RBI comes to the rescue of Centre and States

My new piece in Moneycontrol.

Amidst all the economic chaos and uncertainty, RBI once again comes to rescue both the Centre and State governments.

The impact of bankruptcy on innovative firms

Song Ma, Joy Tianjiao Tong & Wei Wang in this NBER paper:

This paper studies how innovative firms manage their innovation portfolios after filing for Chapter 11 reorganization using three decades of data. We find that they sell off core (i.e., technologically critical and valuable), rather than peripheral, patents in bankruptcy. The selling pattern is driven almost entirely by firms with greater use of secured debt, and the mechanism is secured creditors exercising their control rights on collateralized patents. Creditor-driven patent sales in bankruptcy have implications for technology diffusion—the sold patents diffuse more slowly under new ownership and are more likely to be purchased by patent trolls.

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An online tour of Bank of Japan

Bank of Japan has videos giving a tour of the central bank building and its underground vault:

Welcome to “BOJ from Home.” Here, you can explore the tour route of the Bank of Japan’s Head Office (designated as an Important Cultural Property) through various online contents, including a video showing the must-sees on the tours and a 3-D/virtual reality (VR) tour of the Main Building.

In the VR tour and “360-Degree Walk-Through” of the Bank’s Main Building, the interior of the building can be viewed in 3-D on any PC or mobile device.

You can also enjoy an immersive virtual reality experience using VR goggles or glasses

Tyler Cowen interviews Mark Carney: Why a trend of recruiting central bankers from other countries?

Wide raging interview of Mark Carney in typical Tyler Cowen style. Lots of insights with wit thrown in between.

COWEN: Now, this — yourself through Stanley Fischer — as you know, there’s a trend of recruiting central bankers from other countries. So far, it seems it’s worked quite well. But what are the limits of this process of recruiting leaders in government from abroad? You wouldn’t name someone to run the Department of Defense who is from another country, right?

CARNEY: Yes.

COWEN: What’s the margin where that doesn’t work anymore?

CARNEY: Well, candidly, I think it was a relatively unique set of circumstances when I was put in place. The UK had had a very bad financial crisis. We had a new central bank, in other words; the powers had been tripled, it had been doubled in size. There’s an opportunity to bring an outsider in, in order to help try to make that work. I don’t know. I’m a little hard pressed to see the set of circumstances where it would be immediately obvious to bring an outsider back in again.

My answer is there have been examples. The governor of the Bank of Ireland, for example, is a third example: Gabriel Makhlouf, head president. But it’s very much the exception as opposed to the rule. It relies heavily on the technocratic nature of the role.

COWEN: Are there classes of decisions where such a head should recuse himself or herself, or would just feel hesitant — very risky decisions or extending foreign lines of credit, which the Fed of course has done a lot, or exchange rate policy?

CARNEY: No. I think if you take these roles, you have to be able to take every decision no matter how small or how large. I never felt any circumstance where either I didn’t have adequate information or, God forbid, that I was somehow conflicted in my loyalties that it would have influenced the decision.

The ghost of Smoot-Hawley tells why America isn’t too big to avoid retaliation

Kris Mitchener, Kevin O’Rourke and Kirsten Wandschneider in this voxeu research:

The Trump administration’s pursuit of protectionist trade policies was predicated to some extent on the belief that America was too lucrative a market to face retaliation. Using the most detailed data set of bilateral trade flows constructed to date for the interwar period, this column shows that in fact the US faced substantial and widespread retaliation from trade partners in response to protectionist measures employed in the wake of the Great Depression. Exports to retaliating countries fell by as much as 33%.

…..

Peter Navarro was mistaken in 2018, and economic history suggests that this should have come as no surprise. Trade data suggest that the US faced widespread retaliation against Smoot-Hawley, and that the impact was large. While retaliation may indeed have been costly for the countries concerned this did not dissuade them. No matter how lucrative your market, if you behave badly, you risk being punished.

 

Grave sites of famous economists

Prof Malcom Rutherford of Univ of Victoria has compiled pictures of grave sites of famous economists:

This web page contains details of the grave sites of famous economists. Where possible original photographs are included, otherwise a link is provided to pictures available on findagrave.com or on another site. I have also provided links to Wikipedia pages concerning the economists listed and to the graveyards or churches where they can be found. Wikipedia entries are not entirely reliable, but I was struck by how may of the economists listed here have Wikipedia pages. Perhaps by including these links some of my colleagues in the history of economics might be motivated to improve the entries on Wikipedia. I am also always interested in new pictures and information on the whereabouts of other famous economists.

