Archive for August, 2019

Review of Jalan Committee: A case of both glass half-full and half-empty

August 29, 2019

After much wait and expectation, the Jalan Committee released its report. It was like watching the play Waiting for Godot.

My review of the key messages behind Jalan Committee in this piece on moneycontrol (fixed link).


As we know, the RBI gave a total surplus of Rs 1,76,051 crore to the Government of India (Government) comprising of Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions. It is the second portion of Rs 52637  Cr which is due to the recommendations of the Committee. This piece focuses on this excess provision only leaving the analysis of the first part for a future piece when RBI releases its annual report.

I do this piece rather differently starting with a primer on RBI balance sheet seeing how this reserve arises and then taking it forward from there.


Hong Kong’s Real Problem Is Inequality (So it is of most countries)

August 29, 2019

Andrew Sheng and Xiao Gang in this piece say two things. One HK riots are part of ongoing crisis of capitalism to address inequality which has been seen in other countries too. Second, most people say this is democracy vs autocracy with former being superior but has to be questioned:

A powerful, but oft-ignored factor underlying the frustrations of Hong Kong’s people is inequality. And, contrary to the prevailing pro-democracy narrative, the failure of Hong Kong’s autonomous government to address the problem stems from the electoral politics to which the protesters are so committed.

Since China regained sovereignty over Hong Kong on July 1, 1997, the city has prospered economically, but festered politically. Now, one of the world’s richest cities is engulfed by protests, which have blocked roads, paralyzed the airport, and at times descended into violence. Far from a uniquely Chinese problem, however, the current chaos should be viewed as a bellwether for capitalist systems that fail to address inequality.
In times of crisis, it is easy for emotion to overwhelm reason, and for dramatic and deceptive narratives to take root. This tendency is exemplified by media reports that frame the unrest as a clash of cultures symbolizing a broader global struggle between autocracy and democracy, or references to a “fight between two civilizations,” as Hong Kong legislator Fernando Cheung put it.
Such narratives often treat “democracy” as synonymous with improved welfare – a characterization that is not borne out by the facts. As the political scientist Francis Fukuyama has conceded, centralized, authoritarian systems can deliver economic outcomes that are superior to decentralized, inefficient democratic regimes. It is also worth pointing out that officials like Cheung are free to criticize China’s government on the international stage.
China is fine with the protests like that of teenager. What it will not allow is an independent city:
Those who think that China’s government will resort to a military-led forget Sun Tzu’s dictum that winning wars without fighting is the “acme of skill.” China’s government is well aware that if Hong Kong becomes a political or ideological battleground, peace and prosperity will suffer in both the city and on the mainland. Given this, it is willing to go to great lengths to uphold the “one country, two systems” arrangement that forms the basis of its sovereignty over Hong Kong.
What China’s government is not willing to do is consider independence for the city. Like a parent dealing with a frustrated teenager, China views the current upheaval as a family matter that must be resolved internally. The appeals of some Hong Kong protesters for outsiders like the United States to intervene are not only unhelpful; they fail to appreciate the long and destructive track record of US-led “democracy-building” efforts around the world, from Central America to Central Asia.
The real deal is inequality:

A powerful, but oft-ignored factor underlying the frustrations of Hong Kong’s people is inequality. Hong Kong’s Gini coefficient – in which zero represents maximum equality and one represents maximum inequality – now stands at 0.539, its highest level in 45 years. By comparison, the highest Gini coefficient among the major developed economies is 0.411 (in the US).

This inequality is most starkly apparent in housing. The per capita residential space in Hong Kong is just 16 square meters (172 square feet), compared to 36 square meters (387 square feet) in Shanghai. Moreover, whereas nearly 45% of Hong Kong’s residents live in public rental or subsidized housing, 90% of Chinese households own at least one home.

Yet, despite having fiscal reserves of more than HKD$1.2 trillion ($147 billion), Hong Kong’s autonomous government has failed to address inequality, precisely because of the electoral politics to which the protesters are so committed. The city’s Legislative Council – whose members are elected through a complicated process based on proportional representation – is too politically and ideologically divided to reach consensus.

Unable to push through tough reforms to subdue vested interests, as China’s government is doing on the mainland, the Council is also vulnerable to the influence of real-estate developers eager to block measures that would lower prices, such as the allocation of land for more public housing.

Some companies are reportedly hoarding large amounts of unused rural land, either directly or through shell companies, precisely to constrain supply.

