Archive for December, 2020

Last day of 2020: RBI continues to issue directions for failed cooperative banks

December 31, 2020

What an year for Indian banking. Full of drama and hype.

Even on the last day of 2020, RBI issued directions for 2 coop banks which had failed earlier

What will the year 2021 hold for banking in India?



Vernacularisation and linguistic democratisation

December 31, 2020

Interesting research by Christine Binzel, Andreas Link, Rajesh Ramachandran:

The Missing Link in Economic Development: Look beyond incentives

December 31, 2020

Prof Ricardo Hausmann in this Proj Synd piece:

Like the proverbial man with a hammer who sees every problem as a nail, economists study the world through the lens of incentives, and have developed a rich understanding of how market participants make decisions. But although incentives are important, developing countries must do more than institute the right ones.

Though economics can capture many of the subtleties of incentives, it has developed a relatively narrower palette with which to describe capabilities and how they grow. But capabilities clearly matter. If someone is not doing something that we as a society value, it might be because they can’t, not because they don’t want to. This weakness in economics has far-reaching implications for our understanding of economic growth and development, which is fundamentally about the social accumulation of productive capabilities.

Whereas incentives affect the choices one makes among the options one faces, capabilities determine which options are available. Economic growth and development are about the expansion of those options and hence depend fundamentally on policies that catalyze or facilitate the accumulation of capabilities. Yet, owing to the exclusive focus on incentives, economists and policymakers end up searching only for nails.

For example, when asked what can be done to boost a country’s exports, economists tend to look for disincentives to export. Perhaps trade protectionism is causing firms to prefer the profitable domestic market over more competitive and risky export markets. Perhaps import tariffs are raising input costs, making exports less profitable. Maybe cumbersome trade policies and customs procedures are adding transaction costs. Or maybe high transport costs have become a hindrance. Not surprisingly, all of these incentive-based factors are included in the World Bank’s Doing Business Index and in the World Economic Forum’s Trade Facilitation Index.

Seldom do economists studying this question consider whether a country has the capabilities needed to produce the right products of the right quality. Would policies to lower trade protections and reduce transport costs enhance that capacity? Or would increased competition in the domestic market impede industrialization and weaken the ability to negotiate with foreign companies? Without a view on how such policies affect the accumulation of capabilities, they cannot even be properly assessed.

We keep going in circles over this. AS we start to focus on capabilities, someone else will write incentives matter..

Maradona’s goals and Argentina’s economic instability

December 29, 2020

Prof Vivek Moorthy of IIMB in Mint:

The demise of Diego Maradona last month incidentally brought to the fore the topic of monetary policy in Argentina. The governor of Bank of England in 2005, Mervyn King, in a lecture staunchly supporting inflation targeting, had used Maradona’s (invisible) ‘Hand of God’ goal, and his unexpected tactics in his second goal in Argentina’s spectacular 1986 win against England, to elucidate concepts related to inflation expectations. Lord Mervyn King’s comments were alluded to in newspaper editorials, and in Mint too, last month.
Since India embarked upon inflation targeting in 2016, it is worthwhile to follow the twists and turns in Argentina’s economy over decades, and draw vital lessons from it. Argentina, an economic powerhouse and huge agricultural exporter prior to World War II, was known for its elegant café culture. Buenos Aires before World War II was often compared to Paris.

The Central Bank of Argentina was formed in 1935, the same year as the Reserve Bank of India (RBI). In the 75-year post-War period from 1946 onwards, it has had 60 Bank presidents (equivalent to our governors), far more than its 24 heads-of-state presidents. Under the flamboyant Juan Peron, who ruled from 1946 to 1955, it had four Bank presidents. His policies were in the 1950s’ development economics mould: Massive government spending and pro-corporatist protectionism. Inflation reached double-digit rates under his reign, remained at those levels through the 1960s, and then rose to triple digits by the 1970s.


