Archive for March, 2021

World Development Report 2021: Data, Data and Data

March 31, 2021

World Development Report, flagship document of World Bank in out with the 2021 edition. This one focuses on Data for better lives:

Today’s unprecedented growth of data and their ubiquity in our lives are signs that the data revolution is transforming the world. And yet much of the value of data remains untapped. Data collected for one purpose have the potential to generate economic and social value in applications far beyond those originally anticipated. But many barriers stand in the way, ranging from misaligned incentives and incompatible data systems to a fundamental lack of trust. 

World Development Report 2021: Data for Better Lives explores the tremendous potential of the changing data landscape to improve the lives of poor people, while also acknowledging its potential to open back doors that can harm individuals, businesses, and societies. To address this tension between the helpful and harmful potential of data, this Report calls for a new social contract that enables the use and reuse of data to create economic and social value, ensures equitable access to that value, and fosters trust that data will not be misused in harmful ways.

Conversable Blog has a useful summary.

Confronting the Hazards of Rising Leverage

March 31, 2021

IMF’s Global Financial Stability Report-Apr 2021 has two chapters – One on rising leverage in non-financial sector and other on commercial real estate.

IMF economists in this blogpost explain the rising leverage bit:

Leverage, the ability to borrow, is a double-edged sword. It can boost economic growth by allowing firms to invest in machinery to expand their scale of production, or by allowing people to purchase homes and cars or invest in education. During economic crises, it can play a particularly important role by providing a bridge to the economic recovery.


Even before the COVID-19 crisis, leverage in the nonfinancial private sector—comprising households and nonfinancial firms—had been increasing steadily in many countries. From 2010–19, this sector’s global leverage rose from 138 percent to 152 percent, with leverage of firms reaching a historical high of 91 percent of GDP. Easy financial conditions in the aftermath of the global financial crisis of 2008–09 have been a key driver of the rise in leverage.

In both advanced and emerging market economies, borrowing has increased even further as a result of the policy support provided in response to the COVID-19 shock. In addition, the decline in output suffered by many countries has contributed to the increase in the debt-to-GDP ratio, and corporate leverage has risen an additional 11 percentage points of GDP through to the third quarter of 2020.

Policy faces a dilemma which they have created:

Policymakers face a dilemma. Accommodative policies (cut in policy rates in conjunction with quantitative easing to reduce firms’ and households’ borrowing costs) and the resulting favorable financial conditions have been supportive of growth but also fueled an increase in leverage. Such an increase, while needed in the short term to cushion the global economy from the devastating impact of the pandemic, may be a vulnerability that poses a risk to financial stability further down the road.

Indeed, our latest analysis provides evidence of this tradeoff.

Easing financial conditions—when investors lower their pricing of credit risk—provide a boost to economic activity in the short term. However, the easing comes with a cost. Further along in the medium term, a heightened risk of a sharp downturn arises, starting at 7-8 quarters out. This tradeoff becomes more accentuated during credit booms. That is, the near-term boost is greater, while the medium-term downside risks are also larger.

The authors say Macropru policies can help:

Our analysis suggests there are measures policymakers can take to resolve, or at least lessen, this dilemma. Macroprudential policies—such as setting limits on borrower eligibility, raising minimum capital, or liquidity ratios for banks—can tame buildups in nonfinancial sector leverage.

The analysis shows that, after countries tighten borrower-related tools (e.g., reducing the maximum loan-to-value ratio for mortgage borrowers), leverage for households slows. When policymakers tighten liquidity regulations on banks (e.g., raising the minimum amount of liquid assets that must be held in proportion to total assets), leverage of firms slows in response. And when policymakers in emerging markets tighten foreign currency constraints on banks (e.g., limiting their open foreign currency positions), leverage of firms slows down as well.

Importantly, macroprudential tightening can mitigate downside risk to growth, thus alleviating the key policy tradeoff. Furthermore, if policymakers loosen financial conditions via monetary policy but also concurrently tighten macroprudential tools, medium-term downside risks to economic activity can be mostly contained.

Given the economic slide, macropru policies are also difficult to get going.

We are not out of the economic hole. Infact, we keep moving from one hole to another…

Don’t Let Financial Regulators Dream Up Climate Solutions

March 30, 2021

There is a rush of central banks responding to climate risks.