Hong Kong’s protesters believe they haven’t been heard. But it is the city’s own elites, not China’s government, who have failed them. Hong Kong’s leaders were so thoroughly out of touch with ordinary people that the protest movement took them by surprise, despite signals from social media and the free (though adversarial) press.

This means that, beyond addressing concrete problems like high housing prices, Hong Kong will need to reopen channels of communication between the public and policymakers. This will not be easy – not least because the protest movement lacks any clear leaders. But some consensus on how to move forward as a community will be needed to ensure the government’s legitimacy while it implements needed reforms.

It will take time for Hong Kong to recover from these months of upheaval. But all Chinese, from Beijing to Hong Kong, know that there are no quick fixes or decisive battles. Progress is a never-ending series of small steps, many of which must be made in difficult conditions. The only way to succeed is with humility, patience, wisdom, and a sense of shared destiny.

Inequality inequality everywhere, yet no one sees it…

The inning of Ben Stokes: The art of batting with the tail

August 29, 2019

Ben Stokes once again came to the party merely a month after his feat at the WC Final. Once again he never gave up and continued to battle with the tailenders. With last wicket to go, he broke loose and scored 75 of the required 76 runs including 8 sixes.

However, this was not the first time that someone batted so well with the tail. Just a few months ago, Kusal Perera of Sri Lanka played a similar inning against South Africa in South Africa making it even more special as Stokes made the runs in his home England (though he is from NZ). ESPNcricinfo ran a poll of best such innings and not surprisingly, Perera tops the list. in a piece on Mint analyses what it means to bat will the tail.

There was history on one side, and Ben Stokes and Jack Leach on the other. History said the average tenth-wicket partnership for England in test cricket was an anaemic 14 runs. History said of the 123 times that England was dismissed while chasing a target, on 77 of those occasions, the last-wicket pair had failed to even reach 10 runs. Stokes and Leach wrote their own history, adding an undefeated 76 runs in last week’s humdinger in Headingley.

In a summer that has belonged to him like no other cricketer, Stokes also burnished his credentials of batting with the tail. Coming in usually at the fall of the third or fourth wicket, Stokes’ approach was to take his time and take matches deep. Stokes, 28, is still early in his career, and he will have many outings batting with the bowlers: wickets 7 to 10. It’s an art that few among the top order have mastered.

Ironically, two of the foremost exponents of batting with the tail were from the side that Stokes was putting in the shade that afternoon in Headingley: Australia. In the history of the game, no top-order batsman (coming in at number 6 or before) has scored as many runs with the tail (batsmen coming in at 7 to 10) as Steve Waugh.

The doughty Waugh, who batted at three or four down for much of his Test career, added 4,102 runs for wickets 7 to 10. Close behind him is another prolific, but low-profile, batsman, Shivnarine Chanderpaul of the West Indies. He is followed by Allan Border, who is the only one in the list of top 10 batsmen batting with the tail who stopped playing test cricket before the turn of this century.

There are three Indians in that list, led by VVS Laxman. The other two are Sachin Tendulkar and Ravi Shastri, whose presence here reflects a distinct characteristic about their batting craft and the circumstances surrounding it. For Shastri, it reflected his ability to put a great price to his wicket.

For Tendulkar, who batted at number four for nearly his entire career, that characteristic is last man standing. As many as 85% of Tendulkar’s innings and 92% of runs with the tail came outside India, which is also the highest percentage in away runs among this list of 10. While part of this showcases his colossal appetite for runs, part of this also reflects India’s frailties overseas in the top half of Tendulkar’s career: in 23 of the 62 away innings where Tendulkar batted with the tail, he started doing so before India had crossed 200 runs.

Availability of data has made cricket so interesting.

Saving Venezuela: Requires both sanctions and negotiations

August 28, 2019

Andres Velasco, former Finance Minster of Chile writes:

Venezuela was once the pride and democratic example of Latin America. It can be that once again: a free, stable, and productive country, where citizens live in safety and peace – but only if the international community provides support in at least three key areas.


First, it should immediately recognize the need for large debt reduction, rather than attempting to postpone the inevitable for years. Second, the IMF and the other multilaterals will have to provide emergency balance-of-payments support. And, third, grants will be needed to meet urgent humanitarian needs and to prevent foreign debt from building up too fast once again.

