Archive for November, 2021

Empirical perspectives on auctions

November 29, 2021

Ali Hortaçsu & Isabelle Perrigne in this NBER paper analyse research in auctions over 30 years:


Central bank digital currencies as superheroes?

November 29, 2021

Tara Rice, Head of Secretariat, Committee on Payments and Market Infrastructures at BIS in this speech compares CBDCs to superheroes who can do all:

Last year’s CPMI CBDC survey showed that financial inclusion and enhancing domestic payments efficiency and safety are key motivations of central banks for issuing CBDC. These are followed by financial stability and monetary policy-related reasons. But CBDCs are seen by many central banks as an opportunity to enhance cross-border payments, as well. Cross-border payments can be defined as where the payer and payee each reside in a different jurisdiction, most often with a different currency. As you might have experienced yourself, cross-border payments have four primary challenges – they are generally costly, can be slow, suffer from low transparency and are not widely accessible. Many of today’s frictions are rooted in differences among domestic payment systems (eg opening hours, technical standards, data requirements).6

In this context, CBDCs are seen by some as a superhero or superheroine solution; that is, as an opportunity to address all of the pain points in payments. Superheroes and heroines have fantastic abilities. They are full of possibilities. They come in many shapes and sizes: some are gifted with flight (like Captain Marvel), some with telekinesis (Wanda Maximoff), and others with super strength (Wonder Woman).

We could say that CBDCs also have many potential superpowers, or design features. They ought to have at least a “required” set of powers – perhaps strength and agility. Figuratively speaking, these ought to represent the prerequisites for a safe and secure CBDC.

CBDCs offer hope in improving payments generally, and in enhancing cross-border payments, more specifically. Like all superheroes, CBDCs do not need the full spectrum of superpowers. Having a few important design features could be sufficient for enhancing cross-border payments. Like Kamala Khan, whose powers include shapeshifting, elasticity, and size alteration – the ultimate power is perhaps interoperability. 

On that note, I’d like to focus my remarks on three topics related to how CBDCs can help on the international dimension of payments: (i) a taxonomy to describe the different forms and elements of cross-border interoperability; (ii) the conceptual trade-off between cost and complexity on the one hand and benefits on the other (which in this case would be mainly in reducing the frictions of cross-border payments); and (iii) some thoughts on lessons learned and the way forward.

Interesting analogy..

How DBS Became the ‘World’s Best Bank’?

November 26, 2021

Euromoney has named DBS Bank as the best bank in the world for 4th year in a row.

Vinika Devasar Rao, Executive Director of the INSEAD Emerging Markets Institute writes on what makes DBS as world’s best bank.

The main reason is how DBS managed its digital transformation:


Taliban struggling with modern banking

November 26, 2021

Taliban celebrated 100 days of Afghanistan control this week.

Peter Apps says the celebrations are hiding what lays ahead for the country and its banking system:

According to the United Nations, Afghanistan last year imported around $7 billion worth of goods and services, mostly foodstuffs. Billions of Afghan assets are tied up overseas, while the physical deliveries of U.S. dollars to the country on which Afghan banks relied have ceased.

The result of that is as dangerous as it is predictable – an Afghanistan-only version of the late 2000s global credit crunch and the 2008 financial crisis. The United Nations estimates that many of Afghanistan’s banks might collapse within six months – although once such speculation mounts, it becomes self-fulfilling even faster.

Even when money now exists within the system, anxious Afghans are sitting on it. Of an estimated $4 billion of the Afghani currency believed to be within the economy, only about $500 million remains in circulation. Banks have ceased lending, and the United Nations says 67% of their loans within Afghanistan are now seen as non-performing, their repayment in jeopardy.

Having gradually regrown over the last two decades, Afghanistan’s banking system would likely need access to private capital as well as support from multilateral institutions such as the International Monetary Fund and World Bank to recover and survive. Whether the necessary willingness is there is another question – the signals remain mixed.

Earlier this month, the United Nations announced it had paid nearly $8 million in salaries directly to 23,500 Afghan health workers, bypassing the still-sanctioned Taliban. Other public sector salaries, however, have gone largely unpaid over the last three months.

On Saturday, Taliban authorities announced they would begin paying the backdated salaries. Where that money was to come from remained unclear – but the announcement followed a meeting with German and Dutch donors.

After 20 years of war, this is a more diplomatic dance. But if those involved are not careful, this winter it could yet prove just as deadly.

Happy 100th Birthday Dr Kurien!

November 26, 2021

Dr Kurien was born on 26 November 1921 and today (26 Nov 2021) marks his 100th Birthday.