The vital lesson from Argentina is that the technicalities of monetary policy and the choice of exchange rate regimes (fixed versus floating) matter less than the terms and conditions of the appointments of those in charge. The average length of tenure for the Bank president from 1945 to December 2020 has been about 15 months. By contrast, Joseph Yam was chief of the Hong Kong Monetary Authority for 14 years. While it may be coincidental, under his stellar stewardship, Hong Kong weathered the Asian currency crisis of 1998, without abandoning its currency board and the dollar peg, unlike Argentina.

Longer terms for central bankers in office are clearly better than shorter ones. However, for sound monetary policy, it is best that the central bank’s head should not just have a non-dismissible appointment, but also a non-renewable one. Argentina is not the only country that would greatly benefit from such an appointment rule.

Franklin Templeton using nudging for e-voting: Green for Yes, Red for No

December 29, 2020

Interesting bit from Moneylife.

FT India had goofed up its 6 debt funds and asked unitholders to vote for future of the schemes.   However, it has used interesting nudging techniques to push voters to select the winding option:

The e-voting of unit-holders of six debt schemes of Franklin Templeton Mutual Fund (FTMF), which started on 26th December and would conclude on 29 December 2020, appears to be turned into a farce by FTMF, especially when the market regulator has been playing the role of a mute spectator. The Securities and Exchange Board of India (SEBI) has appointed TS Krishnamurthy, former chief election commissioner (CEC) as observer for the e-voting process and issued a statement on 26th December when the e-voting process had commenced. This move came a day after the Chennai Financial Markets and Accountability (CFMA) moved an urgent application before the Supreme Court (SC) against SEBI for not appointing an observer for the e-voting.
What is more startling is the design of the e-voting process, especially the use of green colour for ‘Yes’ and red colour for ‘No’ option with appropriate wording accompanying each. Next to the green ‘Yes’ button are words framed in an affirmative and comforting manner: “Means opting for an orderly winding-up of the scheme with a potential to realise fair value from the assets.” Next to the red ‘No’ button are words framed in a scare-mongering and negative manner: “Means opting for the Scheme to be re-opened, potentially leading to distress sale of assets and loss of value.”
This colouring and textual framing makes the entire e-voting process biased towards FTMF since we all have the perception of green signal and red signal embedded in our minds.
Everyone who sees a green signal at a traffic post will go ahead and would stop after seeing a red signal. Therefore, the use of this specific colour coding by FTML appears a deliberate attempt to influence the voting process.

RBI’s inflation target at 4%: If it ain’t broke, don’t fix it

December 29, 2020

This new RBI research by DG Michael Patra and Hemendra Behera is creating a lot of buzz in media:

This paper began with a question that goes to the root of FIT in India – is the choice of the target for inflation consistent with its trend? A target set below the trend imparts a deflationary bias to monetary policy because it will go into overkill relative what the economy can intrinsically bear in order to achieve the target. Analogously, a target that is fixed above trend renders monetary policy too expansionary and prone to inflationary shocks and unanchored expectations.

Trend inflation is an empirical question and choice of methodology is crucial if the estimate of trend inflation has to be precise. Within the proliferation of work on the subject, there is a loose consensus that none of them can outperform the random walk model for forecasting purposes. For the setting of monetary policy, however, it is necessary to consider significant changes in the overall macroeconomic ecosystem in which monetary policy is conducted. In this regard, Markov switching offers a computationally lighter alternative without sacrificing precision.

Trend inflation was falling even ahead of the institution of FIT and the latter entrenched this tendency, as reflected in the rising probability of trend inflation at 4 per cent in both filtered and smoothed posterior estimates. The probability-weighted average of trend inflation has come down from around 5 per cent until 2014 when the pre-conditions of FIT were beginning to 4.1-4.3 per cent in Q1 of 2020, just before COVID-19 struck.

The decline in trend inflation since 2014 is, however, coincident with a flattening of the Philips curve. Underlying this is (a) a decline in the inflation persistence, indicating that households and businesses in India are becoming more forward looking than before as credibility associated with monetary policy increases; and (b) an increase in sacrifice ratio – further disinflations will become costlier in terms of the output foregone. At the same time, the credibility bonus accruing to monetary policy warrants smaller policy actions to achieve the target. This points to maintaining the inflation target at 4 per cent into the medium-term. If it ain’t broke, don’t fix it. 