But none of this can happen unless and until Venezuela gets a new, legitimate government with full control of the situation on the ground. On-and-off negotiations between the Maduro and Guaidó camps – the most recent rounds of which were sponsored by Norway – have gone nowhere. Maduro’s representatives walked away from the negotiating table earlier this month, claiming that they would not keep talking while the United States ratcheted up sanctions.

Dialogue will indeed be necessary to end the Venezuelan catastrophe. But the international community should not make the mistake of treating talks as a meeting of two parties of good will in need of friendly encouragement to subordinate their differences. Maduro heads a dictatorial regime that inflicts violence and suffering on a daily basis. The representatives of the National Assembly – Guaidó’s camp – are democratically elected officials who have been on the receiving end of that violence. Talks will not bear fruit unless the world’s democracies apply maximum diplomatic pressure on Maduro.

That raises the thorny issue of sanctions. Earlier this month, US President Donald Trump signed an executive order prohibiting all economic transactions with Venezuelan state entities and froze the assets of the Venezuelan government and of a number of Venezuelan officials. Some critics worried, understandably, about the effects on Venezuela’s poor. Others fretted over the possible indirect effect on local private firms, most of which are already on the verge of collapse.

But even those of us who find the Trump administration deeply distasteful must recognize that the case for severe sanctions is strong. Maduro will not leave power out of the goodness of his heart. The recent revelation – confirmed by US and Venezuelan officials – that high-level contacts have been taking place behind closed doors suggests that international pressure is beginning to yield results.

Besides, there is no guarantee that the regime would use additional resources to feed a starving population. During the second quarter of 2019, in the middle of an unprecedented domestic crisis and already under strict sanctions, government-owned oil company PDVSA amortized $800 million to Russia’s Rosneft. Maduro’s priorities are clear.

Given the cataclysmic political, economic, and humanitarian crisis underway, the moral imperative is to act now. Venezuela was once the pride and democratic example of Latin America. It can be that once again: a free, stable, and productive country, where citizens live in safety and peace.

It is really difficult to imagine human obsession with power over centuries. How can some of these people push so many people towards all kinds of crisis and deprivation?

Whither Central Banking?

August 27, 2019

Larry Summers whose tweets created quite a storm of late.

In Proj Syndicate Piece along with Anna Stansbury he writes central banks should realise their impotence in solving another crisis:

In an environment of secular stagnation in the developed economies, central bankers’ ingenuity in loosening monetary policy is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.


He says lower interest rates will not work this time around:

From a macro perspective, low interest rates promote leverage and asset bubbles by reducing borrowing costs and discount factors, and encouraging investors to reach for yield. Almost every account of the 2008 financial crisis assigns at least some role to the consequences of the very low interest rates that prevailed in the early 2000s. More broadly, students of bubbles, from the economic historian Charles Kindleberger onward, always emphasize the role of easy money and overly ample liquidity.

From a micro perspective, low rates undermine financial intermediaries’ health by reducing their profitability, impede the efficient allocation of capital by enabling even the weakest firms to meet debt-service obligations, and may also inhibit competition by favoring incumbent firms. There is something unhealthy about an economy in which corporations can profitably borrow and invest even if the project in question pays a zero return.

These considerations suggest that reducing interest rates may not be merely insufficient, but actually counterproductive, as a response to secular stagnation.

This formulation of the secular stagnation view is closely related to the economist Thomas Palley’s recent critique of “zero lower bound economics”: negative interest rates may not remedy Keynesian unemployment. More generally, in moving toward the secular stagnation view, we have come to agree with the point long stressed by writers in the post-Keynesian (or, perhaps more accurately, original Keynesian) tradition: the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.

If reducing rates will be insufficient or counterproductive, central bankers’ ingenuity in loosening monetary policy in an environment of secular stagnation is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Instead of more old New Keynesian economics, we hope, but do not expect, that this year’s gathering in Jackson Hole will bring forth a new Old Keynesian economics.



Israel as a safe haven for emerging markets..

August 27, 2019

Bank of Israel Governor at Jackson Hole conference reviewed the Israel economy. He points how it had become a safe haven of sorts due to its stability.