Happy B’day Dr Kurien. Your journey continues to inspire us.

Financial crises and political radicalization: How failing banks paved Hitler’s path to power

November 25, 2021

Sebastian Doerr, Stefan Gissler, Jose-Luis Peydro and Hans-Joachim Voth in this BIS paper look at rise of Nazis via banking failures.

Germany had a banking crisis in 1931. The paper shows that regions which suffered more from financial crisis had higher support for Nazis:

Do financial crises radicalize voters? We study Germany’s 1931 banking crisis, collecting new data on bank branches and firm-bank connections. Exploiting cross- sectional variation in pre-crisis exposure to the bank at the center of the crisis, we show that Nazi votes surged in locations more affected by its failure. Radicalization in response to the shock was exacerbated in cities with a history of anti- Semitism. After the Nazis seized power, both pogroms and deportations were more frequent in places affected by the banking crisis. Our results suggest an important synergy between financial distress and cultural predispositions, with far-reaching consequences.

What Jerome Powell’s second term means for US and India

November 24, 2021

On November 22, US President Joe Biden nominated Powell for another 4-year term, and promoted Board member Lael Brainard as the Vice Chair. This decision ended months of speculation over whether Powell will be granted a second term as Fed Chair or not.

The next question is what does this second term mean for US and Indian economy?

My moneycontrol article provides a perspective on the question.

Impact of Covid-19 on India’s States

November 24, 2021

Pragyan Deb and TengTeng Xu in this IMF paper:

The health and economic impacts of COVID-19 on India have been substantial, with wide variation across states and union territories. This paper quantifies the impact of containment measures and voluntary social distancing on both the spread of the virus and the economy at the state level during the first wave of the COVID-19 pandemic. We construct a de-facto measure of state-level social distancing, combining containment strigency and observed mobility trends. State-level empirical analysis suggests that social distancing and containment measures effectively reduced case numbers, but came with high economic costs. State characteristics, such as health care infrastructure and the share of services in the economy, played an important role in shaping the health and economic outcomes, highlighting the importance of adequate social spending, health care infrastructure, and social safety nets.

Lessons from RBI’s Regulatory Review Authority: Conduct periodic reviews to ease compliance

November 23, 2021

In Apr-21, RBI had constituted Regulatory Review Authority (RRA) to review and ease regulations, circulars and so on.

RRA released its interim recommendations recently.

My new piece in Moneycontrol on RRA 2.0.  We need to have these reviews periodically.


Profile of AW Phillips the person behind Philips Curve and Phillips Curve in India

November 22, 2021

Michael Debabrata Patra, Harendra Behera and Joice John of RBI in this Nov-21 Bulletin article write on the Phillips Curve in India.

The article begins by profiling AW Philips, the person behind the Philips Curve. Quite a journey of the New Zealander who was Prisoner of War for three years! The paper then goes on to discuss the several avatars of the Philips Curve.

On India’s Philips Curve:

The Phillips curve postulates that unemployment can be lowered (output can be increased) but only at the cost of higher wages (inflation) or conversely, wage growth (inflation) can be lowered only at the cost of higher unemployment (lower output). The conduct of monetary
policy hinges around this exploitable trade-off. Our results indicate that the Phillips curve is alive in India but recovering from a period of flattening over the past 6 years. The Phillips curve is convex, flattening with low and negative output gaps and steepening when the output
gap is positive and high.




Caution against various Co-operative societies using the word “Bank” in their names: History rhymes itself

November 22, 2021

RBI in its recent (22-Nov-2021) press release cautions cooperatives from using the word “bank” against their name:

The Banking Regulation Act, 1949 (BR Act, 1949) was amended by the Banking Regulation (Amendment) Act, 2020 (Act 39 of 2020) which came into force on September 29, 2020. Accordingly, co-operative societies cannot use the words “bank”, “banker” or “banking” as part of their names, except as permitted under the provisions of BR Act, 1949 or by the Reserve Bank of India (RBI).

It has come to the notice of RBI that some Co-operative Societies are using the word “Bank” in their names in violation of Section 7 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies) (the BR Act, 1949).

It has also come to the notice of RBI that some Co-operative societies are accepting deposits from non-members/ nominal members/ associate members which tantamount to conducting banking business in violation of the provisions of the BR Act, 1949.

Members of the public are hereby informed that such societies have neither been issued any licence under BR Act, 1949 nor are they authorized by the RBI for doing banking business. The insurance cover from Deposit Insurance and Credit Guarantee Corporation (DICGC) is also not available for deposits placed with these societies. Members of public are advised to exercise caution and carry out due diligence of such Co-operative societies if they claim to be a bank, and look for banking license issued by RBI before dealing with them.