Digital Transformation – The Case of South India Bank

December 29, 2020

International Finance Corporation helped South Indian Bank transform digitally.

IFC released a report on the digital transition of SIB:

In 2016, IFC began a new project with South Indian Bank (SIB), a mid-sized private bank (currently the third-largest in southern India), to strengthen its digital capabilities. By doing so, the bank aimed to transform its retail and small and medium enterprise businesses (SMEs) to drive customer engagement and to mobilize deposits.

SIB partnered with IFC to implement the strategy, which more specifically was designed to boost new accounts, to increase existing customers’ account usage, and to grow the bank’s portfolio. Implementation required leveraging technology and digital channels to target retail and SME customers while also seeking new opportunities with microentrepreneurs and women-owned businesses. The transformation strategy helped SIB improve efficiency and support growth by reducing the weight of transactions on SIB’s branch network.

As of May 2019 (2.5 years into the project), SIB had onboarded approximately 1 million new accounts and issued 1.5 million new debit cards.


From Chaiwala to Chowkidar: Learning art of political/marketing campaigns from BJP

December 28, 2020

Prof Ronojoy Sen of National University of Singapore in this EPW research:

In the 2019 Indian general election, Prime Minister Narendra Modi countered corruption charges made by the Indian National Congress’s (INC) Rahul Gandhi through the Chowkidar campaign. The author analyses how Modi and the Bharatiya Janata Party (BJP) were successfully able to employ the Chowkidar slogan on social media and integrate it with their offline campaign. The Chowkidar campaign and use of social media, the author argues, are a part of Modi’s populist playbook, noting the similarities the most recent campaign has with the BJP’s Chaiwala campaign in the 2014 general election.

Central Banks trying their bit to avoid 2020s resemble the 1920s: Lords of Finance Part-II?

December 26, 2020

My year end piece in Moneycontrol. I write how 2020s are becoming similar to 1920s (History rhymes) and how central banks are trying their bit to avoid 2020s look like 1920s. However, one could still get hit from different sources and we could have Lords of Finance Part-II.

Historical Echoes: Santa Claus as Legal Tender

December 24, 2020

NY Fed’s Liberty Street Economics Blog posted this in 2014:

From 1793 until 1861, when the U. S. Treasury Department was given exclusive rights to produce legal tender, thousands of different styles of bank notes were created by U.S. banks. The banks all based their currencies on standardized units, but in most every other way the notes differed wildly—colorful versus monochromatic, and graphics ranging from stock images to almost any concept one could imagine.

During the unregulated 19th century, a variety of banks issued their own holiday-themed currency. One popular figure featured on many bills was Santa Claus. Christmas was declared an official holiday in many northern states in the mid-1800s, and some banks celebrated by creating Santa Claus currency. This was a very popular time for Santa in the United States, spurred on by the publication of “A Visit from St. Nicholas” by Clement Clarke Moore in 1823.

The Santa Claus bank notes became very popular as keepsakes, because denominations were typically small and the subject was at the forefront of peoples’ minds given the brand-new official holiday. One motivation for the banks to release these and other collectible currencies was to dissuade people from redeeming the bills for their underlying gold value. Among the banks to issue Santa Claus money was the Howard Banking Company of Boston, Massachusetts, which issued such a bank note in the 1850s. This $5 bill featured Santa Claus wearing a tricorne hat and riding his sled along a roof, led by a herd of reindeer.

Sadly, banks stopped releasing Santa Claus currency once the U.S. Treasury took over the production of legal tender. After that point, these currencies became known as obsolete bank notes and lost all value outside of their worth as collectibles. Fortunately, the spirit of Santa Claus lives on even if his visage on currency has disappeared. Happy Holidays!

Happy X-mas wishes to all..

Money, Banking, and Old-School Historical Economics

December 24, 2020

Eric Monnet  and François Velde in this Chicago Fed research:

We review developments in the history of money, banking, and financial intermediation over the last twenty years. We focus on studies of financial development, including the role of regulation and the history of central banking. We also review the literature of banking and financial crises. This area has been largely unaffected by the so-called new econometric methods that seek to prove causality in reduced form settings. We discuss why historical macroeconomics is less amenable to such methods, discuss the underlying concepts of causality, and emphasize that models remain the backbone of our historical narratives.

