Credit guarantees of 1970s make a comeback

India’s FM Ms Nirmala Sitharaman gave the breakup of the Rs 20 lakh cr stimulus over a 5 day presentation. One key feature of the stimulus is the several credit guarantees with the loans.

My new piece in Moneycontrol where I look at the long history of credit guarantees in India..

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Pandemic central banking: the monetary stance, market stabilisation and liquidity

Philip Lane, chief economist and Board Member ECB in this speech reviews ECB’s policy during the crisis.

In my recent blog post, I described the range of scenarios that have been developed by ECB staff to support the analysis of the near-term and medium-term macroeconomic dynamics in the context of the coronavirus (COVID-19) crisis.^[1],[2] I also explained the current monetary policy of the ECB and outlined our approach to setting the future course of monetary policy. My remarks today aim to reinforce these points by presenting some additional empirical evidence.

Lots of graphs and data in the speech. One could just use similar data for other countries to evaluate macro trends and policy responses.

Success through failure? Four Centuries of Searching for Danish Coal

Kristin Ranestad and Paul Richard Sharp in this new paper:

Natural resources, especially energy resources, are often considered vital to the process of economic development, with the availability of coal considered central for the nineteenth century. Clearly, however, although coal might have spurred economic development, development might also have spurred the discovery and use of coal. To shed light on this, we suggest that the case of resource poor Denmark, which spent centuries looking for coal, is
illuminating.

Specifically, we emphasize that the process of looking for coal and the creation of a natural resource industry in itself is important beyond the obvious dichotomy of haves and have-nots. We seek to understand this process and find that prices proved an important stimulus to coal surveys.

Apart from finding the natural resource, developing the entire ecosystem is as important:

In his analysis of natural resource exploitation and the growth of international business, Geoffrey Jones presents some common features that mining industries share, which should be stressed here, and all of which we touch on below. These include the importance of geology, the capital-intensity and high risk nature of their business, and, although there are important differences in their availability, the fact that most metals and minerals are sold on the world market (Jones, 2005: 45). He finds that mineral and metal surveys and mining have been risky businesses, which is related to the nature of their operation. The extension and composition of ores has often been difficult to know in advance and operational techniques have changed along the way. There have been many uncertainties related to such production and large capital investments have often been required. These, in turn, have involved uncertainties regarding costs, completion time and operational performance. As mineral deposits are located in remote places, and sometimes in rough terrain, challenges concerning infrastructure and logistics have also been common. Finally, fluctuations in prices represent another risk factor (Jones 2005: 52). In sum, capital, knowledge about the composition of ore, and the extension of the ore deposit; as well as relevant operational techniques and infrastructure to mine and process the ore need to be in place before rational mining can occur. 

 

Revisiting Amartya Sen vs Jagdish Bhagwati debate: Was Sen right after all?

Manas Chakravarty revisits the Sen vs Bhagwati debate in this moneycontrol article:

Just before the general elections in 2014, a rather unlikely fight erupted in the pink papers. In the Left corner, wearing what some people said were bright red shorts, was Nobel Laureate and economist Amartya Sen. In the Right corner, wearing true blue shorts, was eminent trade economist Jagdish Bhagwati.

The dispute was whether social welfare and health and education were best served by rapid economic growth, which was the view from Bhagwati’s corner, or whether social equity and health and education lay the groundwork for rapid growth, which was Sen’s thesis.

These arguments became prominent in the context of the 2014 elections. The pundits said Narendra Modi stood for rapid growth, while the UPA was all about social welfare.

The UPA’s critics, who were legion, made Bhagwati their intellectual mascot and argued there could be no redistribution without rapid growth. Let India grow first, they said, by freeing markets and allowing the ‘animal spirits’ of entrepreneurs free rein and there would soon be a surplus that would trickle down to the masses. Go in for social welfare too soon, they added, and growth would falter, just as it had done under the UPA government.

…….

And then came the COVID-19 pandemic. 

 

Prof Jeemol Unni Webinar on “Impact of COVID19 Lockdown on the Informal Economy”:

Prof Jeemol Unni of Ahmedabad University is the goto person to understand India’s informal economy.

