The lasting influence of Robert Lucas on Chicago Economics

Harad Uhlig of Univ of Chicago in this paper:

This paper is an overview from a personal perspective on the various ways Lucas has shaped today’s economics in general and in terms of ‘Chicago economics’ in particular. In honor of the 50th anniversary of its publication, much focus is given to his 1972 neutrality paper and its impact. I discuss how the paper was a trigger of the subsequent emergence of rational expectations macroeconomics. Further, I touch upon his fundamental contributions to growth theory, asset pricing and the characteristic use of the Bellman equations. After covering these topics, the paper concludes with a portrayal of the Money and Banking Workshop to describe the environment that Lucas established at the Chicago department, and to illustrate his enduring influence on the culture of teaching and discussing macroeconomics at the University of Chicago

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Curious connection between Indian Rupee and Russian Rouble

All kinds of histories are being revisited.

In Madras Courier, Roshni D’ Souza looks at the curious connection between the Russian Ruble & Indian Rupee .

The Indian Rupee and Russian Ruble have a long history. Centuries ago, Indian merchants used the Russian Ruble to trade goods and services across continents. Surprisingly, Chinese Turkestan was a key centre for trading goods in Russian Rubles. This fascinating exchange also continued into the twentieth century.

When Indira imposed Emergency, the Soviets supported her move. But in 1977, when Morarji Desai became the Prime Minister, the Russians, worried that their relationship with India would be jeopardised, extended a hand to the new government. To make peace, Morarji Desai and his Foreign Minister Atal Bihari Vajpayee went to Moscow to negotiate the Russian ruble/Indian Rupee exchange. That incident, looked through the rear view mirror of time, makes for fascinating reading.

 

Thinking about interlinkages between monetary policy, macroprudential policy and financial stability

Luc Laeven, Angela Maddaloni and Caterina Mendicino in this ECB paper discuss the interlinkages:

Recent research developed under the ECB research task force on Monetary Policy, Macroprudential Policy and Financial Stability highlights the existence of trade-offs and spillovers that monetary policy and macroprudential authorities face when deciding on their policy interventions. Monetary policy measures are key to support the supply of credit to the economy, but they could also have unintended consequences on financial stability risks. Macroprudential policies are instead effective in limiting financial stability risks, but they could also reduce the length of economic expansions by preventing credit from flowing to productive economic activities. In addition, since monetary and macroprudential policies transmit to the broad economy via the financial system, they unavoidably affect each other’s effectiveness. Taking these factors into account is key for the design and implementation of both policies.

When a NBFC uses logos of RBI and CBI to recover loan dues

RBI recently cancelled registration certificate of Delhi based NBFC – M/s P C Financial Services Private Limited. The reasons for cancellation are quite something:

M/s P C Financial Services Private Limited, New Delhi was primarily engaged in mobile app-based lending operations through an app called ‘Cashbean’. The CoR of the company has been cancelled on account of supervisory concerns such as gross violations of RBI directions on outsourcing and Know Your Customer norms. The company was also found to be charging usurious rate of interest and other charges to its borrowers in an opaque manner apart from indulging in unauthorized use of logos of Reserve Bank and Central Bureau of Investigation for recovery from the borrowers in gross violation of the Fair Practices Code.

People are still falling for usurious interest rates. Using logo of RBI/CBI is quite brazen one must say!

Bank of Russia bans short sales in Russian financial market

Russian stock markets crashed by 50% yesterday. Usually, the first thing financial regulators do in wake of a crisis is ban short selling.

So not surprised to Bank of Russia did the same yesterday:

Given the current situation in the financial market and to protect the rights and legitimate interests of investors in financial markets, mitigate risks and curb excessive volatility, the Bank of Russia has instructed brokers to suspend short sales in the exchange and over-the-counter markets starting from 24 February 2022 11:00 Moscow time until the said instruction is cancelled.

Demystifying LIBOR Transition in India: Recent Developments and the Way Forward

Harsh Khandelwal, Manoel Pacheco and Payal Ghose of CCIL in this research article in Rakshitra (CCIL Monthly Bulletin):

This article traces the origins of the London Interbank Offered Rate (LIBOR), its transformation into the most important interest rate in the global financial markets and the loopholes that triggered the global shift to Alternative Reference Rates (ARR) with particular emphasis on highlighting the transition process in India.

Best before: Personal loss recovery for offline digital cash

In physical cash world, if we lose money, it remains lost. In digital world, one can figure ways to recover lost cash.

Charles M. Kahn, Maarten van Oordt, Yu Zhu propose a solution to recover lost cash:

An inconvenient aspect of physical cash is that it can be lost without a way to recover it. This column considers a feature to solve this problem for offline digital cash: automated personal loss recovery through an expiry date. Consumers whose digital cash expired unused would automatically receive their funds back into their online account without having to file a claim. Personal loss recovery could substantially increase consumer demand for digital cash, with the time to expiry playing a key role.

Digital rupee: The history of Indian currency shows that monetary revolutions are messy processes

Shweta Banerjee (Doctoral Scholar at the Department of History, University of Toronto) in this Scroll article writes on the Indian government announcement of launching digital rupee.