Why current and retired central bankers feel threatened by Modern Monetary Theory?

December 24, 2020

The year has been full of debate on MMT with strong arguments for and against the topic. I just blogged about an article which argued what Alexander Hamilton would have made of MMT.

James Galbraith in this piece takes a stand for the  MMT:

It is not surprising that current and retired central bankers feel threatened by Modern Monetary Theory. With deep roots in the Keynesian tradition and a consistent commitment to achieving full employment, MMT shows that good economics and sound policy doesn’t have to be shrouded in obscurantist cant.

 As anyone who has ever been responsible for legislative oversight of central bankers knows, they do not like to have their authority challenged. Most of all, they will defend their mystique – that magical aura that hovers over their words, shrouding a slushy mix of banality and baloney in a mist of power and jargon.

As a result, tormenting central bankers is great fun. John Maynard Keynes famously tormented Montagu Norman, Governor of the Bank of England (BOE) from 1920 to 1944. Wright Patman and Henry Reuss, two US congressmen who chaired the House Banking Committee in the 1970s, did the same to Federal Reserve Chair Arthur Burns. I know that Reuss enjoyed it; I assisted him at the time.

In our day, the voices of Modern Monetary Theory perturb the sleep not only of present central bankers, but even of those retired from the role. They prowl the corridors like Lady Macbeth, shouting “Out damn spot!”

Two fresh cases are Raghuram G. Rajan, a former governor of the Reserve Bank of India, and Mervyn King, a former governor of the BOE. In recently publishedcommentaries, each combines bluster and condescension (in roughly equal measure) in a statement of trite truths with which one can, for the most part, hardly disagree.

But Rajan and King each confront MMT only in the abstract. Neither cites or quotes from a single source, and neither names a single person associated with MMT.

For example, King begins, “If you can’t explain something, try an abbreviation. The latest in economics is MMT – Modern Monetary Theory or, in other words, a magic money tree.” Does King mention that there are whole books explaining MMT, including The Deficit Myth, a current bestseller by a fully credentialed economics professor, Stephanie Kelton? He does not. Nor does Rajan mention books by Pavlina R. Tcherneva of Bard College or L. Randall Wray of the Levy Institute, to mention just three prominent exponents of the MMT school.

So what is MMT?

What, then, is MMT? Contrary to the claims of King and Rajan, it is not a policy slogan. Rather, it is a body of theory in Keynes’s monetary tradition, which includes such eminent thinkers as the American economist Hyman Minsky and Wynne Godley of the UK Treasury and the University of Cambridge. MMT describes how “modern” governments and central banks actually work, and how changes in their balance sheets are mirrored by changes in the balance sheets of the public – an application of double-entry bookkeeping to economic thought. Thus, as Kelton writes in the plainest English, the deficit of the government is the surplus of the private sector, and vice versa.

MMT shares Keynes’s view that a proper goal of economic policy in a sovereign and developed country is to achieve full employment, buttressed by a guarantee of jobs to all who may need them. This is a goal that I helped write into law in the US under the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, along with balanced growth and reasonable price stability. With occasional successes in practice, this policy objective, known as the “dual mandate,” has been the law of the land in the US ever since.

In short, as an example of good economics made popular, accessible, and democratic, MMT represents what central bankers have always feared – as well they might.

RBI Bulletin Dec-2020

December 24, 2020

Several interesting research articles in RBI’s Dec-2020 Monthly Bulletin:

he eight articles are: I. State of the Economy; II. Indicator of Economic Activity to Capture Real-time Spatial Momentum; III. Government Finances 2020-21- A Half-Yearly Review; IV. Rural-Urban Inflation Dynamics in India; V. Managing Exchange Rate Volatility in the time of COVID-19; VI. Services and Infrastructure Outlook Survey: Recent Trends; VII. Bank Lending Survey- Recent Trends; VIII. Seasonality in India’s Key Economic Indicators.