Israel is an interesting case study. We are a relatively strong small open economy that is obviously also influenced by external shocks. In Israel, for example, it was perceived during the nineties and early 2000’s that interest rates must be significantly higher than in the US, otherwise capital outflows would emerge followed by a depreciation and inflation. However, in this round, and in spite of having kept rates very low, Israel faced capital inflows following the US rate hikes, as it was perceived as an “emerging markets safe haven”, and appreciation pressures emerged—a marked change from past-patterns. This corresponds with the risk perspective that Sebnem Kalemli-Ozcan presented here earlier, as a spillover of the US monetary policy, and with Governor Carney’s speech emphasizing the importance of the sources of shocks to EMEs. This shift, which was only partially offset by a sustained accommodative monetary policy, reflects the structural change in the fundamentals of the Israeli economy, including the continuous expansion of employment; the current account surpluses; the decline in the debt-to-GDP ratio since the Fiscal Stabilization program in 2003.

The strong fundamentals of Israel’s economy manifest themselves in financial markets, and are intimately related to the perceived absolute and relative resilience of the economy. Figure 2 is taken from Du And Schreger’s (2016) paper on “Local Currency Sovereign Risk”, which introduces a new measure of emerging market sovereign credit risk, and compares the development of sovereign risk in a few emerging markets between 2005 and 2014. It shows that Israel’s sovereign credit risk is low, with exceptionally low variance compared to the other countries—emphasizing the “safe haven” status within emerging and even advanced economies.


Economic, Fiscal and Financial Governance in the Euro Area

August 26, 2019

Jean Claude Trichet, former chief of European Central Bank reviews the experiences so far in Euro area.

He says we need to be a bit more patient with Euroarea. It s hardly as bad as people make it out to be:

1. Contrary to many negative predictions, the euro, as a currency, is a remarkable success in terms of credibility, stability and resilience. This resilience is due, in particular, to a large popular support.
2. The euro area is more of a success in terms of real growth measured during the period starting from its inception until today. But the appreciation must be more nuanced as regards nominal and real convergence inside the single currency area.
3. In a medium- and long-term perspective, EMU calls for further significant reinforcing its economic, fiscal and financial governance.
4. Drawing a number of lessons from the crisis, the ECB actively participated in what I call “conceptual convergence” of policy making in advanced economies’ central banks.

Overall, the success of the euro and of the euro area in terms of credibility,resilience, flexibility, popular support and real growth during its first 20 years is
impressive. It justifies reasonable optimism as regards the long-term success of this unique, ambitious, historic endeavor of the Europeans.

To consolidate this long-term success, a lot of hard work remains to be done as is always the case when a bold historic endeavor is in the making. The single market with a single currency of the U.S. was not  achieved in a short span of time. Neither in 20 years, nor even in 40 years! From the Coinage Act of 1792 to the Federal Reserve Act of 1913, there is a maturing process of around 120 years. And since the issuance of the first federal note in 1914 and today, an
additional period of 105 years.

The Road to Serfdom after 75 Years

August 26, 2019

Another anniversary this year. This one is of Hayek’s much acclaimed and criticized book: Road to Serfdom.

Bruce Caldwell of Duke Univ in this paper reviews what motivated Hayek to write the book, the reactions of the book and the overall message of the book.

F. A. Hayek published The Road to Serfdom in 1944, so 2019 marks the 75th anniversary of the event. The paper traces how Hayek came to write the book, who his opponents were, and how the book got interpreted by both friends and critics after its publication. Because the book is more typically invoked than read, part of the goal of the paper is to identify and correct some common misperceptions.

Caldwell says people usually think Hayek’s idea was to oppose any govt intervention as it leads to eventual totalitarianism. However, Hayek mainly wrote the book opposing the idea of nationalisation:

To sum up: Friedrich Hayek wrote The Road to Serfdom as a liberal who was worried that England would embrace “hot socialism,” or full nationalization of the means of production, after the war. His warning that socialism so defined was incompatible with democracy seems well borne out. People who opposed such policies, but also anyone who thought government was getting too big, or saw that as a looming danger, would be happy to invoke the book to justify their position, despite his later insistence that his target was not big government per se.

Progressives who favored more government intervention would counter that many countries in Western Europe and elsewhere had expanded the size of the welfare state and not experienced any of the horrors that Hayek described.But in the book Hayek’s target was not them, but those who were promoting full nationalization of production. That is, after all, what socialism means.

In short, the slippery slope argument – any increase in the size of government is bound eventually to end up in totalitarian outcomes – never died because it was popular with both those who believed it and those who felt that the experience of the twentieth century democratic welfare states refuted it. Despite his protests, this was how The Road to Serfdom was inevitably read. Ah, the dangers of choosing a provocative title.


