Archive for September, 2021

The demise of Doing Business: Goodhart’s Law in action

September 30, 2021

Thorstan Beck in this voxeu research:


History of Urban Resilience: What happens to cities post Covid-19 shock?

September 30, 2021

Prof Edward Glaesar in this NBER paper reflects on how Covid-19 will impact urban locations. For this, he goes back to history of urban resilience. He is hopeful that most urban places will rebound post the covid shock.

Superb narration..

Climate policy is macroeconomic policy, and the implications will be significant

September 30, 2021

Jean Pisani-Ferry in this PIIE research says climate policy is macro policy:

For all the long-term benefits of urgently addressing climate change, economic policymakers must plan for a challenging transition to carbon neutrality. Pretending that the costs will be trivial is dangerous. Estimates by the Intergovernmental Panel on Climate Change of the United Nations indicate that emergency action is indispensable to limit catastrophic climate disruption. Because of the magnitude of the efforts involved and the pace of the transformation implied, the accelerated transition to a carbon-neutral economy is bound to have serious, immediate economic implications, warns Pisani-Ferry. Some equipment will lose economic value. Some plants will have to close. Employees will have to be reallocated to other occupations. Investment will have to increase, to repair or rebuild infrastructure and the capital stock. He argues that so far policymakers have not addressed these implications in a systematic manner. It is high time policymakers realize that climate policy is also macroeconomic policy and design transition strategies now.


How Emerging European Economies Found a New Monetary Policy Tool: Asset purchase programs

September 30, 2021

Group of IMF researchers have written this paper on how some of the Emerging European economies used asset purchases during the 2020 pandemic induced crisis. They found the asset purchases fairly effective in mitigating the crisis:

Several emerging market central banks in Europe deployed asset purchase programs (APPs) amid the 2020 pandemic. The common main goals were to address market dysfunction and impaired monetary transmission, distinct from the quantitative easing conducted by major advanced economy central banks. Likely reflecting the global nature of the crisis, these APPs defied the traditional emerging market concern of destabilizing the exchange rate or inflation expectations and instead alleviated markets successfully.

We uncover some evidence that APPs in European emerging markets stabilized government bond markets and boosted equity prices, with no indication of exchange rate pressure. Examining global and domestic factors that could limit the usability of APPs, in the event of renewed market dysfunction we see a potential scope for scaling up APPs in most European emerging markets that used APPs during the pandemic, provided that they remain consistent with the primary objective of monetary policy and keep a safe distance from the risk of fiscal dominance.

As central banks in the region move towards monetary policy tightening, the tapering, ending, and unwinding of APPs must also be carefully considered. Clear and transparent communication is critical at each step of the process, from the inception to the closure of APPs, particularly when a large shock hits and triggers a major policy shift.

The paper has been explained in this IMF article.

Interesting to see how asset purchases are becoming an important mon pol tool across central banks.


The Difference Between “Conducting” and “Implementing” Monetary Policy

September 29, 2021

Jane Ihrig and Scott A. Wolla in this St Louis Fed research point to the difference between conducting and implementing mon policy:

At the end of his prepared remarks at the June 16, 2021, press conference, Federal Reserve Chair Jerome Powell noted both that the Federal Reserve System (Fed) made a “technical adjustment” to its administered interest rates and that it “has no bearing on the appropriate path for the federal funds rate or stance of monetary policy.” So you might be wondering, what exactly is a technical adjustment and how is it different from the Federal Open Market Committee’s (FOMC’s) actions to adjust the stance of monetary policy? 

This technical adjustment to the Fed’s administered rates is the difference between the FOMC conducting monetary policy and the Fed implementing monetary policy. The FOMC conducts monetary policy by determining a target range for the Fed’s policy rate—the federal funds rate (FFR)—to move the economy toward its congressionally mandated goals of maximum employment and price stability. When the FOMC sets this target range, the idea is that it will influence the FFR and other market interest rates, which, in turn, affects the spending, investing, and saving decisions of businesses and consumers.