IHD-ISLE webinar organised a webinar with Prof Unni on 26-May-2020.

The recording has been put up on youtube. Do watch and learn about several sections of India’s informal economy.

Webinar with Montek Ahluwalia and D Subbarao: Indian Economy – Navigating Through A Crisis

The SP Jain webinar happened yesterday.  The recording has been put on youtube.

Thanks Prof Ananth Narayan for organising this interesting webinar and sharing the video link.

In developing countries, communities and primary care providers—not hospitals—hold the key to successful pandemic response

Nachiket Mor in this blogpost:

Almost uniformly across the developing world, pandemic policy responses so far have tried to replicate the typical developed country strategy: social distancing coupled with national lockdowns, quarantining suspected cases in centralized locations, and increasing hospital capacity of hospitals by shoring up their intensive care units (ICUs) and increasing the supply of invasive mechanical ventilators. This will almost certainly have to change.

To be sure, the steps being taken by advanced countries are significant and they could prove to be adequate if the caseload remains between 10-20 per 100,000 and the associated mortality between 0.5-1.0 per 100,000. But to help poorer countries deal with infection rates in the neighborhood of the 30,000 per 100,000 being predicted by the modeling work of the Imperial College COVID-19 team—even with social distancing—these strategies will have to be supplemented by an entirely different set of measures. This is because there is a concern that—as the Italians discovered much later than they should have—with infection rates of about 300 per 100,000, even well-equipped hospital systems become overwhelmed. In such conditions, mechanical ventilation is not an effective strategy even for those individuals fortunate enough to get access to one, and hospitals themselves become lethal transmitters of infection back into the community.

Many low- and middle-income countries (LMICs) lack adequate hospital and emergency transportation infrastructure, but most have strong community-based structures, such as community-based organizations and local nonprofits. LMICs could benefit from the near ubiquitous presence of these nonprofit organizations if their governments empower them to, among other things:

1. 1. Identify the most vulnerable, such as individuals over the age of 60, and guide their families on how to protect them over the next several years until a good adult vaccine is developed;
   2. Communicate home care and isolation guidelines even for the very sick, including the development of collaborative arrangements between families where space within a single home is limited;
   3. Map the local primary care provider (PCP) network, including private and the nonprofit providers and, wherever possible, assign households to specific PCPs so that when the numbers start to rise, there is no confusion as to who is responsible for taking care of particular families;
   4. Ensure that these PCPs are well prepared to manage all but the sickest of the cases; and
   5. Provide essential support to those families that are in the greatest economic need.

Additionally, while PCP availability varies greatly across LMICs, given the high levels of out-of-pocket expenditures in most of them, the supply of independent formally qualified PCPs is likely to far exceed the numbers within government facilities, even in relatively remote areas

 

Webinar on 30 May 2020: The Science and Economics of Climate Change

Ahmedabad University is organising a webinar on ‘The Science and Economics of Climate Change’. I will be conversing with Minal Pathak who is Scientist at Intergovernmental Panel on Climate Change (IPCC) and runs the Global Centre for Environment and Energy at Ahmedabad University.

Interested folks especially students can register here.

 

COVID-19 and non-performing loans: lessons from past crises

Anil Ari, Sophia Chen, and Lev Ratnovski of ECB in this research look at NPL story.

During crises, the number of loans that cannot be paid back increases. What are the lessons from past crises for non-performing loan resolution after COVID-19? In this article we use a new database covering non-performing loans (NPLs) in 88 banking crises since 1990 to find out. The data show that dealing with NPLs is critical to economic recovery.

Compared with the 2008 crisis, some factors are conducive to NPL resolution this time: banks have higher capital, the forward-looking IFRS 9 accounting standards can help NPL recognition, and the COVID-19 crisis was not preceded by a credit boom. However, other factors could make NPL resolution more challenging: government debt is substantially higher, banks are less profitable, and corporate balance sheets are often weak.

 

Interview of Joshua Angrist: On charter schools, the elite illusion, and the “Stones Age” of econometrics

Nice interview of Prof Joshua Angrist of MIT:

As a teenager growing up in Pittsburgh, Joshua Angrist became fed up with high school and said his goodbyes to it after his junior year. Today, at the Massachusetts Institute of Technology, he’s a top researcher in labor economics and the economics of education — with work that includes a series of famed studies of policy choices for K-12 schooling.

