Archive for January 6th, 2020

25 years of WTO: Why Keynes would be a worried man!

January 6, 2020

My piece in Moneycontrol reflecting on 25 years of WTO.

In 2019, the IMF completed its 75 years. IMF historian Atish Ghosh wrote a fascinating piece “bringing” Keynes to visit IMF headquarters. Ghosh wrote how Keynes would be surprised by changes in the world economy, particularly transition from fixed exchange rates to flexible exchange rates and proud that the IMF has adapted to the changes and remains relevant — though some may not agree.

What would Keynes say of the WTO? He would be surprised that it took so long for the WTO to deliver, but still happy to note of the progress world economies have made under the GATT/WTO umbrella. He might show concern that post 2008 crisis, the world has increasingly turned protectionist. Some historians make references to how today’s times are similar to the end of the World War-I (1919), which would really worry Keynes (WW-3 was trending on Twitter recently). Keynes would say that it is exactly for such times that he had suggested creation of the ITO and unhappy that just in these times, the WTO has been sidelined!

Keynes would remind the current world polity to be aware of the fateful history and work in all possible ways to ensure this history is neither repeated nor rhymed.


Libra’s shockwave to central bankers: Germany edition

January 6, 2020

Interview of Jens Weidmann of Bundesbank.

Mr Weidmann, Facebook sent shockwaves through the financial community with its plans for Libra, the group’s own digital currency.
You’re right to call them “shock waves”. But I would hesitate to dub Libra a currency. Facebook is looking to roll out a new digital payment medium pegged to a basket made up of multiple currencies like the euro and the US dollar. This exposes users to exchange rate risk, however. We’ve got a stable currency – the euro – with a proven track record over the past decades.

So there’s no potential for Libra?
I see greater potential in countries with weak official currencies and underdeveloped payment infrastructures, such as a number of emerging market economies.

Why, then, has Facebook’s announcement made such waves?
Payments is an area where network effects and scale can be decisive. Facebook has more than two billion possible users. This clout would give Libra the potential to become a dominant market player from the outset.

Do you think the European Central Bank needs to push back with a digital currency of its own?
I’m not a fan of always calling on the government to intervene. In a market economy, firms should be the first to come up with the right products and services to satisfy customer needs, Competition is what spurs market players into action. For example, the prospect of new rivals arriving on the scene was one reason for the banking industry’s campaign to offer an improved pan-European payment system.

Christine Lagarde, the new ECB President, says that central banks need to be ahead of the curve, not behind it.
First and foremost, it is a question of understanding the pros and cons of central bank digital currency. Then, it can be decided whether central bank digital currency is needed and the risks can be kept in check.

How is Germany reacting to all this?

And yet for all that, the Bundesbank itself is also experimenting with a digital currency.
That concerns payment transactions between the Bundesbank and credit institutions. What we are trialling here is a blockchain-driven solution to complement our existing centralised account-based solution.

And is that working well?
In our specific context with a small number of trusted counterparties, our initial finding is that blockchain is no more efficient than centralised settlement. It does, however, allow automatic functions to be integrated for smart contracts. For example, the transfer of a security would simultaneously trigger a payment.

With reluctance so widespread in Europe, isn’t there a danger of being left behind? China has already responded to Libra by announcing plans to create a central bank digital currency of its own.
China might be quicker off the mark, but then again it has a different political system. It’s a country where the state has abundant powers which would not be to the liking of many of us. My view is that a social market economy in a liberal society will ultim..

The last words are missing..Perhaps it is “will ultimately prevail/win”..


End of CFA Franc Zone and start of Eco: An African monetary union worth watching

January 6, 2020

New piece in Business Standard.

In the wee days of 2019, a historic announcement was made by French and Ivory Coast Presidents of ending the CFA Franc Zone. My earlier posts on CFA Franc Zone here. It is interesting and perplexing how France continued to dominate some of the African countries despite ending colonialism in these countries. Call it French monetary imperialism.

CFA Franc Zone involved 15 African economies. With the end of CFA Zone, the 8 erstwhile members join 6 African countries (not part of CFA Franc Zone) to form a monetary union (you guessed it) and have named their single currency Eco.

I write about this important development which ended French colonial currency arrangement to a new arrangement for the African countries.

The making of star economists..