This is super interesting.

In Indian Banking history, it has been seen that all kinds of firms use banks against their name without really doing banking work.

In 1949, when Banking Regulation Act was instituted, one of the first things was to do away with this practice. Section 7 of BR Act says:

7. Use of words “bank”, “banker”, “banking” or “banking company”

(1) No company other than a banking company shall use as part of its name 2[o in connection with its business] any of the words “bank”, “banker” or “banking” and no company shall carry on the business of banking in India unless it uses as
part of its name at least one of such words.

(2) No firm, individual or group of individuals shall, for the purpose of carrying on any business, use as part of its or his name any of the words “bank”, “banking” or “banking company

As Cooperatives have been included in BR Act and are not defined as a bank, they cannot be using the word bank.

However, given some (if not most) cooperatives have used the word bank for so long, if they remove the name bank how will public react?

El Salvador Plans World’s First Bitcoin City

November 22, 2021

After allowing bitcoin to become legal tender, El Salvador and its President are onto other ideas around bitcoin like a bitcoin city:

El Salvador plans to build the world’s first “Bitcoin City”, funded initially by bitcoin-backed bonds, President Nayib Bukele said on Saturday, doubling down on his bet to harness the crypto currency to fuel investment in the Central American country.

Speaking at an event closing a week-long promotion of bitcoin in El Salvador, Mr Bukele said the city planned in the eastern region of La Union would get geothermal power from a volcano and not levy any taxes except for value added tax (VAT).

“Invest here and make all the money you want,” Mr Bukele said in English, dressed all in white and wearing a reversed baseball cap, in the beach resort of Mizata. “This is a fully ecological city that works and is energised by a volcano.”

Half of the VAT levied would be used to fund the bonds issued to build the city, and the other half would pay for services such as garbage collection, Mr Bukele said, estimating the public infrastructure would cost around 300,000 bitcoins.

El Salvador in September became the first country in the world to adopt bitcoin as legal tender. 

Although Mr Bukele is a popular president, opinion polls show Salvadorans are skeptical about his love of bitcoin, and its bumpy introduction has fueled protests against the government.

Invoking Alexander:


Does trade lead to inequality? A primer

November 22, 2021

Dani Rodrik in the new NBER paper reviews research on the evergreen topic of whether international trade leads to inequality or not:

The monetary and fiscal policy challenges of cryptocurrency

November 19, 2021

Sajjid Chinoy, Chief Economist JP Morgain India in this Indian Express article points to challenges cryptos will pose on mon and fiscal policy.

On mon policy, he says this will be akin to dollarisation where home central banks lose their importance:

For starters, how would monetary policy be impacted if a private digital currency was competing with fiat currencies? Think of this as “dollarisation” by another name, but with a crucial difference as enumerated below. Latin America is replete with economies becoming “dollarised”. As domestic nationals lost faith in their own currency as a store of value, they shifted into and began transacting in US dollars for the security and stability it accorded. What this did was to render domestic monetary policy ineffective, because domestic central banks cannot set interest rates and inject liquidity in a foreign currency. The greater the substitution into US dollars, the lower the potency of monetary policy. In effect, these economies were importing the monetary policy of the US Fed.

Widespread adoption of privately issued digital currencies as a medium of exchange will have much the same impact. The larger the monetary base they cannibalise, the less potent will be domestic monetary policy in responding to business cycle needs and external shocks.

In this speech, Fabio Panetta of ECB also spoke on how central banks will lose their monetary anchor which is cash.

What about fiscal policy? In backdrop of loss of mon pol, focus comes to fiscal policy:

What about fiscal policy? The implications are more straightforward. The greater the substitution into digital currencies the more the loss of seigniorage revenues to governments from the monopoly issuance of fiat currency. Separately, fiscal revenues can also be adversely impacted by the increased tax evasion opportunities that crypto-currencies can facilitate.

To the extent that increased substitution into cryptos reduces the efficacy of monetary policy, the onus on fiscal policy to respond to economic shocks will commensurately rise. This could create challenges in a post-Covid world. The pandemic has left a legacy of elevated public debt around the world. Fiscal policy, especially in emerging markets, will have the least space to act when it is most needed.

On external account, he says demand for bitcoins/cryptos will lead to money flowing out which is like capital outflows:

Finally, what are the implications for the Rupee? To the extent that cryptos are mined abroad, demand for them — whether for transactions or speculative purposes — will be akin to capital outflows. In turn, if cryptos begin to get mined onshore, they will induce capital inflows. These dynamics will increase capital account volatility and, to the extent that these cross-border flows circumvent capital flow measures, they de facto increase capital account convertibility, accentuating the policy trilemma that emerging markets confront.