Amalgamation of District Central Co-operative Banks with the State Co-operative Bank

RBI has issued guidelines for amalgamating District Central Co-operative Banks (DCCBs) with the State Co-operative Bank (StCB):

The Banking Regulation (Amendment) Act, 2020 (39 of 2020) has been notified for the State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs) with effect from, April 1, 2021 vide Notification dated December 23, 2020 issued by Government of India. With the issue of the notification, the amalgamations of the above banks have to be sanctioned by Reserve Bank of India in terms of the provisions of the Section 44-A read with Section 56 of the Banking Regulation Act, 1949.

In recent past, a few State Governments approached RBI for amalgamation of DCCBs with the StCB as a two-tier Short-term Co-operative Credit Structure (STCCS). In order to help the States contemplating delayering their STCCS, following guidelines are being issued to bring the requirements and indicative benchmarks for the amalgamation of DCCBs with the StCB to the notice of all stakeholders. These guidelines will also apply for amalgamation of one or more DCCBs in a State with the StCB or amalgamation of one DCCB with another.

2. The Reserve Bank of India will consider proposals for amalgamation if the following conditions are fulfilled:

1. 1. When the State Government of the State makes a proposal to amalgamate one or more DCCB/s in the State with the StCB after conducting a detailed study of the legal framework along with additional capital infusion strategy, assurance regarding financial support if required, projected business model with clear profitability and proposed governance model for the amalgamated bank.
   2. When the scheme of amalgamation is approved by the requisite majority of shareholders in accordance with the provisions of Section 44A read with Section 56 of the Banking Regulation Act, 1949.
   3. When such proposal of the State Government has been examined and recommended by NABARD.

Regulatory criteria:

4. The basic regulatory criteria for amalgamation shall be as under:

1. 1. The proposal should be in compliance with the legal requirements, past orders/ rulings of the Courts, if any. The State Government shall verify that there are no Court Orders prohibiting or staying the proposal for amalgamation.
   2. Financial parameters of the amalgamated entity based on notionally consolidated latest audited financial statements should be robust. It should have its CRAR above the prescribed regulatory minimum, Gross NPA below 7% and Net NPA below 5% and availability of adequate liquid assets. Post-amalgamation, it should be a profit making and financially viable entity on sustained basis.
   3. The StCB should have a satisfactory track record of regulatory and supervisory compliance.
   4. The StCB should have strong governance/ management practices.

This will be interesting to watch..

150 Years of the Austrian School of Economics

Birth of Austrian School started with Carl Menger’s Principles of Economics published in 1871

Nicolas Cachanosky of Metropolitan State University of Denver in this research paper celebrates 150 years of Austrian School:

The year 2021 marks the 150th anniversary of Carl Menger’s Principles of Economics, the Austrian School of Economics’ foundational work. This paper looks at the most relevant work this school of thought has produced during the last century and a half. The Austrian School has worked on pressing topics of their time and is well aligned with the work being developed in “mainstream” economics.

How did the word mainstream economics come about?

Thinking about public and private money

Jon Cunliffe of Bank of England in this speech takes one through some foundational issues about money:

In the UK, the Bank of England – a public institution– has been issuing money to the public for over 300 years. Its banknotes, carrying the famous “I promise to pay the bearer” pledge are carried in millions of wallets and purses and used millions of times every day by the public to make transactions.

These notes and coins are denominated in Pounds Sterling, the currency of the UK. It is the Bank of England, on behalf of the state, that is charged with ensuring the stable value of the currency by keeping inflation at its 2% target.

Public money for general use in the UK is only available in the form of physical cash. It is highly visible, trusted and, indeed, is probably the image that many people in this country have in their mind when they picture money.

However, the majority of the money held and used by people in the UK today is not physical ‘public money’, issued by the state, but digital private money’ issued by commercial banks. Around 95% of the funds people hold that can be used to make payments are now held as bank deposits rather than cash. In everyday use, only 23% of payments pre pandemic were made using public money in the form of cash, down from close to 60% a decade earlier.

his private money is not a claim on the state or backed with the resources of the state. It is not covered by that familiar Bank of England promise to ‘pay the bearer’.

It is not clear to me to what extent the general public understand this distinction between public and private money – or even that for most of the time they are using private money. I am not aware of any surveys or research that address this question.

I have, over the years sometimes asked the question of those I have met. Such an approach is statistically reprehensible of course and one certainly shouldn’t base policy on it. But for what it is worth, the answers suggest that people are generally unaware of the distinction between private and public money.

So should it matter if the Bank of England issues digital public money?

The question – and it is not just a question for central banks -is: does it matter if the public cannot access public money they can use in their everyday lives?