I. State of the Economy

Since the assessment presented in the last month’s Article, more evidence has been turned in to show that the Indian economy is pulling out of COVID-19’s deep abyss and is reflating at a pace that beats most predictions. Economic conditions continued to improve through November 2020 on the back of the uptick in agriculture and manufacturing activity. Financial conditions embodied in interest rates are perhaps at their easiest in decades. Although headwinds blow, steadfast efforts by all stakeholders could put India on a faster growth trajectory.

Thus spoke the Bank of Italy’s Governors: an analysis of the language corpus of the Concluding Remarks, 1946-2018

December 23, 2020

Valerio Astuti, Riccardo De Bonis, Sergio Marroni and Alessandro Vinci in this Bank of Italy paper:

This paper is the first to construct and analyse the language corpus of the Concluding Remarks (CF from now on), using the texts from 1946 to 2018. The first part of the paper summarizes the characteristics of the dataset, which contains around 850,000 words. The second part analyses the topics addressed by the Bank’s Governors over seventy years of Italian economic history. The third section provides a linguistic analysis of the CF, focusing in particular on the use of some types of subordinate clauses.

The topics covered in the CF have been influenced by events, but also by each Governor’s personal point of view. The CF reached their maximum length in the 1970s and then became shorter. The length of the sentences increased in the 1950s and then declined, with the shortest sentences dating to the end of the 1990s. Our linguistic analysis shows that, up until the time of Baffi, the Governors concentrated on presenting economic trends. Over the last 25 years, however, the CF have focused on drawing up action programmes for Italy’s economy.

Unfortunately, the paper is only in Italian.

Should we have PG economics programs offering courses on Indian Agriculture?

December 23, 2020

Roshan Kishore of Hindustan Times posted this on Twitter:

How many PG economics departments offer courses on Indian Agriculture? If they do, have reading lists evolved overt-time?

The replies to Roshan’s tweet were on these lines:


Exploring central banks’ art collections

December 23, 2020

Danae Kyriakopoulou is Chief Economist and Director of Research at OMFIF in this piece looks at fab art collections of central banks:


Outlook 2021: Digital dynamism will fuel Asia’s outperformance

December 22, 2020

Taimur Bang, chief economist of DBS in this piece writes how Asia is centre of digital dynamism in money and payments space:

From digital bank license approvals in Singapore to the roll-out of the e-RMB initiative in China, digital finance picked up momentum in Asia through the year of the pandemic. Just like the rest of the world, the pace of e-commerce adoption soared as consumers and businesses favoured remote transactions. Monetary authorities in Australia, Cambodia, China, Hong Kong, Singapore, South Korea, and Thailand made forays in central bank digital currencies, launching pilots to explore legal framework, settlements, and cross border payments.

The developments in China are particularly noteworthy. In October, over 47,000 consumers in Shenzhen spent RMB8.8m at 3,389 designated shops during a week-long trial of People’s Bank of China’s digital currency. Users also transferred credit into the official digital Renminbi app, which can be used well after the end of the trial.

Tests have also taken place in Suzhou, Chengdu and Xiongan. In Suzhou, the e-RMB has been used for paying salaries to some public servants, while in others the focus has been on retail. More than RMB2bn has been spent using China’s new digital currency in 4m separate transactions, according to the PBoC. The next batch of pilot programmes will likely include other major metropolitan areas such as Beijing, Tianjin, Shanghai, Guangzhou and Chongqing. A countrywide launch by the 2022 Winter Olympics in Beijing is on the cards.

PBoC is working with lifestyle apps, including ride-hailer Didi Chuxing and food delivery company Meituan, with plans to make the digital currency available for online transactions in the upcoming experiments. The authorities are also testing new functionalities like offline, phone-to-phone (just by tapping one device to the other) transfers. Indeed, the next step could be to provide access to e-RMB even without a phone number or bank account information. This makes sense since CBDC is legal tender that can be exchanged without needing a bank as an intermediary. Such a development could facilitate CBDC use by foreigners, who can directly exchange foreign currencies for the digital yuan without carrying cash or opening an onshore bank account.

