Archive for December, 2021

Mostlyeconomics blog in 2021: Decline in viewership and posts

December 31, 2021

Today is the last day of the year 2021. Here is a quick review of the mostlyeconomics blog in the year 2021:

  • Views – 1,14,551
  • Visitors – 82,383
  • Posts published – 721

Top 5 posts

Both the viewership and number of posts have declined compared to 2020:

  • Views – 2,23,823
  • Visitors – 1,58,465
  • Posts published – 820

Infact the viewership and number of posts are at their lowest since 2012.

2021 was a very tough year and was difficult to  post regularly. Thanks a lot to all the visitors and well-wishers who have visited the blog in the difficult times. Highlight for the blog was its inclusion the Library of Congress Web Archives.

But then I must not complain as the viewership and posts since the blog’s inception look really good:

  • Views – 35,66,872
  • Visitors – 14.99,557
  • Posts published – 11428

Hoping for a better 2022 for all of us.  In case the visitors have feedback/suggestions on improvement, please send your feedback.


Watching economics on TikTok

December 30, 2021

Tyler Cowen on the MR Blog:

For my latest Bloomberg column, I ran the experiment of typing “economics” into the TikTok search function, and here is what came up:

The first video I saw was about the high pay of economics majors in the job market, relative to softer majors. The speaker has a strange British accent, and it is possible that he was deliberately trying to look and sound stupid. It has been liked more than 32,000 times. The next was a rant about the outrageous price of beer at sporting events. There is no obvious intelligence or analysis in the video. It has been liked almost 32,000 times.

I also saw a video called “Why I left economics,” in which a student who took an economics class at Brown explains how his professor taught about inequality but lived in a mansion with servants. He argues that economics as a subject distracts our attention from “what the **** we’re supposed to do.” The number of likes exceeds 258,000.

I watched a video of a woman loudly sighing in relief as a caption explains she has just dropped her economics class. Likes: more than 22,000. Then there was one mocking the idea of being an economics major, calling it another religion and suggesting the demand for economist friends is quite low. It had more than 34,000 likes.

But I am not upset at TikTok:

I think of TikTok as a useful wake-up call for economists.

First, TikTok is one of the dominant modes of presenting and debating issues and ideas, including economics, yet it is hardly used or even discussed by professional economists. (University of Houston Professor Chris Clarke is a notable exception.) Economists are ignoring the market signals — to our own detriment.

Second, TikTok’s preoccupation with the status and morality of economics exists beyond TikTok. TikTok offers economists a view of ourselves as much of the world sees us. We are judged not for our analytics, but rather by how we fit into various moral codes. Like it or not, that is something we economists have to come to terms with. Maybe we should thank TikTok for making this so clear.

Recommended.  And whether or not you like TikTok, you all should be spending a non-zero amount of time with it.


Economic theories and macroeconomic reality

December 30, 2021

Francesca Loria, Christian Matthes, Mu-Chun Wang in this Bundesbank paper:

Economic theories are often encoded in equilibrium models that cannot be directly estimated because they lack features that, while inessential to the theoretical mechanism that is central to the specific theory, would be essential to fit the data well. We propose an econometric approach that confronts such theories with data through the lens of a time series model that is a good description of macroeconomic reality. Our approach explicitly acknowledges misspecification as well as measurement error. We highlight in two applications that household heterogeneity greatly helps to fit aggregate data, independently of whether or not nominal rigidities are considered.

The US Library of Congress begins to archive Mostly Economics blog

December 30, 2021

In 2018, the US Library of Congress (LOC) started Economics Blogs Web Archive for digital archiving of economics blogs.

The goal of the Economics Blogs Web Archive is to capture current economic research and original thought as reflected in the blogs by professors of economics, economic policy and/or research institutions and other practitioners of economic disciplines.

It is important to preserve this openly available content that covers a variety of topics in economics ranging from general macro or microeconomics to specific sub-topics in finances, taxes or healthcare economics.

The majority of the blogs are well established, long running blogs with verifiable credentials of the authors. The collection is not limited to the United States in scope. Notable blogs from Canada, United Kingdom, Belgium, Australia, France and other countries are included.