The current mix of public and private money in the UK is the result of history rather than some informed policy decision and some might argue, generally available public money is becoming an anachronism. Given we have the credible public authority framework for private money I described earlier, why should the state need to be involved in the issue of money to the public in competition with the private sector? The state does not directly provide electricity or water to the public in the UK anymore? Why should it provide money?

These are important questions that should not be brushed aside. Any decision that the state should issue a new form of digital money to its citizens cannot rest simply on the fact that the role in society of public money is declining. It must rest on an assessment of the benefits of ensuring available and useable public money and the costs and risks of letting it disappear.

Such an assessment has not yet been done in the UK and no decision has been taken to introduce a public digital money – or to use its technical name, a Central Bank Digital Currency or CBDC.

Introduction of a CBDC would be a very major public project which would have material implications for the financial sector, many parts of the economy and for society more broadly.

The Bank of England, like many other central banks, has been exploring these issues in recent years. We published a discussion paper last year with an illustrative model of a general purpose public digital currency. We will shortly publish another discussion paper on some of the public policy issues generated by new forms of digital money.

Hmm

RBI Balance Sheet 2020-21: Higher Income and Lower Expenditure leads to high transfers to the government

RBI released its annual report for the year 2020-21. Earlier RBI had informed that it is paying government a dividend of Rs 99122 cr leading to discussions on what led to the second highest dividend.

The annual report sums up the reasons:

The year 2020-21 is significant for the change in the accounting year of the Reserve Bank to April – March (earlier July – June). Due to this transition, the accounting year 2020-21 was of nine months only, i.e., July 2020 – March 2021. Thus, data presented in the chapter are for a period of nine months for 2020-21 as compared to twelve months for the previous year(s).

The Balance Sheet size of the Reserve Bank, nevertheless, increased by 6.99 per cent for the year ended March 31, 2021, mainly reflecting its liquidity and foreign exchange operations. While income for the year decreased by 10.96 per cent, the expenditure decreased by 63.10 per cent. The year ended with an overall surplus of `99,122 crore as against `57,127.53 crore in the previous year, representing an increase of 73.51 per cent.

Within income, RBI earned most from Exchange gain/ loss from Foreign Exchange transactions which increased from Rs 29,993.22 cr to Rs 50,629.18 cr, an increase of Rs. 20635.96. Last year, the RBI changed using the weighted average cost method for arriving at the cost.

Satyakam Gautam has more insights into the risk management of the RBI’s balance sheet. He says next year will be tricky for RBI as it there will be a constraint on balance sheet expansion given risk buffers.

 

Economics and the study of race

Arun Advani, Elliott Ash, David Cai, Imran Rasul in this voxeu research say race related research features poorly in economics journals:

In the wake of last summer’s Black Lives Matter protests, many have asked themselves what they are doing to tackle racial injustice. For economists, one central question is the extent to which the profession has examined the causes and consequences of racial inequality. This column reports evidence that race-related research in economic journals constitutes a far lower share than in comparable publications in sociology and political science. What’s more, economists over-estimate the extent of race-related research done by the profession. Understanding why economists produce so little race-related research is essential if the discipline is going to be able to reform.

How is it that whatever is a critical issue which matters to society (and is of larger interest) is missing from mainstream economics journals?

 

Quantifying culture and its implications for bank riskiness

Joel Suss, David Bholat, Alex Gillespie and Tom Reader explain their recent paper on the Bank Underground blog. The paper finds a statistically significant relationship between organisational culture and bank risk. The effect is substantive – a one standard deviation improvement in culture is expected to reduce risk by 25%.

In sum, a bank’s culture is a leading indicator of its risk. While this claim has often been made, it has been far less frequently substantiated. Our research provides evidence to support it.

This finding has a few implications for banking supervision. First, it suggests that supervisors should seek to measure organisational culture explicitly and use cultural indicators as inputs into microprudential models of bank risk. While culture is already monitored by supervisors qualitatively and directly, via surveys and interviews of bank staff, we suggest it might be done quantitatively and unobtrusively, in ways both more objective and less costly to obtain. Our own composite indicator is an initial attempt that could be further developed, with additional data added. It is also likely that the way we measure organisational culture needs to change over time. As per Goodhart’s Law, if firms are aware that regulators are looking at a handful of indicators to measure their culture, they may seek to manipulate them, or optimise them while allocating resources away from other, equally important practices that make for a good organisational culture.  

Second, our research underscores the importance of analysing firms holistically. Many of our indicators, such as the frequency of internal fraud or customer complaints, are traditionally thought to relate to conduct and consumer protection. However, our research shows they are directly relevant for prudential supervision.

