Archive for January, 2021

Estimating Government cash balances from RBI’s Money Market Operations: A primer

January 29, 2021

I have been receiving a few calls/messages on this term called government cash balances. Here is a primer on the topic. (download as pdf).

I tried to put this as a post earlier but the tables were all over the place. There were some errors in the earlier edition as well.

Comments/suggestions are welcome..



Deposit rate averaging -0.07% in Denmark

January 28, 2021

From Dane central bank:

In October 2020, the average rate on Danes’ ordinary deposits, which can be immediately withdrawn or used for payments, was -0.07 per cent. This
means that Danes pay an average of kr. 7 annually to banks for each kr. 10,000 of deposits.

Crazy times continue…

Sweden central bank begins transition to a fully self-financed foreign exchange reserve

January 28, 2021

Interesting bit from Sweden central bank:

The foreign exchange reserve is currently financed in two different ways: partly through the Riksbank’s own financing, which comprises of equity, banknotes and coins issued and deposits from the banks, and partly through loans in foreign currency on the international capital market via the Swedish National Debt Office. In an international perspective, it is unusual for central banks to finance a large share of the foreign exchange reserve by borrowing foreign currency.

The Riksbank has now decided, over the course of three years, to replace the borrowed part of the foreign exchange reserve, which currently amounts to SEK 178 billion*, with self-financing. The Riksbank will therefore purchase foreign currency on the foreign exchange market at an even pace and pay for the purchases in Swedish kronor, which means that the banks’ deposits in Swedish kronor on the Riksbank’s balance sheet will increase. At the same time, the Riksbank will repay the currency loans through the Swedish National Debt Office as they mature. The Riksbank assesses the current size of the foreign exchange reserve to be appropriate and the change is not aimed at affecting the size of the foreign exchange reserve over time.

Over the period February 2021 until 31 December 2023, the Riksbank will purchase foreign currency with Swedish kronor in an amount averaging SEK 5 billion per month. 

As the maturity structure of the currency loans and the planned currency exchanges will not match one another at every given point in time, the size of the foreign exchange reserve will vary somewhat during the transition to a fully self-financed foreign exchange reserve. To avoid the foreign exchange reserve being too small for short periods, the Riksbank may therefore need to refinance some currency loans in the coming years.

The purpose of spreading out the exchanges evenly over a three-year period, instead of only purchasing currency when the currency loans mature, is to minimise the effect of the exchanges on the foreign exchange market and the Swedish krona exchange rate. The exchanges shall be carried out with due caution and taking market conditions into consideration. This means that the volumes can vary on individual dates, even though the Riksbank will endeavour to attain an even pace of exchange every month. This is important because the exchanges have no monetary policy purpose and are thereby not being conducted to affect the Swedish krona exchange rate.

Can the United States Postal Service (USPS) improve financial inclusion? Insights from USPS history..

January 27, 2021

David Lott of Atlanta Fed in this article wrtes how US Postal Services has been enabling financial inclusion in the past. Infact, they have been nudging to increase saving (emphasised below) just like Syndicate Bank did in 1920s:

During the nationwide discussion regarding the distribution of the personal economic impact (stimulus) payments, the subject of having the United States Postal Service (USPS) offer basic banking services again surfaced—an idea that has been raised numerous times in the recent pastOff-site link. The premise is that the USPS, with its 34,000-plus retail locations, could provide a convenient and low-cost financial services channel for the estimated 7 million unbankedOff-site link and 24 million underbankedOff-site link households.

As I began to research this issue, I was surprised to learn that the USPS had provided savings deposit accounts in the past. In 1910, Congress created the Postal Saving System, which began operating on January 1, 1911. The program was designed to get money being held by families into circulation. It found particular favor with new immigrants who were familiar with postal office savings programs in their native countries.

An individual could open a savings account with a minimum of $1 (equivalent to approximately $27 today), later raised in 1956 to $5. However, to help customers save lower amounts, the program offered a postal savings card. Customers would purchase postage savings stamps in 10 cent increments and affix them to the card. Once the customers accumulated stamps worth at least $1, they could deposit the card or redeem it for cash.

Initially, the maximum account balance was $500, but that was raised to $1,000 in 1916 and then to $2,500 in 1918. And until May 1916, the deposit limit was $100 per month. Interest was paid on the account at the rate of 2 percent. The USPS deposited the funds in local banks and earned 2.5 percent. The post office used the difference to cover the cost of the operating the program.

In her book How the Other Half Banks, author Mehrsa Baradaran writes that the postal savings program “was the most successful experiment in financial inclusion in the United States. More effective than any other philanthropic or mutual effort to bank the poor, postal banking brought millions of new immigrants and rural dwellers into the U.S. banking system all at once. One of the central aims of the postal banks was also the most difficult to measure: teaching habits of thrift and saving to the poor.”