I am delighted and humbled to mention that the LOC has decided to include Mostly Economics blog in the list of its archives. 

Once again, I wish to thank all the visitors and well-wishers of this blog.

Analysing Fiscal Federalism in Global South: South Africa, Kenya, Ethiopia and Nepal

December 30, 2021

New NIPFP paper by Lekha Chakraborty, Gurleen Kaur, Divy Rangan, Amandeep Kaur and Jannet Farida Jacob:

This paper examines the fiscal federalism processes in four countries in the global south – viz., South Africa, Kenya, Ethiopia and Nepal – focussing on their revenue and expenditure assignments and intergovernmental revenue sharing mechanisms. The significance of focussing on federations in global south is that the processes are still evolving in terms of “optimal concurrency” in the expenditure and revenue assignments; and “revenue sharing” norms.

The common feature of all these federations is the vertical and horizontal fiscal imbalances emanating from the asymmetric revenue and expenditure assignments and in turn identifying and restating the role of intergovernmental fiscal transfers to arrive at economic convergence across jurisdictions.


Arguing for a more anthropological approach to policymaking

December 29, 2021

Gillian Tett cultural anthropologist and chair of the editorial board of the Financial Times in this IMF article:

When the news broke in 2020 that scientists had raced ahead with efforts to create vaccines for COVID-19, policymakers and voters around the world cheered. No wonder: the development of these vaccines is a triumph for 21st century medical and computer science, raising the chances that the world will beat the pandemic.

However, in 2021 it has emerged that there is a catch: quite apart from the fact that distribution of the vaccine has proved to be lamentably—and dangerously—inequitable, not least because of the structures of the global political economy, vaccination even in some rich countries is turning out to be difficult. The reason? Culture—as defined by the web of half-acknowledged rituals, symbols, ideas, spatial patterns, and social affiliations that shape humans, wherever they live. Most notably, in places such as the United States, there has been so much vaccine resistance—or “hesitancy,” to use the polite euphemism—that it has undermined efforts to stop the pandemic.

And while some jurisdictions—such as France—have managed to overcome initial vaccination hesitancy (at least to some degree), the fact that there even are such battles illustrates a crucial, but oft-ignored, point about policymaking today. Effective responses to fast-moving (or even slow-moving) challenges require more than reliance on so-called hard sciences, such as medical research or the powers of big data. You need “soft” science too, to understand human behavior and culture. 

Or to put it another way, it is a profound mistake to try to solve public policy problems today just by relying on one set of intellectual tools, deployed with tunnel vision. You need lateral vision, to appreciate the wider human context and how elements that lie outside your model, big data set, or scientific trial could affect what is happening. Culture, as defined above, matters, along with environmental and political systems—and not just the pieces of our cultural systems that we openly notice (the “noise”) but also the pieces we tend to ignore because they are embarrassing or familiar or too complex to discuss (the “silence”). 

We need lateral vision to deal not only with pandemics but also with a host of other issues around economic development and policymaking—climate change, pensions, and so on. Trying to devise effective policy purely on a technical basis, such as with a narrowly bounded economic model or with engineering science, is akin to walking through a dark wood at night looking only at a compass dial. No matter how technically brilliant your tool might be, if your eyes are fixed on it alone, you will trip over a tree root. Context matters.

How to build this vision?

How can policymakers adopt that lateral vision? I would suggest that one way to do this is to borrow some ideas from a field I trained in, before becoming a financial journalist: cultural anthropology. This might sound odd to some policymakers, given the discipline’s often rather dusty, exotic image—its adherents viewed as academic versions of Indiana Jones who spend their time traveling to remote locations to study colorful rituals that seem far removed from 21st century economic challenges.

However, this stereotype is not just wrong—it also creates a gigantic missed opportunity. Yes, anthropologists are dedicated to studying human culture, in all its glorious spectrum of difference. But they do not do this in a patronizing manner (unlike the early 19th century anthropologists, who had a deplorably racist, sexist, and imperialist bent). Instead 21st century anthropologists believe that it is important to study different cultures, with respect, because that process not only yields empathy for strangers, which is crucial in a globally integrated world, it also helps us understand our own cultures better—wherever we initially hail from. It is a win-win.