Summer Macro reading list..

Ashish Kulkarni has a list of books to read on his super blog.

 

Will ghost of Arthur Burns haunt Federal Reserve again?

Stephen Roach in this Proj Synd Piece revokes his years at Federal Reserve under chair Burns:

  Memories can be tricky. I have long been haunted by the inflation of the 1970s. Fifty years ago, when I had just started my career as a professional economist at the Federal Reserve, I was witness to the birth of the Great Inflation as a Fed insider. That left me with the recurring nightmares of a financial post-traumatic stress disorder. The bad dreams are back.

They center on the Fed’s legendary chairman at the time, Arthur F. Burns, who brought a unique perspective to the US central bank as an expert on the business cycle. In 1946, he co-authored the definitive treatise on the seemingly rhythmic ups and downs of the US economy back to the mid-nineteenth century. Working for him was intimidating, especially for someone in my position. I had been tasked with formal weekly briefings on the very subjects Burns knew best. He used that knowledge to poke holes in staff presentations. I found quickly that you couldn’t tell him anything.

Yet Burns, who ruled the Fed with an iron fist, lacked an analytical framework to assess the interplay between the real economy and inflation, and how that relationship was connected to monetary policy. As a data junkie, he was prone to segment the problems he faced as a policymaker, especially the emergence of what would soon become the Great Inflation. Like business cycles, he believed price trends were heavily influenced by idiosyncratic, or exogenous, factors – “noise” that had nothing to do with monetary policy.

This was a blunder of epic proportions. When US oil prices quadrupled following the OPEC oil embargo in the aftermath of the 1973 Yom Kippur War, Burns argued that, since this had nothing to do with monetary policy, the Fed should exclude oil and energy-related products (such as home heating oil and electricity) from the consumer price index. The staff protested, arguing that it made no sense to ignore such important items, especially because they had a weight of over 11% in the CPI. Burns was adamant: If we on the staff wouldn’t perform the calculation, he would have it done by “someone in New York” – an allusion to his prior affiliations at Columbia University and the National Bureau of Economic Research.

Then came surging food prices, which Burns surmised in 1973 were traceable to unusual weather – specifically, an El Niño event that had decimated Peruvian anchovies in 1972. He insisted that this was the source of rising fertilizer and feedstock prices, in turn driving up beef, poultry, and pork prices. Like good soldiers, we gulped and followed his order to take food – which had a weight of 25% – out of the CPI.

Similar to today?

Fast-forward to today. Evoking an eerie sense of déjà vu, the Fed is insisting that recent increases in the prices of food, construction materials, used cars, personal health products, gasoline, car rentals, and appliances reflect transitory factors that will quickly fade with post-pandemic normalization. Scattered labor shortages and surging home prices are supposedly also transitory. Sound familiar?

Do Free Markets Still Beat Central Planning?

Andrew Sheng and Xiao Geng in this Proj Synd piece look at one of the biggest questions in economics:

In 1944, Friedrich A. Hayek suggested that the spontaneous order of markets was inherently superior to the supposedly dynamism-draining totalitarian order of communist or fascist regimes. The ensuing decades – when free-market economies thrived, and the Soviet Union’s centrally planned economy imploded – seemed to vindicate him. Then along came China.

The metrics of China’s phenomenal economic rise are well known: three decades of double-digit GDP growth; some 700 million people lifted out of poverty; an infrastructure boom; the emergence of innovative tech giants; and a comprehensive blueprint for continued (sustainable) growth and development.

China’s success has eroded the belief that free markets represent the best development strategy for everyone, to the point that even the International Monetary Fund – long a leading champion of free-market ideology – has been rethinking its own orthodoxy. Yet Chinese-style central planning is still viewed with disdain in the West, where observers disparage it for its supposed opacity and repressiveness.

……….

So, are free markets still superior to central planning? Well, it’s probably the wrong question.

Institutional arrangements are complex systems, shaped by history, geography, and culture. The objective should not be to identify a one-size-fits-all approach, but rather to devise the combination of characteristics that would deliver the greatest good for the greatest number of people, with the right checks and balances, in a particular country.

Here, China’s system of policy experimentation, implementation, and institutionalization of reform “algorithms” to support constant adaptation in a constantly changing environment has been a game changer for the country’s development. The proof is in the results.

When Narratives Drive Economic Policy

Kaushik Jayaram, a former central banker in this TheIndiaForum article discusses the importance of narratives in economics. He uses demonetisation 2016 as an example of how narrative trumps economics facts:

Demonetisation was not just an egregious act of cruelty but also an economic policy disaster. Yet, the successful use of popular narratives to sell the demonetisation story meant that the public did not make the government pay for this major folly.