At its peak during World War II, the program’s deposits reached $3.4 billion ($40.6 billion today adjusted for inflation) with more than four million depositors. As interest rates paid by financial institutions after the war exceeded the rate of the USPS savings program, the program’s popularity began to decline. It officially ended on July 1, 1967, with about $50 million in unclaimed deposits that was later turned over to states for holding and distribution under escheatment rules.

Today, Japan and a number of EU countries have successful postal banking programs. On the other side of the coin, Canada stopped its century-old postal banking program in 1969.

Public banking in US?

Advocates for the USPS offering financial services argue that providing these basic banking services could be a win-win situation for unbanked/underserved consumers and also bring in additional revenue for the agency. An Atlanta Fed white paper (September 2020) titled “Digital Payments and the Path to Financial Inclusion” lists public banking as a potential option for increasing financial inclusion. What do you think?

Well India has lessons for both postal service and public banking…

The Republicans’ Fake Budget Hawks

January 27, 2021

Prof Jeffrey Frankel in this Proj Synd piece:

With Donald Trump having departed the White House, many Republicans are suddenly rediscovering the dangers of budget deficits, after four years of conspicuous indifference. This was entirely predictable: for the last 45 years, the GOP has done the same thing every time a Democrat has won the presidency.

He points to three political cycles where Republicans cried fiscal fears while in opposition only to do the opposite while in power. The 4th cycle is underway now…

Monetary Policy Transparency and Anchoring of Inflation Expectations in India

January 27, 2021

G.P. Samanta and Shweta Kumari of RBI in this WP analyse whether and how monetary policy transparency has shaped inflation expectations in India:

This paper constructs an index of monetary policy transparency for India and examines the role of transparency in anchoring inflation expectations. Empirical results show that the degree of policy transparency has indeed increased substantially since the adoption of Flexible Inflation Targeting (FIT) in 2016. Further, empirical evidence suggests that inflation expectations of professional forecasters and households were anchored, in weak-form, in the post-FIT period, though households’ expectations did not necessarily lie within the inflation tolerance band. During the transition period (between the self-imposed disinflationary glide-path since 2014 and adoption of the FIT), both realised inflation and expectations followed a declining path, which resulted in a positive association between them. During the pre-transition period, when explicit inflation target was absent, expectations were also reasonably anchored, albeit, at a higher level.

Qualitative Field Research in Monetary Policy Making

January 25, 2021

Bank of Canada economists Chris D’Souza and  Jane Voll in this paper point how qualitative research like in-depth interviews help in research:

Many central banks conduct economic field research involving in-depth interviews with external parties. But very little is known about how this information is used and its importance in the formation of monetary policy. We address this gap in the literature through a thematic analysis of open-ended interviews with senior central bank economic and policy staff who work closely with policy decision-makers.

We find that these central bankers consider information from field research programs not just useful but also an essential input for monetary policy making. They use this information in conjunction with quantitative tools primarily to inform their near-term forecasts.

The information is considered most valuable at potential turning points in the economy when uncertainty about the pace of economic growth is heightened (in the advent of large shocks to the economy) and when timely official data are not available or are viewed as unreliable. Senior staff also place a high value on maintaining a reliable and credible sample of representative economic agents that can be accessed on an ongoing basis and very quickly when required.


Hercule Poirot at 100: the refugee detective who stole Britain’s heart

January 25, 2021

ECB sets up climate change centre

January 25, 2021

Interesting development on ECB front:

The European Central Bank (ECB) has decided to set up a climate change centre to bring together the work on climate issues in different parts of the bank. This decision reflects the growing importance of climate change for the economy and the ECB’s policy, as well as the need for a more structured approach to strategic planning and coordination.

The new unit, which will consist of about ten staff working with existing teams across the bank, will report to the ECB’s President, Christine Lagarde, who oversees the ECB’s work on climate change and sustainable finance.

“Climate change affects all of our policy areas,” said ECB President Christine Lagarde. “The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves. The climate change centre will shape and steer the ECB’s climate agenda internally and externally, building on the expertise of all teams already working on climate-related topics. Its activities will be organised in workstreams, ranging from monetary policy to prudential functions, and supported by staff that have data and climate change expertise. The climate change centre will start its work in early 2021.

The new structure will be reviewed after three years, as the aim is to ultimately incorporate climate considerations into the routine business of the ECB.

BIS has launched a new Euro-based Green bond fund in which ECB is investing.