Is England cricket team’s performance in Ashes 2021 like the Lehman moment?

December 29, 2021

Andrew Miller in this article hits hard at England’s Ashes performance. He compares the events to global financial crisis.

Much before 200 crisis, economic outlook was worsening across the world particularly in developed countries. But the spin was all is well and there is nothing to worry. Similarly, decline in English test cricket has been there for a while now but it was never addressed:


New Year may herald first round of bank privatisation, new licences for private entities

December 29, 2021

My new year piece on what to expect from Indian banking sector in 2022:

The next year brings hope that a decade of bad news in Indian banking ends and will pave the way for far-reaching changes. Yet, the surfacing of the new Omicron variant of Covid-19, has cast a pall of uncertainty.

Case of RBL Bank Limited: Poor communications leads to crisis

December 27, 2021

Just as markets were gearing for the Christmas and new year break, there was some noise from India’s RBL Bank over the weekend.

First, the bank board approved CMD Mr Vishwavir Ahuja to proceed on leave with immediate effect. Second, the RBI appointed Mr Yogesh Dayal, currently chief general manager at RBI as an additional director.

The bank issued a press release saying all is well:

  • The Reserve Bank of India has appointed Mr. Yogesh Dayal as an Additional Director on the Board of the Bank for a period of two years till December 23, 2023 or till further orders, whichever is earlier.
  • The Board accepted the request of Mr Vishwavir Ahuja to proceed on medical leave and appointed Mr. Rajeev Ahuja (existing Executive Director of the Bank) as the Interim Managing Director & CEO of the  Bank subject to regulatory and other approvals.
  • The Board is grateful for the significant contribution of Mr. Vishwavir Ahuja towards the transformation
    of RBL Bank.
  • The Bank and the current management team led by Mr. Rajeev Ahuja has full support from RBI.

The markets smelled foul and as they opened, the share price dipped. The share price had closed last week on Rs 172.9 and declined to touch Rs 130.2. the RBI had to release a seperate statement expressing confidence:

There has been speculation relating to the RBL Bank Ltd. in certain quarters which appears to be arising from recent events surrounding the bank.

The Reserve Bank would like to state that the bank is well capitalised and the financial position of the bank remains satisfactory. As per half yearly audited results as on September 30, 2021, the bank has maintained a comfortable Capital Adequacy Ratio of 16.33 per cent and Provision Coverage Ratio of 76.6 per cent. The Liquidity Coverage Ratio (LCR) of the bank is 153 per cent as on December 24, 2021 as against regulatory requirement of 100 per cent.

Further, it is clarified that appointment of Additional Director/s in private banks is undertaken under Section 36AB of the Banking Regulation Act, 1949 as and when it is felt that the board needs closer support in regulatory / supervisory matters.

As such, there is no need for depositors and other stakeholders to react to the speculative reports. The bank’s financial health remains stable.

Following the RBI statement, there was recovery in the stock price to Rs 140 levels.

Hoping there is nothing wrong with RBL. Eeven if there is nothing wrong, it is a clear case of how poor communications can just lead to an unnecessary crisis. Indian banks have been facing governance and financial crisis for nearly a decade now.  RBL an old private sector bank known as Ratnakar Bank earlier has revamped its operations considerably but still has been under radar due to the pandemic. The board and the regulator should have known better.

Financial inclusion empowers monetary policy

December 27, 2021

Michael Patra of RBI in this recent speech links financial inclusion to monetary policy.  This is interesting as usually we have not linked the two fields.

In my remarks today, I would like to contribute to this growing interest in the symbiosis between financial inclusion and monetary policy by (a) assimilating the received wisdom and empirical evidence that has been accumulated so far on the subject; and (b) drawing applicable lessons therefrom for India. This assumes relevance in the context of the pandemic during which the loss of life and livelihood impacted the financially disadvantaged and vulnerable households and businesses the most. Drawing upon its experience with financial inclusion, the RBI crafted a pandemic response that reached out in the form of unconventional measures to those afflicted sections of society, keeping finance flowing, and financial institutions and markets functional, especially when personal incomes were lost and the future was highly uncertain.