….

The case of demonetisation demonstrates that popular narratives can trump economic facts. It is clear that where narratives succeed there is very little political cost. A failed policy that carries no cost is likely to generate more such policies. Unlike most economic shocks, which could be traced to endogenous or exogenous causes, demonetisation was an entirely self-inflicted shock, which was very likely carried out as much in a sincere belief in the narrative as in political calculation.

Demonetisation was a visible failure in terms of its stated objectives, and in spite of the pain inflicted on the vast majority of the population, there was little or no acknowledgement of this failure. Indeed, there was widespread appreciation of the action among the people. Essentially, the success of the demonetisation narrative lay in aligning it with the dominant cultural ethos: create a myth of a battle between good and evil, and the pervasive influence of the epics would do the rest. The mundane details did not matter.

The power of the narrative was such that, contrary to the accepted canon, there was very little loss of public confidence in the currency. The rapid remonetisation and the quantum of currency in circulation testifies to this fact. Recent evidence suggests that preference for cash has increased significantly in the wake of the heightened uncertainty from the COVID-19 pandemic. Paradoxically, public preference has been markedly in favour of higher denomination notes of Rs. 500 and Rs. 2000, whose share of the total currency in circulation in value terms is now around 83% (RBI 2019-20, p 179), very nearly the same as before demonetisation. Apparently the preference for cash, especially in times of stress, is stronger than faith in banks or digital transactions.

The memory of demonetisation has faded or at least is no longer an active part of the discourse. One reason could be that while the economic effects of the policy may not have entirely dissipated, there is a perception that the effects were not lasting. The “perceptions” of the transient nature of the impact of demonetisation may itself be a part of another narrative. Moreover, it has been overtaken by many other events, currently the global pandemic. Undoubtedly, this will generate its own myths. But that is another story.

 

How to vaccinate every country

David Malpass, President of World Bank in this Proj Synd piece:

The current approach to COVID-19 vaccination – using limited vaccine supplies to protect low-risk populations in a handful of countries while low- and middle-income economies wait indefinitely for doses – doesn’t make sense for anyone. A successful global vaccination effort must be equitable, and it must stand on three pillars.
…..
First, countries with an adequate vaccine supply should immediately release doses to the vulnerable worldwide.
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Second, we need greater transparency regarding contracts between governments, pharmaceutical companies, and organizations involved in vaccine production and delivery so that financing can be directed effectively, and countries can plan for receipt and deployment.
…..
The third pillar is increased vaccine production. 

Risk Premium Shocks and Business Cycle Outcomes in India

RBI’s DRG study by Shesadri Banerjee, Jibin Jose and Radheshyam Verma:

This study investigates the dynamic effects of financial shocks on the Indian business cycle. Using bank level panel data, it shows that an increase in default risk leads to a rise in interest rate spread and a decline in credit growth. This micro-level evidence is combined with predictions from a dynamic stochastic general equilibrium (DSGE) model to identify and estimate the impact of a risk premium shock based on a sign-restricted vector autoregression (SRVAR)framework.

A positive shock to risk premium increases the interest rate spread by 30 basis points and contracts credit and output by 75 and 40 basis points, respectively. It causes a downturn in consumption, investment and price of capital goods, while softens consumer prices. The risk premium shock helps in explaining the cyclical variations in key macro-financial variables. A mix of expansionary fiscal and monetary policy is found to be effective in reducing the risk premium driven contraction in economic activity and expediting the recovery.

 

How Not to Launch a Digital Currency? Lessons from Libra

Prof Katharina Pistor in this Proj Synd piece:

The story of Facebook’s failed effort to launch a global digital currency and payment system is reminiscent of the historic struggle between secular and religious authorities. One clear lesson for other monetary aspirants is that it is risky business to reach for the crown jewel of state sovereignty.

Suburbanization in the United States 1970-2010

Stephen Redding in this NBER paper:

The second half of the twentieth century saw large-scale suburbanization in the United States, with the median share of residents who work in the same county where they live falling from 87 to 71 percent between 1970 and 2000. We introduce a new methodology for discriminating between the three leading explanations for this suburbanization (workplace attractiveness, residence attractiveness and bilateral commuting frictions). This methodology holds in the class of spatial models that are characterized by a structural gravity equation for commuting.

We show that the increased openness of counties to commuting is mainly explained by reductions in bilateral commuting frictions, consistent with the expansion of the interstate highway network and the falling real cost of car ownership. We find that changes in workplace attractiveness and residence attractiveness are more important in explaining the observed shift in employment by workplace and employment by residence towards lower densities over time.