Shweta is a historian of Indian money and uses the historical lens to reflect on this momentous change:.

She starts pointing out to similarities in FM Sitharaman’s speech wit that of Finance Member James Wilson’s words on starting paper currency in 1861:

When pre-paid instruments become private money and RBI cautions its users..

These are interesting times when we see all kinds of innovations are happening in space of payments, banking, currency and so on. Technology is key here as it has allowed all these new ideas to emerge at a fraction of a cost.

There is one such car pooling app named SRIDE. SRIDE has developed a mobile wallet for payment amidst its users and RBI has issued a warning against it:

It has come to the notice of Reserve Bank of India (RBI) that sRide Tech Private Limited, a company having its registered office at 1201, Tower-7, Close North, Nirvana Sector-50, Gurgaon, Haryana, is operating a semi-closed (non-closed) pre-paid instrument (wallet) through its car-pooling app (application) ‘sRide’ without obtaining the required authorisation from RBI under the provisions of the Payment and Settlement Systems Act, 2007. As such, any person dealing with sRide Tech Private Limited, will be doing so at their own risk.

Members of public are urged to exercise utmost caution while using such application/s, dealing with and before parting with their money to any such unauthorised entity. In their own interest, members of public should verify and satisfy themselves that the application used or the entity they are dealing with is authorised to carry out the activity it performs or assures to perform. The list of authorized payment system providers/ authorized payment system operators are displayed on RBI website at https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12043

This is really interesting. In several ways, SRIDE folks had created their own form of money which worked in its carpool network.

A major concern which emerges from this is how do people keep track of whether a wallet is approved or not? One does not expect people to check RBI circular each time some new app comes up which allows them to use services and make payments.

 

Regulations Review Authority continues to ease doing banking in India

In an earlier article, I had pointed how RBI’s Regulations Review Authority is making it easier to do banking in India. In the first set of recommendations, RRA had asked RBI to withdraw 150 circulars.

In the second round, RRA has asked to withdraw 100 more circulars and has identified 65 more which could be merged with other returns:

The Reserve Bank of India has set up a Regulations Review Authority (RRA 2.0) with an objective to reduce the compliance burden on Regulated Entities (REs). RRA had recommended withdrawal of 150 circulars in the first tranche of recommendations vide press release dated November 16, 2021.

2. In continuation of the exercise, RRA has now recommended withdrawal of additional 100 circulars in the second tranche of recommendations. Further, on the suggestions of an internal group (Chairman: Dr. O.P. Mall, Executive Director) the RRA has recommended elimination of paper-based returns and has identified 65 regulatory returns which would either be discontinued/ merged with other returns or would be converted into online returns.

RRA has also made this important recommendation of creating a one webpage which lists all the regulatory reporting across regulated entities:

The RRA has also recommended creation of a separate web page “Regulatory Reporting” in the RBI website to consolidate information relating to regulatory reporting and return submission by the regulated entities at a single source. These recommendations are expected to ease regulatory compliance for the regulated entities while improving the accuracy, speed and quality of data submission.

The regulatory reporting shows there are a total of 240 types of different returns which are to be filed and submitted by several RBI regulated entities! Of the 240, Department of Supervision asks 102 returns followed by Department of Regulation at 27 returns.

There is still a long way to go to reduce compliance/documentation/duplications costs for Indian banks. But RRA has made a good start towards the goal of ease of doing banking in India.

 

LIC IPO: History of SBI’s IPO and some lessons

There is a lot of discussion around LIC’s upcoming Initial Public Offer and rightly so. LIC is a behemoth in the life insurance sector and its listing will have multiple benefits such as increased transparency, better understanding of insurance sector and so on.

In several ways LIC IPO is a lot like SBI IPO. Just like LIC dominates the insurance sector, SBI dominated the Indian banking sector.  A quick history of SBI’s IPO (and also of select nationalised banks) also takes one through multiple institutional changes and developments. The sources of this post are taken from multiple RBI publications: Trends and Progress of Banking in India, Currency and Finance Report, RBI History and so on.

The starting point is 1991 Narasimham Committee report which recommended that banks should raise capital from markets (how all roads on Indian financial sector take you to 1991 report!!):

Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms

Andrea Ajello, Nina Boyarchenko, François Gourio, and Andrea Tambalotti in this new Fed paper:

This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit provision, lowers asset prices, and depresses economic activity and inflation. Finally, monetary policy may affect the buildup of vulnerabilities, but the sign of the impact along some of its transmission channels is theoretically ambiguous and may vary with the state of the economy.

 

Zombies and the Process of Creative Destruction

Sitikantha Pattanaik, Silu Muduli and Jibin Jose in the recent RBI Bulletin article analyse the relation between mon policy and zombie lending:

The Schumpeterian creative destruction process requires a dynamic reallocation of resources from weak and vulnerable firms to strong firms having high growth potential. Zombie firms that often survive longer than desirable taking advantage of countercyclical policy support, however, tend to thwart that process. Using firm-level data for India, this article finds that monetary policy does not hinder the creative destruction process by misallocating credit flows to zombies during periods of economic slowdown, but zombies seem to have dampened
the effectiveness of monetary policy at the margin as they use borrowed resources more for their survival than for undertaking new investment.