Monetary policy maximises human welfare by minimising the deviations of output from its potential and inflation from the target. Although it is empirically observed that there is a two-way relationship between monetary policy and financial inclusion, it is unambiguous that financial inclusion is able to dampen inflation and output volatility. This is achieved by smoothing consumption by enabling people to draw down financial savings in difficult times for everyday needs. In the process, it makes people interest-sensitive. Moreover, inflation targeting monetary policy ensures that even those at the fringe of financial inclusion are secured from adverse income shocks that hit them when prices rise unconscionably.

At the cost of being slightly technical, therefore, the rest of my remarks will address four issues that sit at the heart of this confluence: first, the choice of the appropriate price index as the population gets progressively included financially; second, the impact of financial inclusion on output and inflation variability and the trade-off between them – the dilemma that is central to the conduct of monetary policy; third, the transmission of monetary policy impulses through the economy; and fourth, the impact of financial awareness on expectations and hence on the credibility of monetary policy.

On choice of headline vs core inflation:


Does Japan Vindicate Modern Monetary Theory?

December 25, 2021

Takatoshi Ito, former deputy minister of finance for Japan in this proj synd article asks whether Japan is poster child of MMT:

Public debt has soared since the 2008 financial crisis, and especially during the COVID-19 pandemic. According to the International Monetary Fund, the ratio of public debt to GDP in advanced economies increased from around 70% in 2007 to 124% in 2020. But the fear that rising public debt will fuel future financial crises has been subdued, partly because government bond yields have been so low for so long.

Although yields started falling much earlier, in the 1990s, they were kept low by quantitative easing (QE) after the 2008 and 2020 recessions. Few doubt that massive fiscal expenditures were warranted to alleviate suffering during those episodes. But advocates of Modern Monetary Theory take this logic a few steps further.

Advocates of MMT contend that as long as debt is denominated in a country’s own currency, there is no reason to fear a fiscal crisis, because a default cannot happen. Any withdrawal of fiscal stimulus therefore should be gradual. And in the meantime, new issues of public debt can be used to fund infrastructure investments, income-support programs, and other items on progressives’ agenda, provided that the inflation rate remains below the central bank’s target (generally around 2%).

MMT’s boosters cite Japan as proof of concept. Even though Japan’s debt-to-GDP ratio (including both central and local government) is above 250%, compared to 160% in the United States, its ten-year government bond yield has remained at around zero throughout the COVID-19 pandemic, and its average inflation rate has barely exceeded zero for 20 years. Annual new bond issues and soaring debt levels have not had any apparent impact on borrowing costs.

The Japanese story cannot go too far. It is like a ponzi scheme:

MMT’s validity partly depends on projected real (inflation-adjusted) growth per capita. If the population is growing and future generations will be richer than current ones, the “burden” of current bond issues will indeed be small. In this sense, bond issues for consumption function like pay-as-you-go pension systems. As long as the economy is growing faster than the interest burden, PAYGO is a sensible approach, because each generation can simply shift the burden to the next generation, ad infinitum.

Like a Ponzi scheme, this works only as long as the base of the pyramid keeps expanding. In the US, the government may be able to keep increasing its debt and maintaining its PAYGO social-security system for several decades to come. But Japan enjoys no such luxury. Its population has been declining since 2008 (and its working-age population since 1998), and its per capita income has been stagnant for 30 years. The scheme will soon collapse.

Japanese voters and politicians cannot keep treating cash raised from new and rolled-over bond issues as manna from heaven. If the electorate wants income redistribution, it must accept that the transfer should come from today’s rich (many of them elderly), rather than from future generations. And if the social-security system has become too generous, owing to overly optimistic projections, there should be a claw-back.

If, on the other hand, fiscal stimulus is needed, the spending should be directed more wisely to support future growth, such as by boosting investment in human capital and innovation. But a blanket endorsement of MMT and its policy implications is the last thing Japan needs. Now that the acute phase of the crisis is over, Japanese leaders would do well to start thinking about the country’s huge stock of debts.

Denmark’s green bond issuance strategy

December 25, 2021

Denmark government plans to issue green bonds from next year. The bonds  will be issued on twin bond concept.