But how does the Fed ensure market interest rates follow the target range for the policy rate set by the FOMC? The Fed implements policy by using its tools to keep the FFR within the FOMC’s desired target range. Note that the Fed does not directly set the FFR, as this is determined by institutions borrowing and lending in the federal funds market. Rather, the Fed uses it policy tools and sets two of its administered rates—the interest on reserve balances (IORB) rate and the overnight reverse repurchase agreement (ON RRP) rate—to guide the FFR within the target range. 

Not sure whether I get the difference very clearly.

Explained | China’s ban on cryptocurrency

September 29, 2021

The People’s Bank of China recently released a notice on virtual currencies (like cryptocurrencies) which shook the global financial markets. This moneycontrol primer explains the notice and what it means for the future of virtual currencies.

Impact of 2020 pandemic on Public Transportation Ridership and Revenues across New England

September 28, 2021
Riley Sullivan of Boston Fed in this paper studies the impact of pandemic on public transport system. Ridership declined sharply leading to loss of revenue. The government stimulus helped the transit system tide through the period:

In New England and elsewhere, public transportation was among the many sectors immediately impacted by the COVID-19 pandemic. Essential workers and members of the labor force with no teleworking options and no alternate means of transportation continued to rely on public transit following the onset of the pandemic. However, with business closures, event cancellations, and social distancing regulations in effect, ridership dropped sharply, hampering transit systems’ ability to generate revenue.

As of June 2021, ridership remained depressed despite the relaxation of restrictions and a general resumption of economic activity, though it is anticipated to grow slowly as workers return to offices in larger numbers. Systems with a greater reliance on fares for revenue saw large budget gaps emerge, and many responded by reducing services. In Massachusetts, MBTA service cuts garnered substantial news coverage, but the ridership declines and their implications extend beyond the large transit systems.

This brief explores the trends in ridership and financing of all public transit systems in New England. The continued financial health of public transit systems has been on policy agendas, as evidenced by the substantial sums appropriated in the three COVID-19–related federal stimulus packages and the pending bipartisan infrastructure bill.

The appropriations in the three stimulus packages were sufficiently large to fully offset the immediate revenue losses, and—when combined with the funding in the infrastructure bill—they could enable transit systems to make changes that might be necessary to maintain long-term financial viability and entice riders to return to public transit in a post–COVID-19 world.

Shoe Dog: A Memoir by the Creator of NIKE

September 28, 2021

I just finished reading this memoir of Nike’s creator – Phil Knight. While one has picked up some info about Nike in business quizzes, this memoir is one of its kind.

It is wonderfully written in a highly breezy style. Usually memoirs which mix founder’s personal journey along with history of business gives you a tale of bravado and adventure. The one by Knight is lot about self-doubt and adventure.

Andre Agassi sums the memoir well: …”this is a memoir for people who love sport but above all it is a memoir for people who love memoirs.”

The Meaning of MMT

September 28, 2021

Drumetz Françoise and Pfister Christian in this Banque de France paper:

In the last few years in the U.S. and especially since the publication of Stephanie Kelton’s book, The Deficit Myth (Kelton, 2020) in Europe, the so-called Modern Monetary Theory (MMT) has been gaining prominence in the media and the public. This paper exposes the main proposals of MMT in the light of their doctrinal sources, also confronting them with economic facts and with other currents of economic thought. The first part deals with the approach to money and monetary policy developed by MMT, the second part with its recommendations regarding fiscal policy and aggregate demand management, the third part with the structural policies it advocates, the fourth part with the international aspects of MMT. The fifth part concludes. Overall, it appears that MMT is based on an outdated approach to economics and that the meaning of MMT is a more that of a political manifesto than of a genuine economic theory.

Do inflation expectations matter for inflation?

September 27, 2021

Jeremy Rudd in this Federal Reserve working paper questions the foundations of monetary policy (HR Prof Sashi Sivramkrishna). Rudd says concept of inflation expectations is based on shaky foundations:

Economists and economic policymakers believe that households’ and firms’ expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.

He looks at papers of Friedman, Phelps, Lucas and so on which show inflation expectations are central to inflation and thus to monetary policy. But finds them inadequate and wanting…

Need to read this carefully.