The real effects of FinTech lending on SMEs: evidence from loan applications in Portugal

Afonso Eça, Miguel A. Ferreira, Melissa Porras Prado, A. Emanuele Rizzo in this ECB paper analyse impact of fintech lending on the borrowers and economic activity. The data is from a P2B platform named Raize based in Portugal:

We show that FinTech lending affects credit markets and real economic activity using a unique data set of a Peer-to-Business platform for which we have the universe of loan applications. We find that FinTech serves high quality and creditworthy small businesses who already have access to bank credit. Firms use FinTech to obtain long-term unsecured loans and reduce their exposure to banks with less liquid assets, stable funds, and capital. We find that access to FinTech spurs firm growth, employment and investment relative to firms that get their loan application rejected. In addition, firms with access to FinTech increase leverage and substitute long-term bank debt with FinTech debt. Our findings suggest that FinTech allows firms to preserve financial flexibility, reduce their bank dependence and exposure to banking shocks.

 

Does infrastructure spending boost the economy?

There are debates in India over whether higher capital expenditure leads to a higher multiplier effect?  While literature does suggest a positive impact both over the short and the long run. Dr Rathin Roy in this Business Standard article countered this multiplier approach as spurious macro!

Anyways, the discussions on this capital/infra spending are happening elsewhere too. US has passed a  Infrastructure Investment and Jobs Act which plans to spend USD 550 billion over next 10 years.

Marios Karabarbounis of Richmond Fed in this short piece summarises the literature:

Public infrastructure investment is not like other government stimulus. Public investment acts as a typical demand stimulus but also provides important services to the private sector to assist with production of goods. This article analyzes the effects of public investment — especially highway construction, which is traditionally one of the largest components of public investment — on output. Dynamic effects turn out to be very important: Most studies find substantial benefits for the economy not in the immediate aftermath of the investment spending but a few years ahead.

Who Can Tell Which Banks Will Fail?

Kristian Blickle, Markus K. Brunnermeier & Stephan Luck in this NBER paper argue that inter-bank markets can identify bank panics much better compared to depositors:

We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance.

We find that deposits decline by around 20% during the run and that there is an equal outflow of retail and non-financial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks.

In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows.

Since regular depositors appear uninformed, we argue that it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.

Women are “hardworking”, men are “brilliant”: Stereotyping in the economics job market

Markus Eberhardt, Giovanni Facchini and Valeria Rueda study the academic reference letters to figure stereotyping:

Academia faces increased scrutiny because of its gender imbalance. This column uses machine learning methods to analyse gendered patterns in the text of reference letters written for candidates for entry-level positions in the economics job market. The findings reveal that women are systematically more likely to be praised for being hardworking and at times less likely to be praised for their ability. Given the time and effort letter writers devote to supporting their students, the authors suggest this gender stereotype is likely due to unconscious biases.

To manage creative destruction, we should build bridges and not walls

J Bradford Delong in this Project Syndicate article argues that we should build bridges and not walls to manage competition and creative destruction.

Technology and globalization offer far-reaching benefits, …., but they also increase the risk of some people being left behind. Accordingly, we should build bridges to help people move to the sectors that will define the new economy. What we should not do is build walls to protect the industries that will be rendered unproductive by the forces of creative destruction.

 

Discovering the ‘true’ Schumpeter: New insights on the finance and growth nexus

Peter Bofinger, Lisa Geißendörfer, Thomas Haas and Fabian Mayer in voxeu say we misinterpret Schumpeter’s work on finance and growth nexus.

The research portrays Schumpeter as someone who thought finance follows real economy by just intermediating funds from savers to investors. However, this is not correct. The ‘true’ Schumepeter thought finance leads real economy by creating credit:

Joseph Schumpeter made pioneering contributions to economic theory on the relationship between the financial system and economic growth. However, the economic literature has often misinterpreted his work, particularly on the importance of banks and liquidity creation for development. This column argues that a correct interpretation of Schumpeter helps resolve many empirical puzzles which have emerged in the last decades. Using a panel of 43 countries, it finds strong positive effects of credit growth on GDP growth and little effect of saving on GDP and credit growth. 

Further:

Shadow loans and regulatory arbitrage: evidence from China

Amanda Liu, Jing Liu and Ilhyock Shim in this BIS paper point how Chinese banks hide shadow loans from regulators:

This paper examines how Chinese banks used on-balance sheet shadow loans for regulatory arbitrage and whether the financial market priced in the banks’ use of shadow loans and the resulting vulnerabilities in 2016–2020. It finds that banks chose to window-dress their regulatory capital ratio by using shadow loans. It also shows that banks with a higher shadow loan ratio or a lower break-even non-performing loan ratio obtained from reverse stress testing faced higher wholesale funding costs. Finally, after the announcement of a rare bank failure event, more vulnerable banks witnessed lower cumulative stock and bond returns.