John Cochrane provides a contrarian view and says they shouldn’t get into climate change:


Getting Out the Vote: Behind the Scenes of an FOMC Meeting

March 30, 2021

Charles Davidson of Atlanta Fed in this post takes us through the behind the scenes of an FOMC Meeting.


How (and why) economists ignored the Spanish Flu Pandemic in 1918–20?

March 30, 2021

This is a big question: How (and why) economists ignored the Spanish Flu Pandemic in 1918–20?

Mauro Boianovsky and Guido Erreygers in this paper try and figure the answer:


160 years of paper money in India

March 30, 2021

In 1861, the British enacted Paper Currency Act unifying the paper currency business.

Rachel Lopez narrates this history of paper money in two articles in Hindustan Times:

One could also read my three part series on evolution of money globally and nationally featured in Moneycontrol:

How Japan can avoid financial socialism?

March 30, 2021

Jesper Koll in this OMFIF article:

All said, the BoJ’s extraordinary ETF buying programme was clearly justifiable as an emergency effort to stop an asset deflation downward spiral. The central bank’s de facto nationalisation of equity capital markets has become counterproductive for many reasons. The biggest is that nobody can conceive a smooth exit – if the BoJ starts selling, the market will surely crash.

Who could buy the BoJ equity overhang and prevent such a sudden correction? There is only one answer — Japanese savers in general, and the older generation in particular (over 65-year-olds own more than 70% of household net financial assets.) To get an elderly saver to swap from bank deposits into risky ETFs will require a real incentive.

The answer lies in inheritance tax, which is extraordinarily high at up to 55%. If the BoJ and the Finance Ministry can co-operate and devise a scheme where any individual who buys ETFs directly from the BoJ will have these ETFs exempt from inheritance tax, the central bank could clean up its balance sheet within a couple of weeks. The net result would be the reprivatisation of Japanese equities, a healthier corporate ownership profile and a better risk return profile for household sector balance sheets.

Ending Japan’s unique experiment in financial socialism and restoring free-market functioning will require unprecedented co-operation between monetary and fiscal authorities. But make no mistake: without some sort of guidance from Governor Kuroda and his team at the BoJ, domestic and global investors will continue to demand a discount for holding Japanese equities.

Yield curve control still has benefits but not ETF buy:

the ETF policy is counterproductive to at least two other major policy goals: improving corporate governance and private investors’ capital stewardship and promoting an innovative financial centre in Tokyo. In capitalism, ownership is key. Although the bank holds ‘only’ 10% of the TOPIx, it now owns more than one-third of the free-float in many of Japan’s leading companies, including Japanese global large cap stars like Fast Retailing or robot manufacturer FANUC.

The BoJ’s stakes are huge, but they are mute; it will never raise its voice at annual shareholder meetings. Technically, this could be changed if the BoJ instructed its ETF custodian banks to vote in line with governance activist groups like Institutional Shareholders Services. However, this immediately adds a new dimension to the moral hazard problem and risks the BoJ being accused of reincarnating the old Japan Industrial Bank which directly elected and pressured private executives.

As for innovation, while the BoJ’s yield curve control actually forces Japanese banks to invest and develop new profit centres that do not rely on traditional net-interest margins (although they complain about this to no end), the BoJ’s ETF buying has made Japanese asset managers lazy. The fact that the three largest asset managers appear to be making as much as two-thirds of their profits from their cut of the 32 basis points fee the central bank pays for its ETF holdings suggests they are gorging at the BoJ’s trough.

There is no sign of new innovative retail products being developed – no ‘smart beta’, no ‘factor funds’ or thematic ETFs being created. Most importantly, they have had no incentive to develop lower-cost options for retail investors, who still pay around double the fees for investment funds compared to US peers. The BoJ’s ETF programme is one reason for the sleepiness of Japanese asset managers, but there can be little doubt that the bank’s generosity has been a disincentive to product innovation in the retail investor space.

How should RBI regulate NBFCs?

March 30, 2021

New position paper from Dvara Reserach team: Deepti George, Dwijaraj Bhattacharya, Madhu Srinivas and Sowmini Prasad.