Review of Jackson Hole Conference 2019: Are central bankers staring at a bigger hole for economies?

August 26, 2019

The annual Jackson Hole Conference for the year 2019 was held over the weekend. The theme this year was Challenges for Monetary Policy. In 1999 there was a similar theme of New Challenges for Monetary Policy.

Here is my piece reviewing the key speeches and papers in the event. There could not be a more trying time for central banks and select economists to chalk think about economic growth and development.

A new museum in Paris is all about money

August 23, 2019

DW profiles the new money museum in Paris.

They say money makes the world go around, and apparently, it also makes for a good museum: The “Cité de l’économie et de la monnaie” “(which translates as city of economy and money) is a new museum which opened this summer in Paris. Called Citéco for short, it’s appropriately located in the central building of the Banque de France.

While the setting of the museum could hardly be more dignified­­ — a castle-like villa built by the banker Émile in the late 19th century — its content is playful. Excerpts from Charlie Chaplin’s 1915 short film The Bank flicker in the former vault. A work of art by the French artist Christian Champin welcomes the visitors: Djibrila, a cow sculpture made of metal waste, is intended to point out the problem of overproduction around the globe.

While one might imagine a museum about economics to be a bit dull, in fact, the opposite is true. Citéco boasts more than 50 videos and 20 video games, as well as photographs and sculptures in its collection. There’s even an eye-catching one-meter-high sculpture made of hundreds of feathers, pearls, shells and coins, which at some point served as a means of payment. The museum aims to prove that a complex economic history can be explained in an original and playful way.


The tenures under RTI Act should not have been amended but applied to financial regulators too..

August 23, 2019

My new piece in moneycontrol.

I reflect on the recent amendments in RTI Act which are to do with tenures of the RTI officials. Under the older RTI Act, the information commissioners were given a fixed non-renewable tenure of 5 years and salaries were defined as well. These have been amended and made discretionary at the hands of the government.

This is unfortunate and I argue that instead of amending these aspects of the Act, it should have been applied in tenures of appointments of other key officials such as those in financial regulation.

More in the piece.

Having said that, the amendments to RTI Act have been going on for a while now. This piece by Sevanti Ninan in ‘The India Forum’ argues how it has been defanged one step at a time. The recent amendments are an addition to the earlier steps.

The legislature makes acts and takes decisions, then brings another act which could question them  over their policies and then defangs the very act. So much so for whatever we humans do…

Iceland is mourning a dead glacier – how grieving over ecological destruction can help us face the climate crisis

August 23, 2019

Quite stirring pictures to see Icelanders mourn death of a glacier. It was like a funeral of a highly loved person.

During Okjökull’s funeral residents reminisced, public figures such as Iceland’s Prime Minister Katrin Jakobsdottir spoke and presented a death certificate, and this plaque was laid. Grétar Thorvaldsson & Málmsteypan Hella/Rice University

Prof Rupert Read of Univ of East Anglia says will this drive us to do somethin about climate change?


Greenland isn’t Denmark’s to sell: some essential reading for Trump on colonialism

August 23, 2019

Prof Felicity Jensz of University of Münster in this piece reminds Trump that Greenland is not Denmark’s to sell. And decision to purchase Greenland would have to be agreed upon by Greenlanders and nobody else.

The piece is both a history of American colonialism and Greenland’s fight for independent region:


Did India’s business leaders misjudge the current slowdown?

August 23, 2019

India’s business leaders are a puzzling lot. They have been telling us all is well in their recent annual reports and have rated every budget, every policy highly. And suddenly quite a few are shouting that nothing is well and clamoring for immediate stimulus.

Sudeep Khanna of Mint writes this scathing piece on Indian business leaders:

For years, Indian business leaders have been generous in their rating of the domestic economy even while holding out visions of a bright future for their companies.

Well, the future is here and it is not pretty. All the relevant indices of economic growth are blinking an alarming red and the optimism of the past has given way to despair. None of this is news, nor can business leaders protest that they have been caught by surprise. Yet, for some reason, corporate chieftains have been sending signals that negate the reality on the ground.

A 2017 PwC survey, “Inside the minds of CEOs in India”, reported that 71% of India’s CEOs “are very confident of their company’s prospects for revenue growth over the next 12 months as opposed to 64% in the previous year”. As late as June 2018, for KPMG’s fourth annual India CEO Outlook, 91% of the 125 CEOs surveyed said they were confident about their company’s growth prospects, while 81% were confident about the growth of the industry they are a part of.

