Archive for December 11th, 2019

Spread the Word: International Spillovers from Central Bank Communication

December 11, 2019

Hanna Armelius, Christoph Bertsch, Isaiah Hull and Xin Zhang in this BIS Working Paper:

We construct a novel text dataset to measure the sentiment component of communications for 23 central banks over the 2002-2017 period. Our analysis yields three results. First, comovement in sentiment across central banks is not reducible to trade or financial flow exposures. Second, sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables; and the Fed appears to be a uniquely influential generator of such spillovers, even among prominent central banks. And third, geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties have weaker predictive power.

100 years of Assocham: The Associated Chambers of Commerce and Industry of India

December 11, 2019

The Chamber was formed in 1920 and is starting its centenary celebrations on 20 Dec 2019.

Assocham website has history:


US Presidents and the Federal Reserve Chairs

December 11, 2019

Nice piece by Peter Earle,

Throughout Fed’s history, it has been attacked by US Presidents. Trump’s attacks are hardly new and just that the medium of attacks has changed. The article discusses some of the episodes of US President and Fed.

In the end:

The entire exercise of introducing evidence that the Fed isn’t politically independent is moot from the start, though. For despite what numerous media outlets have taken the President to task for, the Q&A section of the Richmond Fed website asserts that, in fact, “the Federal Reserve can be more accurately described
as ‘independent within the government’ rather than ‘independent of government.’”

The Fed is independent within the government, in part, because it is self-financed and does not depend on Congressional appropriations or Presidential recommendations for its funding. By the same token, neither the President or Congress can bully the Fed by cutting its budget. That’s not the case with most other federal regulatory agencies, or even the IRS.

Consider what incontestable political independence would actually require: at the very least, every one of the Fed’s political ties—appointments, testimony, the
ability to expand or reduce their mandate, etc.—would have to be severed. To inoculate them from indirect political pressure, the identity of Fed officials would have to be essentially secret.

As currently structured, and considering both the raft of directives that it labors under and the unique attributes of monetary policy, it is cogent to expect elected officials to attempt to sway Fed actions. It was going on for decades before the current President took office and, barring changes, will continue to do so. That any institution exercising as tremendous a mandate as managing the money supply of the world’s largest economy (and the world’s reserve currency, to boot) would go unheeded in the corridors of political power is unrealistic at best.

In that sense, the Federal Reserve is something of an embodiment of the Hayekian adage: a reminder that, at times, economics is a constant lesson in letting people know what they cannot design.

Useful quote from Hayek..

Small Finance Banks: Have They Delivered on Their Financial Inclusion Promise?

December 11, 2019

Nice webinar by Amulya Neelam of Dvara trust. The webinar was held yesterday and recording is available.

The webinar summarised findings from her research paper. She points to financials of Small Finance Banks and shows how they look much like private sector banks.

We see from the discussion above that SFBs have largely done well in maintaining profitability despite the more stringent regulatory mandates of the RBI, such as higher priority sector lending requirement and loan size restrictions. This has been driven by the high spread between deposit and lending rates
and holds despite their cost of funds for SFBs being double that of public and private sector banks.

However, one must not jump to conclusions about the success of the SFB model towards meeting the objectives of financial inclusion as they are still very nascent in their functioning as full-service banks. It appears that the SFBs’ strategy and expansion are most akin to that of private sector banks.

What is notable is that despite being erstwhile microfinance institutions, the SFBs’ business, lending and to an extent deposit-taking, do not see rural centres being serviced considerably more than what is being done by existing banking models (except for RRBs). Thus, given the strategy adopted so far by SFBs, it
brings into question how well the business-model-level regulatory prescriptions help in fulfilling a financial inclusion mandate. Additionally, a more granular understanding of the benefits at the customer level is required.

We need to understand how many of the previously unbanked/underbanked populations are being catered to by SFBs. We see currently that much of the
SFB branch network is in the semi-urban and urban areas. It is unclear whether these branches are catering to such customers of these areas. It may, however, be a positive sign that all the ten applicants are still functioning and appear to be continuing operations smoothly and expanding. A repeat of the
analysis using data for a longer period (of operations) would yield more insights into the sustainability of the SFB Model and the utility of having a business model-level regulatory approach as laid down by the RBI.

It is surprisingly actually. Most of these SFBs were earlier microfinance institutions and should have done much better on financial inclusion and may be struggled on profitability. What we see is the opposite…

If Wealth Is Justified, so Is a Wealth Tax

December 11, 2019

Katharina Pistor of Columbia Law School in this Proj Synd piece:

Not surprisingly, American billionaires have dismissed recent wealth-tax proposals as an affront to the entrepreneurial spirit to which they attribute their massive wealth. But the ultra-rich never would have their great wealth without legal subsidies from the state and reliable enforcement by the courts.


The private empires over which today’s billionaires preside are organized as legally chartered corporations, which makes them creatures of the law, not of nature. The corporate form shields the personal wealth of the founders and other shareholders from the corporation’s creditors. It also facilitates the diversification of risk within a company, by allowing discrete pools of assets to be created, each with its own set of creditors who are barred from making claims on another asset pool, even though the parent company’s management controls all of them.

Further, the company’s own shares can be used as currency when acquiring other companies. When Facebook bought WhatsApp, it covered $12 billion of the $16 billion purchase price with its own shares, paying only $4 billion in cash. And, as with Facebook, corporate law can be used to cement control by founders and their affiliates through dual-class share structures that grant them more votes than everyone else. As such, they need not fear elections or takeovers of any kind.

Finally, companies whose assets take the form of intellectual property (IP) and other intangibles tend to rely even more on the helping hand of the law. As of 2018, 84% of the market capitalization of the S&P 500 was held in such intangible assets. It takes a legal intervention to turn ideas, skills, and knowhow – which are free to be shared by anybody – into exclusive property rights that are enforced by the full power of the state. And in recent years, Microsoft and other US tech companies have boosted their earning power significantly by promoting US-style IP rules around the world through the World Trade Organization’s body for Trade-Related Aspects of Intellectual Property Rights (TRIPS).

To be sure, there are good reasons for states to adopt laws that empower private agents to reap the rewards of organizing businesses and developing new products and services. But let’s call a spade a spade and a (legal) subsidy a subsidy. While Bezos, Bloomberg, Gates, and Zuckerberg may well be savvy entrepreneurs, they also have benefited on a massive scale from the helping hand of legislatures and courts around the world. This hand is more contingent than the invisible one immortalized by Adam Smith, because its vitality depends on a widely shared belief in the rule of law. The erosion of that belief, not a tax, poses the greatest threat to billionaires’ wealth.

Humanity is all about double standards…

Fiscal stabilisation in monetary unions

December 11, 2019

Plamen Nikolov and Paolo Pasimeni in this piece:

In the EMU fiscal transfers are constrained by the lack of a political union, but we find that fiscal stabilisation through a common budget is relevant in a monetary union. There is a case for addressing both common and asymmetric shocks, but the instruments we choose will have different capacities to address these stabilisation needs. 

The design of the budget, in particular the balance of revenue and expenditure, can maximise its stabilisation effect. The key is to bridge the gap between higher mobility of capital and lower mobility of labour, by collecting revenues based on the income of the most mobile factor (corporate income tax) and providing support to the income of the least mobile factor (social security).

A discretionary program of extended unemployment benefits, mainly funded by the federal level and supported by the borrowing capacity of the federal government, proves a powerful example of a timely and effective stabilisation instrument when we require a specific, contingent stabilisation function.

Hmm..But how to have a common budget?

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