton, N.J., and New York City. In 1788, the Constitution gave Congress the power to establish a permanent home for the federal government, but there was considerable disagreement among the states’ delegates about where that home should be. Eventually, the debate would become entangled with arguments about the nation’s finances, reflecting deep philosophical divides between the country’s founders. The compromise that was eventually reached in 1790, which created a new district on the banks of the Potomac River, had long-lasting political and economic repercussions for the region and for the country.

How Washington, Jefferson and Hamilton navigated through the political economy of those times..

Inflation targeting in era of low inflation: Australia edition

July 26, 2019

Philip Lowe, Governor of RBA in this speech looks at two qs: Why is inflation low in world economy and Australia? Is inflation targeting appropriate for this low inflation era?

First why is inflation low?


Storm clouds are gathering at Central Bank of Ukraine: What a way to defend its autonomy

July 25, 2019

National Bank of Ukraine, their central bank has put up a website to show storm clouds are gathering over the central bank since 18 April 2019. The central bank is being attacked from several fronts…

After the Revolution of Dignity, Ukraine went through the perfect storm of three-way crisis, economic, banking and currency. It looked as though this was a thing of the past for Ukraine, but today we are hearing the thunder of politicians’ populism and pressure from the oligarchs again, we are seeing flashes of lightning in the form of groundless lawsuits and decisions.
Storm clouds are gathering around the National Bank, which is at risk of losing its independence under pressure, and with it – and the ability to ensure price and financial stability. This is not a private storm affecting one institution, just like the National Bank is not a private bank, but an institution working for the prosperity of every Ukrainian.
Amazing to note how the government has not asked to close this website!

The parting shot: Viral Acharya, the Deputy Governor who spoke his mind

July 25, 2019

My farewell piece for Viral Acharya in Moneycontrol:

Known as someone who calls a spade a spade, the fearless RBI deputy chose not to play second fiddle to the Governor and instead make his own mark


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