The contradictory messages that emerge from such surveys are truly baffling. Just a year on from such surveys, many of the same CEOs are decrying the lack of demand in the economy and asking the government for a stimulus. Are we to assume that India Inc.’s denizens speak with a forked tongue or that they don’t have a surer grip on the business environment?

Indeed, the real surprise is why they are shocked at the economic slowdown that is upon us and is now acquiring menacing proportions. After years of insisting that they are okay, barring a slight loss of pace thanks to demonetization and the GST flap, they have set upon the alarm bells with ferocity.

What makes this ostrich-like behaviour truly bizarre is that, like a gathering storm whose fury is visible long before it unloads its havoc, this slowdown has been in the works a long, long time.

This is nothing new though. All across India’s business history we see this repeat. They rarely call “a spade a spade” and praise whoever is in power. Only when things hit the ceiling, suddenly they change ways and cry together….

Significance of 22 Aug: British East India Company purchased Madrasapattinam 380 years ago..

August 23, 2019

Nice video in Hindu which gives you a short history of Madras. It all started 380 years ago when British purchased Madrasapattinam and rest is history.

History of cities is always so fascinating.

Data on demonetisation’s link to economic slowdown may have been suppressed

August 22, 2019

Puja Mehra (who has written the book The Lost Decade 2008-18) writes in this Hindu Business Line article:

Was a task force report that recommended a new law to replace the more than 50-year-old Income Tax Act, 1961 suppressed because it inadvertently provided factual evidence for the debilitating impact of demonetisation on the formal corporate sector?

On September 1-2, 2017, at the Rajaswa Gyan Sangam (an annual conference of senior tax administrators), Prime Minister Narendra Modi had made an observation regarding the need to redraft the Income Tax Act, 1961. The Union Finance Ministry set the ball rolling for making direct taxes (on personal and corporate incomes) simple and in consonance with India’s economic needs. On November 22, 2017, it appointed a six-member ‘Task Force for drafting a New Direct Tax Legislation’.

On September 26, 2018, however, an office memorandum was issued “with the approval of the Finance Minister”, requesting the task force’s convenor “not to submit its report to the Government until and unless the Draft prepared by the Convenor of the Task Force is deliberated clause by clause by all Members of the Task Force and has agreement of all Members or at least majority of Members”.

Read on the piece for more details. There are links to the task force report as well..

CRR and SLR as macroprudential tools: Some Historical Lessons

August 22, 2019

Nice paper by Eric Monnet (Banque de France) and Miklos Vari (IMF):

Liquidity regulations similar the current Basel III Liquidity Coverage Ratio (LCR) have been used from the 1930s to the 1980s in many countries as monetary policy tools. They took the form of required deposits at the central bank (“cash reserve requirements”) or minimum holdings of liquid securities (“securities reserve requirements”). As with the LCR, these two types of liquidity requirements (cash and securities) were computed as a percentage of short-term deposits.

India obviously had Cash Reserve Ratio since 1935 and SLR since 1949 and continues to have both these ratios.

Our paper presents three contributions.

First, based on detailed readings of historical central banks’ reports and documents, we describe how and why liquidity ratios were used in many
countries (especially Europe) from the 1930s to the 1980s , following the American experience. By emphasizing the distinction between “securities-reserve requirements” and “cash-reserve requirements,” we provide details on central bank practices whose history is largely unknown, and shed light on the dual nature of liquidity ratios as prudential and monetary policy tools.

Second, we show how “securities reserve requirements” were at the crossroad of monetary policy and sovereign debt management. It explains why they were phased out by central banks in the 1980s, as they had been associated with the so-called “financial repression” era (Reinhart and Sbrancia (2015)). Securities-reserve requirements were typically used in a period when banks held a large share of government bonds, and they reinforced such phenomenon. Central banks increased liquidity ratios during times of restrictive monetary policy in order to prevent banks from selling government securities, which were the main type of assets eligible to fulfill the requirement. As such, banks were discouraged to shift their assets from government securities to corporate loans.

Third, we build a theoretical model, and show that the mechanisms previously described can be rationalized with a simple model of the interbank market. By this, our paper introduces a new mechanism in the current literature on liquidity regulation and sheds new light on the history of monetary policy.

Hmm. Even without CRR and SLR, RBI has been using macropru policies much before they became buzzword. See these 2010 speeches by Shyamala Gopinath of RBI and James Caruna of BIS. 