Banking-Crisis Interventions, 1257-2019

September 27, 2021

New NBER working paper by Andrew Metrick & Paul Schmelzing track interventions in bank crisis since 1257-2019:

Case of J&K Bank: Union Territory of J&K to make Union Territory of Ladakh a promoter in the bank

September 24, 2021

I had blogged on 4-Aug-21 about J&K Govt planning to increase ownership in J&K Bank.

Earlier on 30-Oct-2020, it was decided to make UT of Ladakh a promoter worth 8.23% in the bank.

Following arrangements for Jammu & Kashmir Bank Limited is hereby also made as per the provisions of the SO 339 dated 30.10.2020 issued by the General Administration Department in furtherance of recommendations of Advisory Committee on Assets & Liabilities of erstwhile State of J&K as dakhwith reference to 31.10.2019

a. J&K Bank Ltd. shall continue its operations as a going concern in both the UTs.
b. The UT of J&K shall continue to have majority shareholding in the Bank.
c. 51 % of the shareholding in the J&K Bank Ltd. shall remain with the UT of J&K. The remaining 8.23% shareholding in the J&K Bank Ltd.
(approximately 13.89% as on 31.10.2019 of the existing shareholding of the erstwhile State of Jammu & Kashmir), is hereby transferred to the UT of Ladakh.
d. One post of Director on the Board of the J&K Bank is hereby earmarked for the UT of Ladakh.
e. A reasonable proportion of employees of the J&K Bank Ltd. shall be recruited from the UT of Ladakh, details of which shall be worked out by the Bank.

Given this, On 10 Aug-21 J&K Bank sent this letter to SEBI informing of this share transfer. The Bank wanted to know whether it can tranfer the shares subject to continuation of lock-in at the hands of tranferee, which is UT of Ladakh.

SEBI in its reply on 24-Sep-21 provides more clarity on both capital infusion and this transfer. Basically, the Bank has been issuing shares to UT of J&K for this capital infusion and these shares require a lock-in period of 3 years. So, once these shares are transferred to UT Of Ladakh the question is of Lock-in period.

SEBI gives information on the laws that apply under this transfer and broadly allows the transfer but expresses some reservations.

Interesting to see how J&K Bank has become a Union Territory promoted bank with both J&K and Ladakh governments owning the bank.



Instant cross-border payments vs. current account inconvertibility

September 24, 2021

Ajay Shah and Bhargavi Zaveri reflect on the recent India-Singapore deal to allow cross border payments via UPI and Paynow.

They say for the transactions to happen seamlessly, India needs to relook at current account convertibility:

Current account convertibility means that cross-border transactions, for the purpose of current account activity, are as frictionless as domestic transactions. Many people believe that India is fully current account convertible; it is sometimes claimed that India has achieved current account convertibility in 1993 and is now inching towards convertibility on the capital account. This is an inaccurate depiction of where India is. There are explicit prohibitions, restrictions or tarriff barriers. There are procedural barriers that drive up the cost of cross-border transactions. There are threats of ad hoc enforcement or disparity across payment instruments or payment service providers.

At first blush, UPI-PayNow connectivity is a sweet and logical idea, there is the possibility of obtaining a quantum leap in reducing transactions costs for cross-border payments. However, it requires the invisible infrastructure of current account convertibility, which is at present lacking in India. The project of building UPI-PayNow connectivity is a great opportunity to re-open these questions and remove all the frictions, whether on paper or in practice, described above. Our objective should be to make India-Singapore payments on the current account as frictionless as (say) payments between the UK and the US.


Chartering the Fintech Future by reflecting on banking history

September 24, 2021

Prof Charles Calomiris in this Cato paper traces future of fintech banks by looking at banking history:

I have shown that the chartering of fintech shadow banks as national banks is a desirable development. In the near term, this will occur in the form of unbundled, novel providers of payments or lending services. Some of their business models entail borrowing deposits, but some do not. All of them are banks. They and their consumers stand to benefit greatly from coming out of the shadows and becoming chartered banks. For many shadow banks, the advantages of greater geographic reach and enhanced market credibility from OCC examination will outweigh the new costs of regulations they will bear. That is especially so if they are able to avoid unnecessary regulatory burdens on their organizations.