The green bond is issued as a twin bond in line with the twin bond concept introduced by Germany in 2020. This implies that the green bond will be issued with the same financial characteristics as one of the central government’s existing conventional on-the-run issues. Accordingly, the new 10-year green bond will have the same maturity, interest payment dates and coupon rate as the central government’s 10-year benchmark bond, 0.00 per cent 2031 (ISIN: DK0009924102).
The twin bond concept supports the liquidity in the green bond, as investors, at any time, will have the opportunity to switch the 10-year green twin bond to the corresponding and more liquid conventional 10-year twin bond one-to-one. However, investors will not be able to switch the conventional twin bond to the corresponding green twin bond.
Trading and liquidity in the new green bond are further supported by existing initiatives established for the conventional government securities. This includes the central government’s securities lending facility, which will apply to the green bond in line with other government securities. Danmarks Nationalbank will at all times ensure that the total outstanding amount of green bonds, including securities lending, does not exceed the amount of eligible green expenditures.
Other details here:


Do Indians need insurance for bank deposits?

December 25, 2021

Prashanth Perumal J interviews me and Prof Amiyatosh Purnanandam on the need for deposit insurance. Here is the podcast version and transcript of the interview.

Reserve Bank of India Quiz 2021 and two wonderful blogs on Indian economic/monetary history

December 23, 2021

DR G Sreekumar, former central banker at Reserve Bank of India has two wonderful blogs on various aspects of Indian and global economics/monetary history.

On the tigerandpalmtree blog, there is a superb quiz on RBI. I will try and post answers later.

Using the Google Places API and Google Trends Data to Develop High Frequency Indicators of Economic Activity

December 23, 2021

Paul A Austin,Marco Marini, Alberto Sanchez, Chima Simpson-Bell  and James Tebrake in this IMF working paper

As the pandemic heigthened policymakers’ demand for more frequent and timely indicators to assess economic activities, traditional data collection and compilation methods to produce official indicators are falling short—triggering stronger interest in real time data to provide early signals of turning points in economic activity. In this paper, we examine how data extracted from the Google Places API and Google Trends can be used to develop high frequency indicators aligned to the statistical concepts, classifications, and definitions used in producing official measures. The approach is illustrated by use of Google data-derived indicators that predict well the GDP trajectories of selected countries during the early stage of COVID-19. To this end, we developed a methodological toolkit for national compilers interested in using Google data to enhance the timeliness and frequency of economic indicators.

Mumba Or Bom Baim: The Etymology Of Bombay

December 23, 2021

Ayushi Kalyani writes on the many names of Mumbai city.

Mombayn, Bombay, Bombain, Bombaym, Monbaym, Mombaim, Mombaym, Bambaye, Bombaiim, Bombeye, Boon Bay, Bon Bahia, City of opportunities, City of Dreams, City that never sleeps, Maximum City–one city, many names.

But what is the story behind Bombay? What does the etymology of Bombay tell us?

Autocratic AI dystopias: From science fiction to social science fact

December 22, 2021

Martin Beraja, Andrew Kao, David Yang and Noam Yuchtman in this research show how AI s serving both political autocracy and local innovation:

Discovering the political Phillips curve: Parliamentary voice on ECB monetary policy

December 22, 2021

Federico Maria Ferrara, Donato Masciandaro, Manuela Moschella, Davide Romelli in this voxeu research point to Political Philips curve:

East Asia’s Squid Game Economies – growing inequality in South Korea

December 22, 2021

Keun Lee, Vice Chair of the National Economic Advisory Council for the President of South Korea in this Proj Synd article writes about growing inequality in South Korea.

The increasing financialization of East Asia’s economies has seen inequality rise to levels unseen in decades, inspiring such dystopian visions as Squid Game and the Oscar-winning South Korean film Parasite. By adopting the right measures, policymakers can begin to reverse this trend and ensure that the region’s economic future is brighter than these recent on-screen portrayals suggest.


Joachim Nagel, convivial central banking heavyweight, takes Bundesbank helm

December 20, 2021

Joachim Nagel currently serving as Deputy head of banking department at BIS has been appointed as head of Bundesbank.

