Archive for April 6th, 2020

Witnessing Wuhan

April 6, 2020

Tracy Wen Liu in this Proj Synd piece:

As the full horror of the epidemic passes from the country of my birth to the country where I live, I want people to know about how bad things got in Wuhan. Watching people in my neighborhood ignore the calls for social distancing fills me with rage and dread. Everyone outside China must understand how much that country’s medical workers sacrificed to bring the outbreak under control.

More to the point, everyone must recognize that the campaign against COVID-19 is far from over, and that we will all be living under its shadow for a long time to come. While the number of confirmed cases in China is decreasing, and immediate fears of death may have eased, the scars from the outbreak’s peak will remain. And doctors, nurses, and other medical professionals, in particular, will continue to struggle with what they experienced. Their wounds will not heal soon.


Why did central banks get a monopoly on banknotes?

April 6, 2020

Trying to catch up with unread stuff.

Came across this interesting paper by Gabriel Söderberg, written in 2018. The paper is mainly on why Riksbank managed to get a monopoly on banknotes but also discusses Bank of England and Federal Reserve case as well.

It is not self-evident that only central banks can issue cash. Historically, private banks in Sweden and elsewhere have issued their own banknotes. The
decision that only the central bank of a country should be able to issue cash, a so-called banknote monopoly, was taken in most countries in the 19th and
early 20th centuries. Today, the situation has changed, and in Sweden, cash is used to a very small extent. This raises the issue of the Riksbank’s role as issuer
of means of payment and its relationship to private banks in the payment system. This article examines the Riksbank’s banknote monopoly, which was
introduced in 1904.

It concludes that the banknote monopoly should be seen as a political decision to clearly delineate the issue of means of payment from
commercial operations, secure the general public’s access to risk-free means of payment and make the Riksbank’s position strong enough to guarantee the
stability of the money and payment system.


Former RBI Governors on the Covid19 crisis

April 6, 2020
  1. C Rangarajan interview.
  2. Raghuram Rajan article:

Economically speaking, India is faced today with perhaps its greatest emergency since Independence. The global financial crisis in 2008-’09 was a massive demand shock, but our workers could still go to work, our firms were coming off years of strong growth, our financial system was largely sound, and our government finances were healthy. None of this is true today as we fight the coronavirus pandemic. Yet there is also no reason to despair. With the right resolve and priorities, and drawing on India’s many sources of strength, it can beat this virus back, and even set the stage for a much more hopeful tomorrow.

2. Urjit Patel joins in as well:

The policy roll-out over the past couple of weeks has, for the most part, been sensible. There has been some commentary that the fiscal-financial programme isn’t bold enough. Perhaps so under certain assumptions, but we have to be mindful that this is not only a constrained exercise in policy making at the current juncture, we also have to brace for likely multiple impacts over an uncertain timeline that could last a year.

The welfare support — encompassing both food and money — by the government to help the most vulnerable, as also to partially defray the cost of retaining workers in smaller enterprises, for the next few months has combined compassion and prudence. And further spending has not been ruled out. Having said this, we do need to expend more resources on preventing Covid’s spread because massive prevalence testing now could, but not guaranteed to, help avoid another national lockdown or reduce the need for multiple localised lockdowns later. So, the optimal policy timing needs to take this externality into account without delay. For the size of our population, the quantum of tests we have conducted so far seems to be too few. The government should bear the entire cost for testing, for without the requisite data we will be flying blind when making the difficult calls in the weeks ahead. The benefits are obvious, viz., credible data will infuse confidence in both the health and economic spheres, and lack of credibility will breed uncertainty, slowing down economic recovery.

Urjit takes on the strategy of restricting trade flows and easing capital flows:
Last week, our breathless pursuit for being part of global bond indices gathered pace. Over the past year, we have incessantly relaxed prudential norms related to external flows management, opening up yet more the possibilities of surges and sudden stops of “hot” foreign capital with well-known attendant consequences. It is an expedient policy in the hope that it will lower borrowing costs for the central government; this may only help in the short run, and in the current environment even that is not apparent. Going down this policy route is puzzling at a fundamental level. While we erect trade barriers to imports through higher custom duties, we are opening the capital account for “bond tourists” further (even as hurdles are raised on outward remittances for households). How does one square this circle since it is well founded that high import barriers ultimately undermine national competitiveness and it is mostly export earnings that will have to service external liabilities? The strategy, leave aside the vision, behind this bi-polar economic policy is not apparent.
Tough words!

Money helicopters are on their way

April 6, 2020

My new piece in moneycontrol.

I look at the history of this idea of helicopter money as specified by Milton Friedman and later clarified by Bernanke. Then I argue how money helicopter which started as an idea to differentiate between real and nominal values has become a policy prescription for the recent crisis.


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