This will also directly impact the currency market. As the 2021 Global Financial Stability Report underscores, there must exist a triangular arbitrage between, say, the local Rupee-Bitcoin market, the Dollar-Bitcoin markets and the Rupee-Dollar market. Consequently, changes in the Rupee-Bitcoin markets will inevitably spill over into the Rupee-Dollar markets for markets to clear.

In the end, policymakers need to prepare for the crypto future:

All told, the macro implications of widespread crypto adoption are complex and interlinked. For now, there is justifiable angst about growing household attraction for cryptos as speculative assets, with its attendant regulatory implications. But the true macro challenge will emerge and compound if and when unbacked private digital currencies are seen as viable mediums of exchange. That’s what policy must anticipate and prepare for.

Plane Tales: Air India’s Return to the Tatas

November 19, 2021

Aashique Ahmed Iqbal of Krea University is a historian of aviation in India. In TheIndiaForum, He has written this reflective essay on return of Air India to Tatas:

From the perspective of Tata’s recent corporate history, there is reason to view the takeover of Air India with cautious pessimism. In a recent email exchange, Mircea Raianu pointed to the similarities between the Air India acquisition and Tata’s expensive purchase of Corus Steel in 2006, both of which were attempts to right what the group views as historical wrongs committed against the group. In the Corus case, by taking over Britain’s most important steel producer, Tata symbolically avenged itself against British industrialists who had dismissed the company’s capacity to make steel in the early 20th century. However, the Corus acquisition has turned out to be both financially unrewarding and politically volatile. So too could Air India, in a period when the airline industry across the world is in the midst of a major contraction due to Covid-19 and climate change.

History may not offer clear lessons that can be used to predict Air India’s future. But the narratives around Air India’s past indicate how history is used as a resource to explain and at times to even justify present-day developments. Much of the impetus for this mobilisation of history as a resource comes from Tata itself. Well aware of the legitimacy conferred by history, JRD meticulously recorded and commemorated his achievements in the field of aviation.  Tata also commissioned glowing biographies and JRD has the distinction of being one of the few Indian industrialists to establish a dedicated archive. Some measure of the success of the historical narrative promoted by  Tata amongst middle-class Indians, can be had from the widespread celebration of Ratan Tata’s tweet on Air India.

Yet, examples and analogies from the past are of limited use outside their specific historical context. Taking the claims on history made by Tata and many in the press at face value carries many risks. This includes turning history into a vehicle for corporate aggrandizement, reducing it to a simple story of a struggle pitting the state against private enterprise and drawing dubious ‘lessons’ from the past. Failing to place events in their context serves not only to provide us with the wrong lessons but also to misunderstand the past.


RBI releases Report on digital lending including lending through online platforms and mobile apps

November 19, 2021

In Jan-21, RBI had constituted a working group to study and give recommendations for the rising digital lending.

Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive. From a peripheral supporting role a few years ago, FinTech led innovation is now at the core of the design, pricing and delivery of financial products and services. While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours. A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.

2. Recent spurt and popularity of online lending platforms/ mobile lending apps (‘digital lending’) has raised certain serious concerns which have wider systemic implications. Against this backdrop, a Working Group (WG) is being set up to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place.

The committee was expected to submit its report in 3 months but submitted its report 11 yesterday, after 11 months. It is easily one of the most important committee reports of recent years and has implications for future of banking in India.

The report defines digital lending as:

A remote and automated lending process, majorly by use of seamless digital technologies in customer acquisition, credit assessment, loan
approval, disbursement, recovery, and associated customer service.

The key recommendations of the committee are:


What killed macroeconomics? Uncertainty?

November 18, 2021

Macro bashing continues by different scholars who use different ways to argue why macro is not working or has failed and so on.

Robert Skidelsky has bashed macro earlier as well. In this recent Proj Synd article, he hits macro again:

The problem with quantitative easing (QE), quipped then-US Federal Reserve Chair Ben Bernanke in 2014 about the Fed’s bond-buying program, “is it works in practice but it doesn’t work in theory.” One could say the same about macroeconomic policy in general, in the sense that there is no robust theory behind it. Governments routinely “stimulate” the economy to “fight” unemployment, but with a theory that denies there is any unemployment to fight.

