Archive for February, 2021

Funding and reserving Canterbury earthquake insurance claims

February 26, 2021

Rober Cole of RBNZ in this research note:

The 2010-11 Canterbury earthquakes are by far the most costly insurance event in New Zealand’s history with estimated property insurance claims costs of around $38 billion, and remain one of the most significant globally. The Funding and reserving Canterbury earthquake insurance claims Analytical Note provides a hindsight review of the funding and reserving of Canterbury earthquake claims after 10 years. There are valuable lessons for insurers and the Reserve Bank (as insurance regulator) to be drawn from a significant event such as the Canterbury earthquakes, for dealing with future catastrophic events. The Analytical Note explores the funding of property insurance claims costs and the development over time of insurer estimates of the cost of claims.


Reviewing RBI’s Monetary Policy Framework

February 26, 2021

RBI has revived the Report on Currency and Finance which was last published in 2014.

RCF was theme based report. The theme for 2020-21 edition is reviewing RBI’s Monetary Policy Framework. The report says RBI should continue with the current target of 4% (band of +/-2%):


Which inflation model to follow? Friedman or Phillips?

February 26, 2021

Manoj Pradhan and Charles Goodhart in this voxeu research:

What does research say about the effects of central bank balance sheet policies?

February 26, 2021

Paola Di Casola of Riskbank in this research:

In a time when traditional monetary policy tools such as the policy rate is approaching the possible lower bound, central banks in many parts of the world had to expand their toolboxes. An increasing number of them have therefore taken measures that have caused their balance sheets to increase.

For instance, in November in Sweden the Riksbank decided to purchase securities for up to SEK 700 billion, to counteract the effects of the coronavirus pandemic. Previously, the Riksbank has implemented balance sheet policies during the financial crisis period of 2008-2010 and during 2015-2017.

This type of measures have so far only been implemented during a limited period of time, so how can we know what effect they have on economic conditions? The Riksbank’s Senior Economist Paola Di Casola, working at the Modelling Division in the Monetary Policy Department, tackles this question by using a collection of earlier empirical research studies for the euro area, the United States and the United Kingdom compiled by Fabo et al. (2020).

On average, the results show positive effects on both output and inflation. The effects are on average two to three times greater in the United States than in the euro area and the United Kingdom, but the differences across countries may be explained to some extent by the selection of studies for the respective country, rather than differences in the estimated effects per se.

What conclusions can be drawn about the effects in Sweden? Paola Di Casola notes in her Economic Commentary that there is a shortage of research literature describing the effects on a small open economy like Sweden. The effects may be different in Sweden compared to, for instance, the euro area and the United States, partly because the exchange rate channel is particularly important for Sweden. In addition, balance sheet policies conducted in other countries may have a substantial impact on the Swedish economy.

All in all, Paola Di Casola concludes that further research is necessary before one can reach any firm conclusions regarding the effects of central bank balance sheet policies in Sweden.

The (de-)central question: Subnational governments and the making of development in Africa

February 25, 2021

How to issue a central bank digital currency

February 25, 2021

David Chaum, Christian Grothoff, Thomas Moser of Swiss National Bank in this paper:

With the emergence of Bitcoin and recently proposed stablecoins from BigTechs, such as Diem (formerly Libra), central banks face growing competition from private actors offering their own digital alternative to physical cash. We do not address the normative question whether a central bank should issue a central bank digital currency (CBDC) or not. Instead, we contribute to the current research debate by showing how a central bank could do so, if desired. We propose a token-based system without distributed ledger technology and show how earlier-deployed, software-only electronic cash can be improved upon to preserve
transaction privacy, meet regulatory requirements in a compelling way, and offer a level of quantum-resistant protection against systemic privacy risk. Neither monetary policy nor financial stability would be materially affected because a CBDC with this design would replicate physical cash rather than bank deposit.

Tamilnad Merchantile Bank’s 100 year anniversary

February 24, 2021

The year 2021 marks 100 years of Tamilnad Merchantile Bank (TMB).

The Nadar Mahajan Sangam decided to open a bank in 1920 to serve the Nadar Business Community.  In May-1921 they registered a bank named Nadar Bank in Tuticorin. The bank opened to public in Nov 1921.  The bank was renamed as Tamilnad Merchantile Bank on November 27, 1962.

Hoping the bank releases a coffeebook/compendium on the anniversary in May-2021.

Central banks of China and United Arab Emirates join digital currency project for cross-border payments

February 24, 2021

In 2020, Central banks of Thailand and HongKong had announced a joint digital currency project for cross-border payments.