Much of his work has been based on ingenious “natural experiments,” that is, episodes in which two or more groups of people were randomly exposed to different policies or different experiences. Such occurrences are an opportunity for Angrist and his co-authors to use the tools of econometrics to assess the effects of those differences — whether that’s a large classroom versus a small classroom or education at a charter school versus education at a conventional public school.

Angrist’s first natural experiment looked at labor market outcomes for men who were drafted during the Vietnam War era compared with those of men who weren’t drafted. The idea came to him from his labor economics teacher and Ph.D. adviser at Princeton, Orley Ashenfelter, who mentioned in class one day that he had seen a news article about a study in the New England Journal of Medicine in which epidemiologists investigated the long-term health effects of being drafted.

“They had done this very clever thing where they used the fact that draft lottery numbers were randomly assigned,” Angrist remembers, “and they compared people who had high and low numbers to test the causal effects.”

Ashenfelter remarked to the class that this use of the draft lottery was a great idea and that somebody should use it to look at the effects of the draft on the men’s earnings. Angrist agreed; immediately after class, he went to the library to start the research that became his doctoral thesis.

Angrist found that in the early 1980s, well after the end of the war, veterans — whether they served in Vietnam or elsewhere — took an earnings hit of around 15 percent compared with non-veterans in the same period. (Angrist himself served as a paratrooper in the Israeli army before he went to grad school.)

In addition to his research and teaching responsibilities at MIT, Angrist is a co-founder and co-director of MIT’s School Effectiveness and Inequality Initiative. He is the author, with Jörn-Steffen Pischke, of the econometrics textbooks Mostly Harmless Econometrics: An Empiricist’s Companion (2009) and, for undergraduates, Mastering ‘Metrics: The Path from Cause to Effect (2015). He also teaches econometrics in a series of free videos offered through the nonprofit Marginal Revolution University.

How he came into economics? It is all about getting one good teacher!

Cash Management Bills (CMB) worth Rs 80000 cr announced…

RBI announced auction of CMBs worth Rs 80,000 cr to be held on 28-May-2020.

The issuance of CMB is done when WMA limits are breached.

This blog has been tracking WMA regularly and the position does not look good. It has become a continuous source of financing. It was a matter of time when the government will breach WMA limits and CMBs to be issued. We will have to wait for WSS data to ascertain whether WMA limits were breached in this weekly period.

WSS release Date	Date of WMA	WMA Amount	WMA Limit	Difference	WMA Breach	CMB
10-Jan-20	03-Jan-20	130171	35000	-95171	Y	worth Rs 60000 cr (30k+30 k)
17-Jan-20	10-Jan-20	60605	35000	-25605	Y
24-Jan-20	17-Jan-20	87735	35000	-52735	Y
31-Jan-20	24-Jan-20	24184	35000	10816	N
07-Feb-20	31-Jan-20	73545	35000	-38545	Y	worth Rs 60000 cr (30k+30 k)
14-Feb-20	07-Feb-20	23324	35000	11676	N
21-Feb-20	14-Feb-20	6817	35000	28183	N
28-Feb-20	21-Feb-20	0	35000	35000	N
06-Mar-20	28-Feb-20	5081	35000	29919	N
13-Mar-20	06-Mar-20	32976	35000	2024	N
20-Mar-20	13-Mar-20	20553	35000	14447	N
27-Mar-20	20-Mar-20	0	35000	35000	N
03-Apr-20	27-Mar-20	50477	35000	-15477	Y	worth Rs 80000 cr (40k+40 k)
10-Apr-20	03-Apr-20	40008	120000	79992	N
17-Apr-20	10-Apr-20	110942	120000	9058	N
24-Apr-20	17-Apr-20	135451	120000	-15451	Y	No CMB, perhaps was resolved quickly
01-May-20	24-Apr-20	111985	200000	88015	N
08-May-20	01-May-20	165833	200000	34167	N
15-May-20	08-May-20	134970	200000	65030	N
22-May-20	15-May-20	128836	200000	71164	N
29-May-20	22-May-20					CMB worth Rs 80000 announced on 26 May and to be auctioned on 28 May
05-Jun-20	29-May-20

 

 

 

 

 

 

History of Repo markets in US..