First what ails NBFC regulation:

At the heart of the current regulatory approach for NBFCs, is a view that they are competitors to banks rather than complements. This is, in our view, a flawed approach that creates a false equivalence between NBFCs and banks. It needs to be recognised that NBFCs are specialised intermediaries with a deep understanding of the real sector risks pertaining to the niche sectors that they serve.  In contrast, banks have to service all sectors of the economy and thus have limited abilities to specialise. More importantly, NBFCs are not money creators, unlike banks. To that extent, NBFCs cannot be seen as posing the same level of risk as a bank or be considered as credit intermediaries similar to banks. This false equivalence has led to a scenario where NBFCs are subject to prudential regulations, which are, in some cases, more stringent than those in place for banks and disproportionate to the risks posed by them. Even among NBFCs, the current regulatory framework has significant inconsistencies which create regulatory arbitrage between different types of NBFCs. Finally, for regulation to be effective, it needs to be complemented by a robust supervisory mechanism and a quick resolution process; both are presently lacking.

We need to look at NBFCs in terms of scale and impact:


Big Data in Finance

March 29, 2021

The Splendoured Gardens Of C.D. Deshmukh

March 29, 2021

Superb profile piece of CD Deshmukh by Shri G. Sreekumar, former RBI official.

C.D. Deshmukh, who served as India’s Central Banker and Finance Minister, had an illustrious career. A polymath, he was adept at managing the affairs of the economy. He was also a passionate gardener, who planted trees and gardens wherever he went. His interest in botany saw him plant the most elaborate gardens with some of the rarest plant species.

At a time when the nation is going through a process of divestment, selling off some of the country’s most lucrative assets, the life of a man, now almost hidden in the annals of history, needs to be revisited. For C.D.Deshmukh is the man who nationalised the Life Insurance Corporation.

One is also touched by how these people went through so much in their personal life, yet managed to put country first and excel in most tasks given to them. This generation was something else.

Lots to learn. Thanks Mr Sreekumar for this timely piece.

The Absent Voices of Development Economics (why just development, all possible streams of economics lack voices)

March 29, 2021

Arvind Subramaniam and Devesh Kapur rock the development economics boat:

Development economics focuses on improving the well-being of billions of people in low-income countries, but the Global South is severely underrepresented in the field. A small number of rich-country institutions dominate, and their growing use of randomized controlled trials in research is entrenching the imbalance.

I had written a similar sounding piece when the Nobel prize was awarded to three economists on their RCT work.

Dev eco is a privileged world:

Consider the Journal of Development Economics, a leading outlet for research papers in the field. Neither the journal’s editor nor any of its ten co-editors are based in a developing country. Just two of its 69 associate editors are, with Africa and Asia completely unrepresented.

Then there is the World Bank’s prestigious Annual Bank Conference on Development Economics (ABCDE). The 2019 event celebrated the 75th anniversary of the Bretton Woods conference that established the World Bank and the International Monetary Fund, but none of the 77 participants were from an institution located in a developing country. And our analysis of the ABCDE’s three-decade history shows that just 7% of those authoring conference papers have been from developing-world institutions.

The surge and sheer dominance of RCT:

The long-standing problem of underrepresentation is being amplified by the growing use of randomized controlled trials (RCTs) to test the effectiveness of specific poverty-reduction interventions in low-income countries. Although the RCT movement deserves immense credit for highlighting the need for evidentiary rigor in development economics, it has had exclusionary consequences.

By virtue of their well-deserved academic reputations, RCT-oriented economists now work at the world’s most prestigious universities and research institutions and serve on the editorial boards of top economics journals. This crucial gatekeeping role gives them agenda-setting power. Two decades ago, for example, there were virtually no RCT-based papers in development economics; in 2020, according to our analysis, they accounted for about 40% of the articles in the leading journals.

Moreover, conducting RCTs is expensive, which means that poverty-reduction research – and funding for it – is increasingly concentrated in the richest universities (J-PAL was established at MIT).

Indeed, the cost of carrying out RCTs can run into millions of dollars per paper, making it difficult for developing-country researchers to study their own countries without genuflecting to wealthy institutions’ academic orthodoxies. If these researchers cannot do RCT-based studies, they have little chance of getting published in leading journals, and risk being consigned to second-class status. Even on a generous interpretation of authorship, our analysis suggests that developing-country institutions accounted for less than 10% of RCT-based papers in the top six economics journals in 2020.

How does one ignore China and Chinese economists in dev eco?

The final cost relates to the type of knowledge that is ignored. Several highly successful economies – including South Korea, Taiwan, China, Vietnam, Mauritius, and Botswana – did not rely on RCTs to change their destinies and lift their large populations out of poverty. Yet, academics from these countries generally do not sit on the editorial boards of major journals or participate prominently in development economists’ conferences and seminars – an omission that is particularly telling in the case of China, with its historically unprecedented economic transformation. It is as if these countries’ development successes have no lessons to offer.