Now People’s Bank of China and UAE Central Bank have joined the project:

The Hong Kong Monetary Authority (HKMA), together with the Bank of Thailand (BOT), the Central Bank of the United Arab Emirates (CBUAE) and the Digital Currency Institute of the People’s Bank of China (PBC DCI), today announced the joining of the CBUAE and the PBC DCI to the second phase of Project Inthanon-LionRock1, a central bank digital currency project for cross-border payments initiated by the HKMA and the BOT.This joint effort is strongly supported by the Bank for International Settlements Innovation Hub Centre in Hong Kong and the project has been renamed as “m-CBDC Bridge”.

          Building on the experience learnt from Project Inthanon-LionRock, the m-CBDC Bridge project will further explore the capabilities of distributed ledger technology (DLT), through developing a proof-of-concept (PoC) prototype, to facilitate real-time cross-border foreign exchange payment-versus-payment transactions in a multi-jurisdictional context and on a 24/7 basis. The m-CBDC Bridge project will also explore business use cases in a cross-border context using both domestic and foreign currencies.

          Following the joining of the CBUAE and the PBC DCI, the m-CBDC Bridge project will further foster a conducive environment for more central banks in Asia as well as other regions to jointly study the potential of DLT in enhancing the financial infrastructure for cross-border payments. Eventually, the outcome is expected to alleviate the pain points in cross-border fund transfers, such as inefficiencies, high cost and complex regulatory compliance.Most importantly, the participating central banks will take into account the results of the PoC work to evaluate the feasibility of the m-CBDC Bridge project for cross-border fund transfers, international trade settlement and capital market transactions.


PBOC has worked extensively on CBDC and is joining hands with other central banks to share and develop the project further. Gradually, PBOC is taking control of the CBDC system.

Supervisory practices regarding financial institutions affected by Texas Winter Storms

February 23, 2021

US Federal and state financial regulatory agencies have issued an interagency statement:

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the state regulators, collectively the agencies, recognize the serious impact of Texas Winter Storms on the customers and operations of many financial institutions and will provide appropriate regulatory assistance to affected institutions subject to their supervision. The agencies encourage institutions operating in the affected areas to meet the financial services needs of their communities.

Perhaps this will be the order of the day to deal with climate change related disasters.

Can digital central bank currencies function as cash?

February 23, 2021

This research by Riksbank econs asks the question:

Digital central bank currencies are money that can either be held in an account with the central bank (account-based) or as digital units of value (token-based). Both types of digital central bank currency require, however, that there are one or more registers behind them, keeping track of who owns the money.

The link to these registers means that neither the token-based nor the account-based money can offer the same anonymity as cash, as the transactions will be traceable.

Nor will offline payments, where there is no communication with the register, be possible to any great extent. A token-based CBDC does not appear to have a greater capacity to fully replicate cash than an account-based one in this respect.

Hmm.. Perhaps a stronger reason for governments to implement CBDCs.

State Bank of Sikkim comes under Reserve Bank of India’s regulatory purview

February 22, 2021

I had blogged about how State Bank of Sikkim remains outside of purview of RBI.

So much so, SBS operates as a quasi central bank cum commercial bank for State of Sikkim.

The State Bank of Sikkim was established in the year 1968 and has a total of 42 branch offices and 3 Revenue Counters, thereby aggregating to a total of 45 branch locations spread all over Sikkim which inclues Head Office. The Bank is headquartered in the State Capital of Sikkim, Gangtok. The Bank is an autonomous body under the Government of Sikkim. The Bank operates within the jurisdiction of the State of Sikkim and is responsible to handle the treasury function of the State as well. The branches of the bank are now on CBS platform. The Bank is headed by the Board of Directors and Managing Director of the Bank is the Chief Executive. Constituted in the pre-merger era, State Bank of Sikkim is celebrating its Golden Jubilee Year 1968-2018 as a mark of completion of 50 years to be completed in September 2018. From the very inception till date, the Bank has always strived and has been successful in becoming the partner in overall development works of the State.

Now SBS is being brought under RBI.


Transparency trade-off for central bank independence (Also why shouldn’t central bankers have some fun?)

February 22, 2021

Miroslav Singer, former Governor of Czech National Bank writes in this OMFIF piece. He says broader mandate of central banks such as green financing and gender balancing could lead to loss of independence:


RBI releases a Punjabi rap song to caution against sharing of PIN, OTP or bank account details.

February 22, 2021

Bank of Jamaica explained the importance of inflation targeting with reggae songs.

RBI spreads financial literacy with Punjabi rap songs. Decent effort but the video could have been slicker.