I emphasize that I am not arguing in favor of requiring fintech banks to obtain national charters. This would impose new regulatory burdens on banks, some of which would be less able to meet customer needs as a consequence. I also emphasize that the externality argument often used to justify forcing traditional intermediaries that issue deposits to be chartered does not apply to unbundled nondepository fintechs. Traditional banks that use deposits to fund loans can magnify recessions as the result of the combination of deposit taking and lending. Losses on loans create credit crunches when banks facing loan losses cut lending to maintain a low risk of default on deposits, and such banks can face a risk of runs if they are unable to keep deposit risk low (Calomiris and Wilson 2004). Unbundled banking does not create these sorts of externalities, and therefore, there are no obvious arguments for forcing fintech shadow banks to obtain charters unless doing so creates value for their enterprises.

The point of chartering fintech banks should be to allow them to reap the net gains of a charter, if those gains are positive for them. This approach ensures chartering only occurs when the charter creates value. Furthermore, by permitting, but not requiring, fintech banks to obtain charters, society reaps a further benefit: technology serves as a check on excessive regulation. If chartering authorities know that excessive regulatory burdens will discourage fintech banks from coming out of the shadows, then regulators will be more mindful of the costs of regulation.29

Consumers stand to gain dramatically from allowing fintechs to obtain national bank charters. Chartered fintechs, in many cases, could offer lower costs, better service, and greater access to financial services, especially for the unbanked and underbanked. Consumers will also gain from improved supervision of these banks, which will help to ensure that their customers are treated fairly and that the banks are run on a safe and sound basis. For all these reasons, the OCC is welcoming novel fintech banks to apply for national bank charters.

Superb read..

Adding birds of New Zealand to hawk/dove/owl classification of central bankers

September 23, 2021

Christian Hawkesby, Assistant Governor of RBNZ in this speech adds names of NZ birds to classify central bankers.  He says that in the Māori culture, the hawk (kahu) and the dove (kereru or native wood pigeon) both have prominent roles.

For a long time, followers of monetary policy have developed a shorthand to categorise central banks and central bankers as either ‘hawks’ or ‘doves’.

The origins of these terms can be traced back to descriptions used to capture the attitudes of leaders to war, with a hawk more inclined to go to war, and a dove more inclined to seek peace.

In the midst of the Vietnam War, these terms found their way into monetary policy and were used in the minutes of a US Federal Reserve meeting in May 1966.12 In this context, a hawk was determined to bring inflation down by having interest rates higher than otherwise, and a dove more inclined to tolerate bouts of higher inflation with a preference to keep interest rates lower than otherwise.

As time has passed and inflation has remained relatively low and stable for past 25 years, this original definition has evolved into a shorthand used by market participants where any decision by a central bank that results in interest rates higher than expected is “hawkish” and any decision where interest rates are lower than expected is “dovish”.

In Māori culture, the hawk (kahu) and the dove (kereru or native wood pigeon) both have prominent roles.

The kahu represents strength and dominance as the most powerful bird in the environment. The kererū represents eternal life, and was once traditionally offered as a sacrifice to Papatuanuku (the earth mother) to promote life and growth in the forest of Tane Mahuta. For these reasons, the feathers of both the kahu and kererū are highly regarded and prominent on the Korowai (cloak) of Māori chiefs.

However, for mon policy another bird is more appropriate –kōtuku (white heron):

However, when it comes to our approach to making monetary policy decisions under uncertainty, it may be that another bird – that is also sought after on the cloaks of chiefs – provides a more fitting metaphor: the kōtuku (white heron) that adorns our $2 coin.

A key feature of our least regrets approach is responding to the environment, risks and uncertainties, including:

    • the starting point of the economy,
    • the balance of risks, and
    • threats to achieving our mandate.

It requires an approach that is adaptable, sometimes moving with caution in slow, small steps, and other times moving with confidence, quickly in large steps to remain successful.

In Māori culture, there are two whakataukī (proverbs) involving the kōtuku that capture this trait of responding to the environment around you.

The saying “he kōtuku rerenga tahi” loosely translates to “a white heron’s flight is seen but once”.