In the end, an example from literature:

We also must heed the novelist Kazuo Ishiguro’s 2017 Nobel lecture, in which he urged a broadening of “our common literary world to include many more voices from beyond our comfort zones of the elite first-world cultures.” That means searching “more energetically to discover the gems from what remain today unknown literary cultures, whether the writers live in far-away countries or within our own communities,” while taking “great care not to set too narrowly or conservatively our definitions of what constitutes good literature.”

Substitute “development economics” for “literature,” and Ishiguro’s injunction yields a constructive agenda of corrective action for intellectuals in the Global North. It also suggests that diversity and broader representation are the best safeguards against intellectual narrowness resulting from elite capture.

Not just replace development economics for literature but entire economics actually. The sheer neglect of economics faculties outside of few Universities is quite telling. One could look at all other journals and see whether voices from Asia/Africa are being represented. Most economics departments lack diversity of all possible types. They all look the same and ask same types of questions.

Prof Sabyasachi Kar in this Twitter thread simply asking the second/third world country economists to join hands with first world will not change anything much. As the former basically copy latter! So you will more of the same.

What is needed is change of incentives where some importance is given to local knowledge. This is so true. All the economics departments just look the same with same kinds of incentives systems.

One other way to address this could be to encourage textbooks of authors from all kinds of countries. After all as Samuelson said “I don’t care who writes a nation’s laws…if I can write its textbooks.”


The Political Economy of Inclusive Growth: A Review

March 26, 2021

New IMF paper by Barbara Dutzler, Simon Johnson and Priscilla S Muthoora:

In this paper, we review the role of the political economy in inclusive growth. We find that political economy forces on the demand and supply side have weakened redistribution over time and contributed to a new wave of populism. We document growing support for a rethink of the social contract to make growth more inclusive and discuss some of its broad elements.

Listed corporates are required to put video/radio recording of their meetings with analysts/institutional investors

March 26, 2021

In the SEBI Board Meeting held yesterday on 25-Mar-21 several decisions were taken.

One of them should go a long way in improving transparency in stock markets:

Presently, a listed entity is required to disclose the schedule of analyst/institutional investors meet and presentations made in such meetings,
to the stock exchanges and on its website. The Board has decided to amend the regulation to introduce the requirement of disclosing:
    • Audio/video recordings of such meetings on the website of the listed entity and exchanges promptly, before next trading day or within 24 hours,  whichever is earlier.
    • Written transcripts of such meetings within five working days


Lessons from 50 years of Bangladesh Independence: Development could succeed anywhere?

March 26, 2021

2021 is quite an anniversary year.

26 March 2021 marks 50 years of independence of Bangladesh. (in pictures)

Bangladesh economy has been quite a story. See this Bank of Bangladesh publication celebrating 40 years (issued in 2011).

Kissinger had dubbed Bdesh as bottomless basket case dependednt on foreign aid.

In 1976, Just Faaland and Jack R. Parkinson had written a book titled: Bangladesh. The Test Case for Development. They famously said: “If development could be made successful in Bangladesh, there can be little doubt that it could be made to succeed anywhere else. It is in this sense that Bangladesh is the test case for development.”

Akbar Ali Khan reviewed the Faland and Robinson hypothesis in 2013:


The Economic Impact of the Black Death

March 25, 2021
Remi Jedwab, Noel D. Johnson and Mark Koyama in new upcoming paper:

The Anatomy of a Banking Crisis: Household Depositors in the Australian Depressions

March 25, 2021

Gianni La Cava and Fiona Price of RBA in the recent Bulletin Article:

Looking into archival material can provide a new lens through which to view historical events. With the launch of Unreserved, the RBA has released archival records to the public, including longitudinal data on individual bank depositors that uncovers new facts about the behaviour of Australian households during the economic depressions of the 1890s and 1930s.

Depositors responded to both depressions by withdrawing more money, consistent with households drawing down on their saving buffers in the face of rising unemployment and falling incomes.

The net withdrawal rate of depositors also increased when deposit interest rates fell and when public confidence in the banking system deteriorated, with clear evidence of a run on a savings bank in the 1930s.