Profile of America’s first Black economist: Dr. Sadie T.M. Alexander

February 22, 2021

NY Fed has a profile of Dr. Sadie T.M. Alexander. She earned her PhD from University of Pennsylvania in 1921.

PhD thesis title was “The Standard of Living Among One Hundred Negro Migrant Families in Philadelphia“.

Use of big data sources and applications at central banks

February 19, 2021

Recent BIS Irving Fischer Committee report surveyed central banks on their usage of big data:

will central banks catch up and radically transform the way they operate in order to fully reap the benefits of the information revolution? Or will their use of big data sources and applications progress only gradually due to the inherent specificities of their mandates and processes? To shed light on these issues, in 2020 the IFC organised a dedicated survey on central banks’ use of and interest in big data, updating a previous one conducted five years earlier.

The survey focused on the following key questions: What constitutes big data for central banks, and how strong is central banks’ interest in it? Have central banks been increasing their use of big data and, if so, what were the main applications developed? And finally, which constraints are central banks facing today and how can they be overcome? 

The survey’s main conclusions are the following:

    • Central banks have a comprehensive view of big data, which can comprise very different types of data sets.
    • Central banks are increasingly using big data.
    • The range of big data sources exploited by central banks is diverse
    • Big data is effectively used to support central bank policies.
    • The survey also underscored the need for adequate IT infrastructure and human capital.
    • Apart from IT aspects, there are many other challenges that central banks face. These include the legal basis for using private information and the protection, ethics and privacy concerns this entails, and the “fairness” and accuracy of algorithms trained on preclassified and/or unrepresentative data sets.
    • Moreover, a key issue is to ensure that predictions based on big data are not only accurate but also “interpretable” and representative, as to carry out
      evidence-based policy central banks need to identify specific explanatory causes or factors.
    • Cooperation could facilitate central banks’ use of big data,
    • International financial institutions can help foster such cooperation.

Will Inflation Make a Comeback?

February 19, 2021

Axel Webar, former President of Bundesbank in this Proj Synd article:

Economic forecasting models have long been notoriously inaccurate in predicting inflation, and COVID-19 has further complicated the challenge. Those who heed current consensus forecasts of persistently low price growth could be in for a rude awakening.


Many argue that the COVID-19 crisis is deflationary, because pandemic-mitigation measures have affected aggregate demand more adversely than aggregate supply. In the first months of the crisis, this was largely the case: in April 2020, for example, oil prices fell toward, or even below, zero.

But a detailed look at supply and demand reveals a more nuanced picture. In particular, the pandemic has shifted demand from services to goods, some of which have become more expensive, owing to production and transport bottlenecks.

In current consumer-price calculations, rising goods prices are partly offset by falling prices for services such as air travel. But in reality, pandemic-related restrictions mean that consumption of many services has fallen sharply; significantly fewer people are flying, for example. Many people’s actual consumption baskets have thus become more expensive than the basket statistical authorities use to calculate inflation. So, true inflation rates are currently often higher than the official figures, as reports have confirmed.


In recent months, commodity prices, international transport costs, stocks, and Bitcoin have all risen sharply, and the US dollar has depreciated significantly. These could be harbingers of rising consumer prices in the dollar area. With inflation rates highly correlated internationally, higher inflation in the dollar area would accelerate price growth worldwide.

Too many are underestimating the risk of a rise in inflation, and sanguine model-based forecasts do nothing to alleviate my fears. Monetary and fiscal policymakers, as well as savers and investors, should not allow themselves to be caught out. In 2014, former Fed Chair Alan Greenspan predicted that inflation would eventually have to rise, calling the Fed’s balance sheet “a pile of tinder.” The pandemic could well be the lightning strike that ignites it.

Open Letter to Economic Advisers to the Government: Convey the economics and not the politics

February 18, 2021

Jason Furman, former Chair of the Council of Economic Advisers to US President writes an open letter to the current chair: Cecilia Rouse. However the letter applies to all such economic advisory positions across the world:

Dear Council of Economic Advisers Chair,

Congratulations! You now have a prestigious job, a wonderful title, and a beautiful office. What you do not have is any statutory powers or responsibilities (okay, you have one responsibility: issuing the annual Economic Report of the President). No one needs to check anything with you or listen to you, let alone do what you say.

You do have one power: the opportunity to persuade. If people think you have some useful insights or inputs, might be right in what you say, and are generally a helpful member of the team, then you just might be able to shape some of the most important decisions the President will make and help to make positive policy happen. But nothing about this power is automatic or happens by virtue of the nice office you now have. It depends on how you use it. These five tips might help:



Has Japan Been Following Modern Money Theory Without Recognizing It? No! And Yes.