Christine Lagarde, President of ECB in this speech explains the rationale:

It is with this history in mind that I want to talk about the role of central banks in addressing climate change. Clearly, central banks are not the main actors when it comes to preventing global heating. Central banks are not responsible for climate policy and the most important tools that are needed lie outside of our mandate. But the fact that we are not in the driving seat does not mean that we can simply ignore climate change, or that we do not play a role in combating it.

Just as with the mice in the fable, inaction has negative consequences, and the implications of not tackling climate change are already visible. Globally, the past six years are the warmest six on record, and 2020 was the warmest in Europe.[3] The number of disasters caused by natural hazards is also rising, resulting in $210 billion of damages in 2020.[4] An analysis of over 300 peer-reviewed studies of disasters found that almost 70% of the events analysed were made more likely, or more severe, by human-caused climate change.[5]

That said, there are now signs that policy action to fight climate change is accelerating, especially in Europe. We are seeing a new political willingness among regulators and fiscal authorities to speed up the transition to a carbon neutral economy, on the back of substantial technological advances in the private sector.

This increased action is often considered as a source of transition risk, which we need to take into account and reflect in our policy framework. This is not “mission creep”, it is simply acknowledging reality. Yet the transition to carbon neutral is not so much a risk as an opportunity for the world to avoid the far more disruptive outcome that would eventually result from governmental and societal inaction. Scenarios show that the economic and financial risks of an orderly transition can be contained. Even a disorderly scenario, where the economic and financial impacts are potentially substantial, represents a much better overall outcome in the long run than the disastrous impact of the transition not occurring at all.[6]

It now seems likely that faster progress will be made along three interlocking dimensions. Each of them lies outside the remit of central banks, but will have important implications for central bank balance sheets and policy objectives.


What the longevity of British India Corporation tells us about government lethargy

January 25, 2021

Manas Chakravarty in his typical humor laced style takes a shot at poorly performing PSUs:

Shortly after independence, Jawaharlal Nehru had a dream, a vision taken to near delirium by his daughter, Indira Gandhi.

They dreamt that, in free India, we would get our food from the Food Corporation of India, the food grown with fertilizer from the Fertilizer Corporation of India, stored in the godowns of the Food Corporation of India and seasoned with salt from Hindustan Salt. We, the citizens of this brave new India, would ride to work on bicycles made by the Cycle Corporation of India, or on scooters from Scooters India.

We would bank with the State Bank of India or the nationalised banks, write on paper from Hindustan Paper, read newspapers printed with newsprint from Hindustan Newsprint, light up our homes—made with cement from the Cement Corporation of India– with electricity supplied by NTPC, using coal from Coal India. If we fell ill, we would use medicines from Bengal Chemicals and Pharmaceuticals and Hindustan Antibiotics. We would fly Air India from airports owned by the Airports Authority of India.

Unfortunately, that dream has turned into a nightmare, with the Public Enterprises survey of 2018-19 showing there were 70 loss-making central PSUs, with total losses of Rs31,635 crore that year alone.

Read on for details..

Poverty in China since 1950: A Counterfactual Perspective

January 25, 2021

Martin Ravallion in this new NBER paper:

Lack of trust opens door for cryptocurrencies

January 25, 2021

Prof Steve Hanke of Johns Hopkins University in this article says lack of trust in central banking has led to rise of cryptos:

When delivering the BBC’s ‘A Question of Trust’ Reith lectures in 2002, Baroness Onara O’Neill recounted advice given by Confucius to his disciple, Tzu-kung. He revealed that a government needed three things to survive: weapons, food and trust. If a ruler cannot hold onto all three, which one should be given up first? For Confucius, weapons were the most expendable, and then came food. But a ruler should attempt to hold onto trust at all costs, for ‘without trust we cannot stand.’

This is widely understood by central bankers. But few have been able to implement policies that have garnered much trust, particularly in the modern era of fiat money—and for good reason. Over the past 120 years, central banks have produced a great deal of inflation, which has been accompanied by a loss in the purchasing power of their currencies. At times, bouts of hyperinflation have reared their ugly heads. Currencies have been rendered worthless overnight.

This brings us to the rise of cryptocurrencies. Lack of trust in central banks and national currencies set the stage for the arrival of private substitutes. While technology played its part in making cryptocurrencies feasible, it is the lack of trust in central banking that has paved the way for what might be a new spontaneous order.

The policy landscape around digital and physical micro-lending: What does history teach us?

January 25, 2021

My new piece in Hindustan Times.

The article reflects on the recent Assam law on microfinance and RBI committee to study digital lending.  I look at similar events in 1870s which led to similar laws and finally the cooperative movement.

The Bank of England nearly financed the deficit. Does it matter?