Did the current crisis change our way of economic thinking?

December 22, 2020

Robert Holzmann, Governor of Oesterreichische Nationalbank (Austrian Central Bank) in this speech:

It is too early to judge whether the COVID-19 crisis will have a lasting impact on economic policymaking. Yet, the crisis has certainly put a spotlight on the powerful effects that economic policy can have. The direct macroeconomic support observed during the past six months has been impressive.

Let me elaborate on one issue in this context, which will be addressed tomorrow in more detail: the view on globalization and the attitude toward global value chains. The COVID-19 crisis led to a marked increase in the demand for specific goods, e.g. health products and IT equipment. These goods are produced in highly organized global value chains. Yet, at the same time, the crisis also led to interruptions in these supply chains due to restrictions in transport and labor mobility. This situation has been exacerbated by export bans and quantity restrictions. World Trade Organization (WTO) estimates suggest that around 20% of global exports of protective clothing and 17% of disinfectant exports were affected.

In light of these examples, does the crisis call for a different view on global value chains? The COVID-19 crisis may not be a “game changer” in this respect, but it will reinforce a trend that has been observed for quite some time. The expansion of global value chains has been slowing since the mid-2000s, and this trend has been intensified by the global financial crisis.

So far, however, we cannot speak of a shortening or even dismantling of global value chains. After all, the rather swift revival of global value chains following the easing of restrictions has demonstrated their stability and their potential for supporting the recovery. Certainly, the current crisis holds some lessons: to promote not only efficient, but also robust and resilient global value chains in the future. For example, the build-up of safety stocks for essential goods could provide for sufficient buffers even though it requires a careful balancing of benefits and costs. Upstream bottlenecks should be identified and avoided by broadening the supplier base. Governments can support the smooth functioning of global value chains by facilitating the smooth flow of goods and
services and by supporting substitutability of inputs through harmonizing norms and standards.

World keeps going in circles. There was thinking that we do not need to create buffers due to heightened globalisation and ready supplies. The recent disruptions has again reinforced the need to build buffers.

The central bank balance sheet as a policy tool: past, present and future

December 22, 2020

Andrew Bailey, Jonathan Bridges, Richard Harrison, Josh Jones and Aakash Mankodi in this working paper:

This paper focuses on what has been learned from the past decade of previously unconventional monetary policy measures and the emerging lessons from the effects of monetary policy responses to the Covid shock. The paper explores two observations from recent quantitative easing (QE) policies in detail. First, large QE programmes implemented quickly may be particularly effective in times of market dysfunction. Second, a rapid pace of asset purchases may also enhance QE effectiveness during these periods. These observations suggest a particular form of ‘state contingency’ for the impact of QE. The paper analyses the potential implications of such state contingency for the appropriate conduct of QE policies and the choice of policy instruments in more normal times. The paper also outlines some potential implications for future central bank balance sheet policies and the operational framework to support them.

Interesting to see a central bank Governor (Andrew Bailey) taking out time to engage in research.

Female employees are paid higher at Central Bank of Iceland!!

December 22, 2020

Missed this development. In Central Bank of Iceland, female employees have been paid more than their male counterparts:

The Central Bank of Iceland’s gender-based pay gap in 2020 is 1.6% in favour of women, according to the pay analysis conducted in September 2020. The analysis therefore revealed that there is no unexplained gender-based pay gap at the Bank. The Central Bank set for itself the objective of reducing the gender-based pay gap to below 2% by 2020. The Bank employs 145 men and 127 women, reflecting the increased size of the staff following the merger of the Central Bank and the Financial Supervisory Authority at the beginning of 2020.

The Bank was awarded equal pay certification at the beginning of 2019. The Central Bank set for itself the objective of reducing the gender-based pay gap to below 2.5% by 2019. The analysis from 2019 showed that female employees’ pay was 1.82% higher than male employees’ pay, and that the Bank employed 86 men and 85 women. This small difference was not considered statistically significant, and the results therefore indicated that there was no unexplained gender-based pay gap at the Bank.

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