January 6, 2020

Tim Sablik in this piece looks at making of star economists:

Every January, hundreds of newly minted economics Ph.D.s travel to the annual Allied Social Sciences Association (ASSA) meeting to engage in a whirlwind of interviews and presentations. (See “Scrambling for Economists: The Ph.D. Job Search,” Econ Focus, Fourth Quarter 2015.) Only a handful of these job-seekers land jobs at the most prestigious research institutions. In a recent article in the journal Economic Inquiry, titled “Young ‘Stars’ in Economics: What They Do and Where They Go,” Kevin Bryan of the University of Toronto investigated which new economists rise to the top of the entry-level job market. In other words, what makes a young economist a star?

Bryan defined stars as those job candidates who attract a high level of attention from academic employers. After the ASSA meeting, academic departments seeking to hire economists invite their top picks to present a seminar on their research and meet with their potential colleagues — an occasion known as a “flyout.” Bryan classified the candidates who get a certain number of flyouts, weighted by the prestige of the institution extending the invitation, as stars. Using this criterion, he examined data on flyouts for young economists between 2013 and 2018. Of the more than a thousand economics Ph.D.s awarded each year during that period, Bryan identified 226 stars.

One potential problem with using academic flyouts as a metric for star power is that it may overlook promising young economists who forgo academic work and instead go straight into the private sector. Reserve Banks, companies, and other nonacademic employers also conduct interviews at the ASSA meeting and post jobs alongside academic employers. As a result, many candidates apply for both academic and private sector jobs at the same time. Thus, Bryan argues that even star economists who choose the private sector are still likely to apply to and attract attention from top academic employers.

Where do stars go?

As it turns out, entry-level stars overwhelmingly choose employment in academia. Bryan found that nearly half of the stars took a job at one of the top 15 economics departments in the United States as ranked by the 2018 U.S. News & World Report. Another 21 percent took a job at a top 10 U.S. business school. All told, 86 percent of the stars in Bryan’s sample took a job in American academia. In contrast, only one candidate out of the entire 226 took a temporary position in the private sector, and that individual later returned to academia.


Just as many new stars end up working in top economics departments, they also tend to come from top departments. Nearly half of the stars in Bryan’s sample earned their Ph.D.s at one of five American universities — the Massachusetts Institute of Technology, Harvard University, Princeton University, Yale University, or Stanford University. Including another six top schools increases the share of stars to nearly 85 percent. Nearly all stars also have an undergraduate degree in economics or some technical field such as math, statistics, or engineering.

One trait that might seem predictive of star power, publishing papers while in school, does not seem strongly correlated with higher job prospects. Bryan found that about half of the stars in the sample did not publish a paper while in school. For those who did publish, their papers tended to be theoretical rather than empirical.

Bryan’s study also suggests that the gender imbalance present in economics generally is even more pronounced at the top. He found that stars are overwhelmingly male: In 2018, less than 17 percent of stars were women. This is even lower than the roughly 30 percent of women who pursue econ Ph.D.s each year on average. These low numbers have sparked a debate in the profession about potential barriers for female economists. (See “Where Are the Women?Pdf” Econ Focus, Second Quarter 2013.)

The fact that many of the stars who go to work in top departments graduated from top departments could raise concerns about academic “inbreeding.” Bryan examined this and found that very few stars in his sample take a job at the same institution where they earned their Ph.D.s — only around 2 percent. But he cited other studies that note that a higher share of faculty at top economics departments come from top departments than in other fields such as math or literature.

Addressing these concerns, Bryan noted that “to whatever extent social closure or other forms of irrational path dependence restrict the entry and diffusion of potentially important new researchers, we ought to be especially concerned about the process by which the next generation of gatekeepers is chosen.”

Gatekeepers are a problem in most fields..

Exchange Rate Pass-through in Emerging Economies

January 6, 2020

New RBI WP by Michael Debabrata Patra, Jeevan Kumar Khundrakpam and Joice John.

This paper provides estimates of exchange rate pass through (ERPT) to consumer inflation for a panel of 17 emerging market economies (EMEs), after controlling for long-run dynamics of domestic prices and external cost variables; potential endogeneity of the exchange rate; non-linearity and heterogeneity. These estimates are useful guideposts for monetary policy authorities in emerging economies to condition their responses to exogenous price shocks that are transmitted to domestic inflation through imported prices.

This paper also finds that ERPT in EMEs is asymmetric – larger for depreciation than for appreciation and non-linear – size does matter, even as exchange rate pass through to domestic inflation has been declining for these countries in the years following the global financial crisis.


Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018

January 6, 2020

Fascinating paper by Paul Schmelzing of Bank of England.

With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed. A gradual increase in real negative‑yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis.

Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of ‘non‑human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

Phew…That is a lot of historical work…

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