David Marsh in this OMFIF article profiles Nagel and how his appointment is crucial with German inflation hitting at 6 percent.

Joachim Nagel, confirmed as the next Bundesbank president, is a convivial central banking heavyweight who will maintain a traditional Germanic anti-inflation message, signalling continuity with incumbent Jens Weidmann, leaving after 10 and a half years.

Nagel, 55, embodies the principled yet pragmatic approach of a ‘central bankers’ central banker’, combining a down-to-earth manner with a firm technical grasp of international financial markets. His appointment, one of the more important jobs settled in the aftermath of Chancellor Olaf Scholz’s government formation, may signal a more emollient style and tone at the German central bank, but no shift in fundamental policy.

Nagel takes the helm at a difficult time for Germany, with the harmonised inflation rate at a 30-year high of 6%, fears of declining post-pandemic recovery momentum and widespread opposition to the European Central Bank’s massive government bond purchases. The ECB on 16 December announced a throttling back of asset purchases next year, but is sticking to a general policy of monetary accommodation that is increasingly out of favour in Germany.

Although the Bundesbank has given up to the ECB its once-feared sway over European money, it maintains a symbolically important position in Germany and abroad. Nagel is a member of Scholz’s Social Democratic Party (SPD), which won a narrow victory in the 26 September general election. The complexities of choosing a candidate supported by all partners in the three-party German coalition helps explain the delay in confirming the choice, which was first reported by the Financial Times on 2 December.

This bit on political economy of central bank appointments at Bundesbank is interesting. The central bank claims to be free from politcal interference but the appointments are closely linked to political cycles.:

Despite the Bundesbank’s much-trumped freedom from political interference, the central bank’s leadership has often coincided with German electoral cycles, with terms in office frequently truncated by political turbulence. Karl Klasen, the autocratic former Deutsche Bank chief executive, president in 1970-77, was a close friend of Chancellor Helmut Schmidt. West Germany’s 1970s leader chose his confidant and fellow SPD member Karl Otto Pöhl, the ebullient finance ministry state secretary, to join the bank in 1977 and take over the reins in 1980, a highly fraught period for the German economy.

After Pöhl quit in 1991 in a row over German reunification, Chancellor Helmut Kohl selected Helmut Schlesinger and then Hans Tietmeyer, both seasoned conservative monetary technocrats, to head the Bundesbank. Newly elected Chancellor Gerhard Schröder brought in Ernst Welteke, a former SPD Hesse economics minister and state central bank chief, as Tietmeyer’s successor in 1999, presiding over the early years of euro introduction.

When Welteke was forced to leave in 2004 in a politically motivated upset, Schröder and his Finance Minister Hans Eichel disagreed over the succession, leading to a messy candidature tussle. Axel Weber, an economics professor and adviser, previously little known outside expert circles, emerged from a field of four other possible successors to become president for seven years. He left one year early in 2011 after Merkel gave him insufficient support to become ECB president after Jean-Claude Trichet. Weber went on to head Swiss bank UBS and Merkel’s confidant Weidmann took the helm.

Compared with past Bundesbank controversies, the Weidmann-Nagel succession has been been relatively straightforward. With German inflation at 6%, choosing a more experimental figure without Nagel’s stability-minded ‘safe pair of hands’ reputation would be, for Scholz and the rest of the government, a high-risk option.

Isabel Schnabel, the German academic who has been ECB board member for two years in charge of the bank’s market operations, earlier thought to be a contender for the Bundesbank post, was rejected owing to her relative lack of experience. Additionally, France, Italy and other euro area members have voiced discreet irritation at how Schnabel’s three German ECB board predecessors in the past decade have all quit prematurely, making it essential that she fulfils her eight-year term.

There had been speculation that Schnabel, had she become the Bundesbank’s first female chief, was being readied to take over from Lagarde when the ECB president’s mandate expires in 2027. With Nagel now due to move back to Frankfurt from Basel, there may be talk – which he will be anxious to quell – that Nagel, at the comparatively youthful age of 61 in six years, could take over from Lagarde. That is still a long way down a road that, for the Bundesbank and its new chief, is likely to be undulating and arduous.


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