Mathematical refinement aside, economics has returned to what it was a century ago: the study of the allocation of given resources, plus the quantity theory of money. Macroeconomics – the theory of output as a whole, which was invented by John Maynard Keynes – has virtually disappeared.

He looks at the arguments for why unemployment occurs. The main reason cited by books is sticky wages:

For example, what causes unemployment? The standard textbook answer is “downward wage rigidity.” A hairdresser who asks for a wage of $14 per hour, but who can be profitably employed only at $13 per hour, is choosing not to be employed. That choice is thus voluntary, reflecting a preference for leisure, or a decision not to be a hairdresser. The same is true of all workers in an economy. On this view, what is called unemployment is a choice not to work.

The key assumption here is that everyone optimizes: they choose the best available option for themselves. Work is always available at some price. Therefore, unemployment is optimal for the unemployed. Given the assumption, the logic is unassailable.

So, if the government expands the money supply in an effort to increase employment, the only result will be inflation, because monetary expansion does nothing to increase the supply of labor willing to work. Monetary policy should thus concern itself solely with the objective of price stability, which is best entrusted to an independent central bank free from political temptation.

He says that in the 2008 crisis as unemployment rose, we saw Monetarist-Keynesianism where central banks passed monetary stimulus.

Central banks can increase the supply of money to private firms to boost their incentive to hire more workers, or governments can run budget deficits. “Monetarist Keynesianism” (in the form of QE) was the main response to the Great Recession of 2008-09. This is what Bernanke said worked in practice, but not in theory. In fact, it didn’t work in practice, either.

Champions of QE argue that things would have been even worse without it. That is impossible to prove or disprove. The fact remains that recovery from the 2008-09 financial shock was far from complete when the new COVID-19 shock occurred in 2020, because a lot of QE money was 

The pandemic saw return of fiscal Keynesianism where government stimulus was at the centre:

The COVID-19 pandemic impelled governments to fall back on “fiscal Keynesianism,” because there was no way that just increasing the quantity of money could lead to the reopening of businesses that were prevented by law from doing so. Fiscal Keynesianism in the big lockdown meant issuing Treasury payments to people prevented from working.

But now that the economy has reopened, the practical rationale for monetary and fiscal expansion has disappeared. Mainstream financial commentators believe the economy will bounce back as if nothing had happened. After all, economies fall into foxholes no more often than individuals normally do. So, the time has come to tighten both monetary and fiscal policy, because continued expansion of either or both will lead only to a “surge in inflation.” We can all breathe a sigh of relief; the trauma is over, and normal life without unemployment will resume.

The relationship between theory and practice is thus not as Bernanke saw it. Monetary policy works in theory but not in practice; fiscal policy works in practice but not in theory. Fiscal Keynesianism is still a policy in search of a theory. Acemoglu, Laibson, and List supply a piece of the missing theory when they note that shocks are “hard to predict.” Keynes would have said they are impossible to predict, which is why he rejected the standard view that economies are cyclically stable in the absence of shocks (which is as useless as saying that leaves don’t flutter in the absence of wind).

The supply and demand models that first-year economics students are taught can illuminate the equilibrium path of the hairdressing industry but not of the economy as a whole. Macroeconomics is the child of uncertainty. Unless economists recognize the existence of inescapable uncertainty, there can be no macroeconomic theory, only prudential responses to emergencies.

Central Bank of Nigeria becomes the second central bank to issues a CBDC

November 17, 2021

After Bahamas, Central Bank of Nigeria becomes second to issue CBDC. Central Bank of Nigeria has named its CBDC as eNaira. Bahamas called it the Sand Dollar.

The eNaira uses blockchain platform and will coexist with physical cash. There is a digital wallet where eNaira will be stored and one can engage in transactions.

Benefits of CBDC:

  • Fast, cheap, reliable and available payment channel.
  • Support digital economy.
  • Improved economic activities.
  • Simplified and easy cross border payments and trade.
  • Inclusion of excluded people in the financial system.
  • Improved effectiveness of monetary policies.
  • Ease in tax remittance and collection to support the Country’s growth.
  • Ease in targeted social interventions to support Nigerians.

There are more details on the website.

IMF has 5 observations on Nigeria’s CBDC. Third and fourth observations are to do with risks:


Will RBI be like Abhimanyu or Arjuna to break the easy monetary policy chakravyuh?

November 17, 2021

My new article in Moneycontrol on how central banks and RBI are going to be tested while trying to exit from easy mon policies.

What happens when cash usage continues to decline? Central banks lose their monetary anchor

November 16, 2021

Fabio Panetta of the ECB in this speech points how rising digital payments could lead central banks to lose their monetary anchor of cash:


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