In more normal times, most saving deposits were ‘sticky’ with transactions being very rare.  This high degree of deposit stickiness appears to be because most people held these bank accounts to save for significant life events. While it is difficult to draw policy implications from the historical analysis, some features of the depositor behaviour are likely to hold true today.


Old Wine in new bottle: Technological innovation is fueling the resurgence of community currencies

March 25, 2021

Andreas Adriano of IMF in this F&D piece:

About a century before Satoshi Nakamoto created Bitcoin, there was Johann Silvio Gesell. A little-known amateur German economist, Gesell was motivated by a similar libertarian spirit: to create currencies independent of national governments and central banks. He believed communities could grow faster with money that would boost local activity and not be spent elsewhere.

Although there have been hundreds of community currencies (or “scrips”), they have always remained largely an economic curiosity. Now, this concept from yesterday is harnessing technologies of today, like blockchain and mobile payments, potentially creating new development tools for tomorrow.


Hong Kong to study General Purpose CBDC

March 25, 2021

Howard Lee Deputy Chief Executive of the HKMA in this speech at BIS innovation summit:

As with many other central banks working on this subject, we are yet to make a decision as to whether general purpose CBDCs will be issued. Indeed, designing a CBDC requires balancing manifold considerations, ranging from consumer needs to policy and technological considerations, against various potential risks.  This could involve difficult trade-off in decision-making.

Therefore, we will study the benefits and challenges of different architectures for the distribution of general purpose CBDCs through commercial banks/payment service providers in our upcoming general purpose CBDC project, called Project Aurum. Specifically we will look into 2 architectural models, namely the hybrid CBDC and private CBDC-backed stablecoins.  In parallel, we are working with the People’s Bank of China on a technical pilot testing of using e-CNY for cross-border retail payments in Hong Kong.  We are extremely excited about these initiatives on CBDCs on multiple fronts, and I would be very happy to share more findings with you all as we make further progress

Further HKMA is going through its own digi transformation:

We in the HKMA are no different, and are now on a multi-year digitalization journey. This is a huge undertaking, as it involves not only substantial financial investment, but also human resources inputs at all levels.  More importantly, if we were to fully reap the benefits of digitalization, many long established processes would have to be changed or even abolished.  As the existing procedures are usually based on dated legacy systems and manual processes, appropriate use of innovative technologies such as artificial intelligence, cloud platforms and APIs can surely help refine supervisory processes.    

For example, our granular data reporting (GDR) which started in 2019 seeks to collect transactional level data from banks, instead of template based aggregate data in the past. This has enabled us to discover insights and trends in a timely manner and conduct advanced analyses through slicing and dicing the data collected.  But this is only possible with very fundamental changes in the way we analyse the risks of banks, with new people, new organizational structure, new IT systems as well as continued experimentation by colleagues with different skills and expertise.       

One thing we have learnt is that the prerequisite for such a digitalization journey is to have strong commitment by all colleagues from top to bottom, and for everyone to have the mindset for embracing changes. Although we are already seeing some concrete positive outcomes from our digitalization project, we are still at the early stage of this long journey.  I would love to hear the experience of other central banks and regulators at this or other forum.

Reading the speech one just gets a strong feeling that central bank speeches in future are going to be quite different as well. So much tech jargon one needs to figure and understand.


Multi-CBDC arrangements and the future of cross-border payments

March 24, 2021

Raphael Auer, Philipp Haene and Henry Holden in this BIS paper:

Cross-border payments are inefficient, and technology could play a role in making them better. One means could be through interoperating central bank digital currencies (CBDCs), forming multi-CBDC (mCBDC) arrangements. This paper explores dimensions of payment system interoperability, how they could feature in mCBDC arrangements and where potential benefits lie. These benefits are especially relevant for emerging market economies poorly served by the existing correspondent banking arrangements. Yet competing priorities and history show that these benefits will be difficult to achieve unless central banks incorporate cross-border considerations in their CBDC development from the start and coordinate internationally to avoid the mistakes of the past.

Central bank of the year: The Federal Reserve System

March 24, 2021 awards Central Bank of the year award to Federal Reserve System.

Overwhelming Fed interventions in March 2020 forestalled a damaging global financial crisis, as policy overhaul prompts introspection in Europe and Japan

Seperately CLaudia Sahm. former Federal Reserve employee who has Sahm rule to her credit praises Jerome Powell:

The Fed chair, Jerome Powell, has become a popular Main Street champion. Here’s a history of the advocacy that made this possible.

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