February 18, 2021

Yeva Nersisyan and L. Randall Wray in this Levy Institute Paper:

Modern Money Theory (MMT) economists have used Japan as an example of a country that demonstrates that high deficits and debt do not lead to insolvency, high interest rates, or inflation. MMT insists that governments that issue their own sovereign currency cannot be forced into insolvency, that they can make all payments as they come due, and that they do not really spend tax revenue or borrow in their own currency—with Japan serving as an example of a country that does not face financial budget constraints as normally defined.
In this paper we evaluate whether Japan is the poster child of MMT and argue that policy-wise Japan is not following MMT recommendations; in fact, it is generally adopting policies that are precisely the opposite of those proposed by MMT, consistently adopting the path of stop-go fiscal measures and engaging in inadequate and temporary fiscal stimuli in the face of recessions, followed by austerity whenever the economy has seemed to recover.
So the leading scholars of MMT think Japan is not really a model of MMT as others think.
What is also interesting is that mainstream scholars like Bernanke suggested the same for Japan from the monetary policy lenses. They said Bank of Japan policies were not consistent for the economy to recover.   Each time the economy showed some signs of recovery, BoJ looked to quickly tighten interest rates.  The suggested policy for Japan was to signal low interest rates for a long time so that markets remain confident that interest rates will not rise anytime soon.

Bollywood, Skin Color, and Sexism: The Role of the Film Industry in Emboldening and Contesting Stereotypes in India after Independence

February 18, 2021

Sudev Sheth, Geoffrey Jones, and Morgan Spencer in this new HBS Working Paper:

This working paper examines the social impact of the film industry in India between Independence in 1947 and the start of liberalization in 1991. . It shows that Bollywood, the mainstream cinema in India and the counterpart in scale to Hollywood in the United States, shared Hollywood’s privileging of paler skin over darker skin, and preference for presenting women in stereotypical ways lacking agency.

Bollywood reflected views on skin color and gender long prevalent in Indian society, but this working paper shows that serendipitous developments helped shape what happened on screen. The dominance of Punjabi directors and actors, organized as multi-generational families, facilitated lighter skin tones becoming a prominent characteristic of stars. By constraining access to legal finance, pursuing selective censorship, and by denying Bollywood cinema the kind of financial and infrastructural support seen in other developing countries, the Indian government also incentivized directors and producers to adopt simplified story lines that appealed to low income audiences, rather than contesting widely accepted views.

Employing new evidence from two oral history databases of producers and actors, the paper suggests that cinema not only reflected, but emboldened societal attitudes regarding gender and skin color. The impact of such content was especially high as rural and often illiterate audiences lacked alternative sources of entertainment and information in this period. It was left to other cinemas in India to contest skin color and gender stereotypes entrenched in mainstream media. The cases of parallel cinema and Tamil cinema are examined, but their audiences were either constrained or—as in the case of Tamil cinema—subject to the isomorphic influence of Bollywood, which grew after 1991.

The Silent Revolution in Economic Policy: Fiscal Policy the only game in town?

February 17, 2021

Robert Skidelsky in this proj syndicate piece:

With Western economies battered by COVID-19 and central banks running out of ammunition, fiscal policy is the only game in town. This should be openly acknowledged, and fiscal rules should be rewritten to allow for more active counter-cyclical policy and a much larger government role in allocating capital.


The case for fiscal policy is not only that it is a more powerful (because more targeted) macroeconomic stabilizer than monetary policy, but also that government is the only entity apart from the financial system capable of allocating capital. If we are not willing to allow investment in technology and infrastructure to be shaped by a purely financial logic, then the  for what Mariana Mazzucato calls a “” public investment strategy that includes taxation policy becomes inescapable.

The second big discussion we need to have concerns the relationship between fiscal and monetary policy. In the United Kingdom, the expansion of QE since March 2020 has exactly tracked the increase in the budget deficit. Can the perception of BOE independence and the credibility of its inflation target survive when the central bank has been acting as an agent of the Treasury for the past year?

If the government is to be the active macroeconomic player, we need to work out how or whether the central bank should revert to its traditional role of checking fiscal excesses. But the fiscal rules themselves should be rewritten to allow for both more active counter-cyclical policy and a much larger government role in allocating capital than has recently been fashionable.

The pandemic presents an opportunity for an open public discussion of these matters. One hopes that this debate will replace the system of insider nods and winks and subterranean understandings that has shaped our economic fortunes – or misfortunes – for too long.

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