I wrote a piece in BQ looking at evolution of Repo markets in India.

John Mullin writes on repo markets in US.

What led to rise of Repo market? In 1970s as inflation rose deposit rates could not rise due to regulatory caps. This is much like India where interbank repo markets developed as call rates were capped.

Trade and travel in the time of epidemics

Hans-Joachim Voth in this voxeu piece says we need to think about trade and travel differently for goods and people.

Goods carry little diseases whereas people do:

Understanding the policy choices: Saving Lives vs Saving Economy

Frederic Boissay, Daniel Rees and Phurichai Rungcharoenkitkul of BIS in this research:

Rakesh Mohan 2006 Speech on Avian Influenza Pandemic: Remains relevant to fighting the crisis today

Came across this 2006 speech by Rakesh Mohan, who was then Deputy Governor at RBI.

He outlined what to expect in case there is an outbreak of large scale pandemic :

The vanishing interest income of Chinese banks as an indicator of loan quality problems

Karlo Kauko of Bank of Finland in this voxeu research:

Many observers have had a sceptical attitude towards Chinese banks’ official disclosures of non-performing loans. A loan should be classified non-performing if the customer stops servicing the loan. Therefore, hidden problems in the loan portfolio would manifest themselves as a suspiciously low interest revenue. Using this simple idea, this column sheds light on the likely distribution of hidden non-performing loans in Chinese banks. It finds that loan quality problems became more commonplace in 2016. Surprisingly, hidden NPLs seem more common in strongly capitalised banks and large banks, but also in banks that rely on interbank funding.

Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?

Robert Hall and Marianna Kudlyak in this new NBER paper:

It is a remarkable fact about the historical US business cycle that, after unemployment reached its peak in a recession, and a recovery began, the annual reduction in the unemployment rate was stable at around 0.55 percentage points per year. The economy seems to have had an irresistible force toward restoring full employment. There was high variation in monetary and fiscal policy, and in productivity and labor-force growth, but little variation in the rate of decline of unemployment. We explore models of the labor market’s self-recovery that imply gradual working off of unemployment following a recession shock. These models explain why the recovery of market-wide unemployment is so much slower than the rate at which individual unemployed workers find new jobs.

The reasons include the fact that the path that individual job-losers follow back to stable employment often includes several brief interim jobs, sometimes separated by time out of the labor force. We show that the evolution of the labor market involves more than the direct effect of persistent unemployment of job-losers from the recession shock—unemployment during the recovery is elevated for people who did not lose jobs during the recession.

 

RIP Alberto Alesina and Oliver Williamson: Taking political and economic frictions seriously

2020 roars and keeps bringing bad news.

Economists Oliver Williamson and Alberto Alesina passed away last week.

A Fine Theorem Blog pays a tribute:

Very sad news this week for the economics community: both Oliver Williamson and Alberto Alesina have passed away. Williamson has been in poor health for some time, but Alesina’s death is a greater shock: he apparently had a heart attack while on a hike with his wife, at the young age of 63. While one is most famous for the microeconomics of the firm, and the other for political economy, there is in fact a tight link between their research agendas. They have attempted to open “black boxes” in economic modeling – about why firms organize the way they do, and the nature of political constraints on economic activity – to clarify otherwise strange differences in how firms and governments behave.

 

Tryst with destiny, planning and deficit financing

My new piece on Moneycontrol:

The media is rife with discussions on whether and how the RBI should monetise the government’s deficits. India is no stranger to deficit financing as its 5-year Plans were based on it, which in turn created several problems for the Indian economy. We explore this long history and also try and answer the questions of today at the end.

Read on for details…

Electrifying Rural America: How during Great Depression, communities formed cooperatives to bring electricity to rural areas

Super article by Tim Sablik of Richmond Fed. He narrates how US initiated its rural electrification program during Great Depression. As they say don’t let a crisis go waste.