This whakataukī expresses an idea that “once ready, open your wings and commit to flight”. Applying this to the protocols of a marae (meeting house), it is used as a reminder that when it is your opportunity to speak, you may only get one chance, so you must take your chance and be bold.

In the world of setting monetary policy, this proverb translates to those times when:

    • the outlook for the economy has been subject to large and uncertain changes,
    • the risks are heavily skewed in one direction, and
    • there is a material threat of not achieving your mandate.

In that situation, the path of least regret is to move quickly and take large steps to provide more confidence that policy settings will be appropriate if the risks to the outlook eventuate. As described above, this approach is consistent with our actions (and other central banks globally) through the early stages of COVID-19.


Equitas-Google Pay deal reflects confluence of banking and fintech

September 23, 2021

Equitas Small Finance Bank recently partnered with Google Pay deal allowing latter’s subscribers to just swipe and avail deposit services of the former. My article on this development

South Korea’s development: From hermit kingdom to miracle on the Han

September 23, 2021

Dowug Irwin recently wrote a paper on how ideas led to export-led growth in Taiwan.

In another paper, he tracks the Korea story:

In 1960, South Korea’s exports were about 1 percent of GDP, and the country’s ability to import depended almost entirely on US aid. After changing its foreign exchange and trade policies in the mid-1960s, Korea saw a surge in exports to more than 10 percent of GDP by the end of the decade. What factors account for the shift in policy that enabled this dramatic export growth to occur? The United States helped initiate the process by withholding financial assistance, pressuring Korea to devalue its currency and reform its foreign exchange regime. Initially, the Korean government resisted taking these steps, but in 1964 it became firmly committed to an export promotion strategy to boost foreign exchange earnings and end its dependence on American aid.

How much should tomorrow’s central bank balance sheets do? And what central banks can learn from parenting

September 23, 2021

Andrew Hauser of Bank of England in this speech discusses role of central bank balance sheets in monetary policy in future:

Central banks can’t choose whether to take the actions necessary to deliver their monetary and financial stability mandates: they are obligated to do so. But they do have choices about how they go about it – and a key factor in those judgments is the role they want financial markets to play. In my remarks today, I want to do three things. First, to show just how dramatically the role of central bank balance sheets has changed in recent years, and the forces shaping the future. Second, to review the complex and shifting inter-relationships between central banks and financial markets over history. And, third, to suggest some possible principles for shaping central bank operations of the future in ways that harness the benefits of financial markets.

Hauser shows how central bank balance sheets have grown across most countries. He then goes back to the history of central bank balance sheets and its relation with financial markets. He connects the relationship to parenting:


The id and the nudge: where Freud meets behavioural economics

September 22, 2021

Briana S Last, a doctoral candidate in clinical psychology at the University of Pennsylvania in this aeon article:

We are not perfectly rational. This is obvious to anyone who has eaten more than their fill, exchanged harsh words with a friend, or taken the wrong turn on their morning commute. Less obvious, though, are the ways in which our thoughts, feelings and choices are systematically biased. Behavioural economics, a field that bridges insights from social psychology, cognitive science and economics, emerged in recent decades to explain the constraints on human rationality – uncovering a still-growing list of biases and heuristics, or mental shortcuts. Behavioural economists have also harnessed research findings to improve judgment and decision-making through simple interventions (often called ‘nudges’).

Though the field’s discoveries are genuinely novel, its intellectual influences run deep. Its founders drew inspiration from the 20th century’s most famous theorist on the irrational unconscious: the founder of psychoanalysis, Sigmund Freud. The notable convergences between Freud’s ideas and behavioural economics are a testament to the durability of theories that divide thinking into two processes. Their divergences point to the distinct historical and political moments in which these psychological paradigms surfaced. Freud and behavioural economists have picked up on something distinct, maybe even intrinsic, about the way we think – but they have done so with very different emphases and to describe disparate realities.


Remembering Emmanuel Farhi: Economist Par Excellence

September 22, 2021

Prof Jean Tirole pays tribute to Emmanuel Farhi who passed away last year.

Undoubtedly one of the best economists of his generation, Emmanuel Farhi transformed the theories of taxation, macroeconomics, and international finance. This essay describes his itinerary and his research style and attempts to pay tribute to his immense contribution to economics.

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