SLR in particular has long been seen as a villain and something which led to financial repression. Several RBI Governors and other officials have written to either remove SLR or bring it to zero. Similar story was played in West too but much earlier than RBI.

Price stability or financial stability? Central Bank’s (and RBI’s) difficult balancing act

August 21, 2019

My new article in moneycontrol where I reflect on the recent speech by the Governor of RBI.

Price Stability and Financial Stability continue to pose challenges for central banks throughout their history…

How banks lobby and capture regulations..

August 21, 2019

Superb paper by Deniz O Igan and Thomas Lambert:

In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes.

The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis.

While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.

I think in other sectors regulatory capture is not as straight forward. In financial sector it is blatant. You see central bankers and securities regulators join financial firms pretty freely.

Philippines economy: Weaving an unprecedented 20 year growth story (without much hype)

August 21, 2019

There is much hype around Indian economy and how high its growth has been all these years. There are some others who manage it without much hype.

Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (their central bank) in this speech highlights how Philippines economy has been growing for 20 years:

Let me begin with our growth story thus far in the Philippines. Our economy has experienced uninterrupted growth for over 20 years since 1999 despite challenges such as the 2004 fiscal crisis and the 2007 global financial crisis-that is 81 consecutive quarters of continuous growth, with annual growth averaging 6.4 percent in the past five years (2014-2018).

Growth in recent years has become more broad-based.

On the demand side,  private consumption remained robust in the first quarter of 2019, as in the previous quarters through the years. This is further supported by rising contribution from investments from 2010 up to present.

On the supply side, services remain the main driver of growth-but the industry sector has also stepped up in recent years.

Meanwhile, the government’s economic managers remain optimistic about achieving our GDP growth target of 6 to 7 percent this year despite the lower than expected 5.6 percent growth in the first quarter of this 2019.

Private consumption is expected to remain robust, aided by remittance inflows and sustained “cooling” inflation. Private capital formation, on the other hand, should likewise contribute more significantly to economic growth, with construction and investments in durable equipment expected to remain solid in light of the government’s projects and other infrastructure programs.

The International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) share these expectations. In fact, all three forecast that the Philippine economy will grow by about 6.2 to 6.5 percent this year.

This has been due to three measures:

The bold reforms and initiatives in the past three years have prompted the government to capitalize on and sustain these gains. It is because of this that we believe the Philippine growth momentum will be sustained moving forward.

First is the government’s ambitious infrastructure program-“Build, Build, Build” which aims to boost the economy’s mobility and connectivity, enabling equitable growth and development. At present, there are 75 high-impact national government infrastructure, with 46 projects (61 percent) already in the implementation stage. 

The government is expected to invest over PhP 4.6 trillion (or US$90 billion at PhP52:USD1) in public infrastructure from 2019 to 2022.

Second, is the recent passage of reforms aimed at strengthening our investment climate. The Ease of Doing Business and Efficient Government Service Delivery Act, the revised Corporation Code, and the Philippine Innovation Act support the government’s agenda of improving competitiveness and ease of doing business in the country, promoting transparency and cutting red tape in the government for a more conducive business environment.

At present, the Philippines’ current standing has improved based on different third-party assessors. For instance, the Philippines’ ranking rose from 68th to 56th place under the 2018 Global Competitiveness Report.

It also received an upgrade in its sovereign credit rating from Standard & Poor’s to “BBB+” from “BBB.” These favorable standings are also boosted by the improved business sentiment and the stable consumer outlook based on the BSP’s latest round of expectations surveys.  

Finally, the continued demand for Philippine skills locally and abroad are evident in the growth of our BPO industry and strong remittance inflows. This further highlights the importance of our country’s most prized resource-our labor force. Based on our estimates, production efficiency has improved over the years with the incremental capital-output ratio (ICOR) declining steadily. As you know, the higher the ICOR, the less efficient the production process is.

Recognizing the skills of our workforce, the government has invested heavily in various social programs such as the Universal Health Care Act and the Access to Quality Tertiary Education Act (RA No. 10931).

You may not know this but 40% of our budget goes to social services.

He goes on to highlight the role central bank has played and is playing to maintain the momentum.

India and its policymakers make much noise about how growth rates have been higher during their tenure and getting into a lot of mud slinging. They make it look as if India is the only country growing and they are the sole reasons for this growth. Examples from smaller countries such as Philippines tells us none of this is needed really.

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