January 22, 2021

Chris Papadopoullos, economist at OMFIF in this piece:

Bank of England officials may have been surprised when they noticed their asset purchases almost matched state borrowing in 2020. Between 1 January and 31 December, the Bank acquired £290bn of gilts. In comparison, net gilt issuance will likely be around £360bn for the same period. By the end of the financial year the Bank will have bought around £320bn-£330bn of gilts, with the budget deficit on track to land in the region of £350bn-£400bn.

When the UK government announced a rise in the amount it could borrow from its Bank of England overdraft – the Ways and Means facility – a slew of articles on monetary financing followed. Robert Stheeman, head of the Debt Management Office, gave more details on the facility in this OMFIF interview. The Ways and Means facility was never used as government cash outflows turned out not to be as large as feared, but the conversation on monetary financing has continued.

Whether fiscal monetary coordination of the kind seen in the last nine months amounts to monetary financing has been open to debate. Central banks have always been involved in government debt markets. In a September speech, the Bank’s Ben Broadbent pointed out that: ‘What really lies behind that term [monetary financing] is instead an institutional question: who is doing what and why?’

The Bank of England has an impressive gilt collection, but it acquired it willingly and independently, in accordance with its remit and without interference from the other branches of government. This is clearly different to the Bank being cajoled into doing so. But fiscal policy can still achieve dominance over monetary policy without any cajoling.


The question over monetary financing is interesting but largely irrelevant. The real question is whether fiscal sustainability will begin to encroach on an independent monetary policy committee that targets inflation. So far, the institutional framework has stood firm, but if it starts to give way, it may not be obvious.

Trump, Berlusconi, and the damage by entrepreneurs to economic policy

January 22, 2021

Tito Boeri and Roberto Perotti in this voxeu research:

Learning from Crises: The Evolution of Indian Banking Regulation

January 22, 2021

My new piece in TheIndiaForum on current Indian banking crisis.

I look at the role of RBI in the banking crisis from a historical perspective (what else!). I show how banking regulation and supervision has evolved in India with each banking crisis. The past crisis pushed RBI into a corner and the response was changes in regulation.

This crisis is no different and has pushed RBI into a corner and the regulator is responding to the crisis.

Financial History Network: Promoting scholarship in financial history and the history of finance

January 22, 2021

This Financial History Network looks really promising.

It has lined up a superb series of webinars. Webinar series starts in Feb with Prof Richard Sylla who is going to speak on whether modern economic growth has been finance led?

Rise of the superstar firms: Taking oligopoly seriously in macroeconomics

January 21, 2021
Prof Xavier Vives of IESE Business School in this voxeu research:
The dominance of Big Tech and other ‘superstar’ firms’ has put market power back on the agenda of politicians, as well as in research. But although oligopoly markets have been introduced in macroeconomic and trade models, this is mostly in the context of a very large ‘continuum’ of sectors such that a firm has market power in its sector but no influence on the wider economy.  This column argues that it is high time that oligopoly is integrated fully into the macroeconomics toolbox.

How the pandemic accelerated the transformation of India’s newspaper industry

January 21, 2021

Sevanti Ninan founder editor of ‘The Hoot’ in this TheIndiaForum article writes how Indian newspaper industry has been disrupted due to the pandemic:

Change cometh, even to the seemingly invincible.

A pandemic can speed up a change in the making. In 2020, Covid-19 became the trigger for a media consumption shift that was both swift and brutal in its consequences.

Covid-19 gave a decisive push to a transition that has accelerated ever since the advent of Jio in 2016. The entry of Jio significantly widened the universe of internet users and moved a generation of news consumers from the broadsheet to the smart phone. And then in the first quarter (April-June) of the fiscal year 2020-21 (Q1FY21), India’s newspaper market shrank dramatically on account of doorstep delivery fears about virus contagion. The industry’s finances were further strained with the disappearance of commercial advertising (itself a consequence of disrupted circulation and the lockdown-induced economic contraction).

India’s newspapers are unlikely to regain their numbers anytime soon, if ever. Of readers lost to online editions, many will not return to print. It is also doubtful if print will gain new readers since the millennials are getting their news and information online.

Small Finance Banks: Balancing Financial Inclusion and Viability

January 21, 2021

Richa Saraf and Pallavi Chavan of RBI in Jan-2021 Monthly Bulletin write a short paper on Small Finance banks:

Small Finance Banks are a new entrant into the Indian banking system with a differentiated focus on financial inclusion. They have witnessed a rapid growth in their branch network and asset base while maintaining a healthy asset quality and generating high return on assets. These banks have been reasonably successful in reaching out to under-served sectors, such as the Micro, Small and Medium Enterprises (MSMEs), and have an impressive coverage of borrowers with small credit needs.

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