Archive for July 6th, 2020

Central banker Musical Chairs at the London Bullion Market Association: Fed exits, Banque de France joins

July 6, 2020

Interesting article by Ronan Munly in Bullionstar. It reminds you how little the central banking world has changed from Liaquat Ahmed’s Lords of Finance world of 1920s:

For a group famous for its caution in appearing associated with and endorsing gold, Western central bankers seem to have made an exception when it comes to sitting on the board of directors of the world’s largest bullion bank gold cartel, the London Bullion Market Association (LBMA). But maybe that’s the point. Because, if central banks and their proxies are close to the action in the gold market, they will be able to control their interests, as well as influence and control others.

Which may explain why news just in reveals that Isabelle Strauss-Kahn, former Market Operations director of the Banque de France (BdF), and formerly at the World Bank and Bank for International Settlements (BIS), is being appointed to the Board of the LBMA as an “Independent” non-executive director, with effect from 1st July. The Banque de France market operations role also included Strauss-Kahn being in charge of the French central bank’s gold and FX reserve management.

Dark intriguing club of elite central bankers…

Managing groundwater in India: rationing the commons

July 6, 2020

Nicholas Ryan and Anant Sudarshan in the new NBER WP:

Common resources may be managed with inefficient policies for the sake of equity. We study how rationing the commons shapes the efficiency and equity of resource use, in the context of agricultural groundwater use in Rajasthan, India. We find that rationing binds on input use, such that farmers, despite trivial prices for water extraction, use roughly the socially optimal amount of water on average. The rationing regime is still grossly inefficient, because it misallocates water across farmers, lowering productivity. Pigouvian reform would increase agricultural surplus by 12% of household income, yet fall well short of a Pareto improvement over rationing.


Business in Time of Spanish Influenza: Economic activity declines with and without lockdowns

July 6, 2020

Howard Bodenhorn of Clemson Univ in this NBER paper:

Mandated shutdowns of nonessential businesses during the COVID-19 crisis brought into sharp relief the tradeoff between public health and a healthy economy. This paper documents the short-run effects of shutdowns during the Spanish flu pandemic of 1918, which provides a useful counterpoint to choices made in 2020.

The 1918 closures were shorter and less sweeping, in part because the US was at war and the Wilson administration was unwilling to let public safety jeopardize the war’s prosecution. The result was widespread sickness, which pushed some businesses to shutdown voluntarily; others operated shorthanded.

Using hand-coded, high-frequency data (mostly weekly) this study reports three principal results.

First, retail sales declined during the three waves of the pandemic; manufacturing activity slowed, but by less than retail.

Second, worker absenteeism due to either sickness or fear of contracting the flu reduced output in several key sectors and industries that were not ordered closed by as much as 10 to 20% in weeks of high excess mortality. Output declines were the result of labor-supply rather than demand shocks.

And, third, mandated closures are not associated with increases in the number or aggregate dollar value of business failures, but the number and aggregate dollar value of business failures increased modestly in weeks of high excess mortality.

The results highlight that the tradeoff between mandated closures and economic activity is not the only relevant tradeoff facing public health authorities. Economic activity also declines, sometimes sharply, during periods of unusually high influenza-related illness and excess mortality even absent mandated business closures.


Analysing fiscal conditions of India’s States..

July 6, 2020

Sangita Misra, Kirti Gupta and Pushpa Trivedi in this RBI research paper analyse fiscal conditions of India’s states pre-covid:

Recognising the increasing precedence of fiscal shocks leading to a deterioration in states’ debt due to the realisation of contingent liabilities, this study assesses the debt sustainability of Indian states by employing both conventional debt and augmented debt, obtained by incorporating information on states’ guarantees and their likely fallout on states’ budgets.

The study uses the standard indicator-based approach and an empirical panel data framework for the post-Fiscal Responsibility Legislation (FRL) period 2004-05 to 2017-18. Results indicate that states’ debt is just about sustainable with some potential signs of unsustainability. Guarantees given by states, if invoked, could certainly pose a potential risk to debt sustainability for Indian states.

The clear policy implications that emerge from the paper include the need to revisit and review states’ FRLs with the inclusion of debt as a medium-term anchor, coupled with greater transparency with regard to contingent liabilities/ off-budget borrowings. The paper does not cover the COVID-19 pandemic period and its impact on state finances.

The impact of Covid-19 on State finances is a different story altogether…

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