Archive for March, 2022

How a culture clash between central banks and techies is holding back CBDCs

March 31, 2022

Chris Ostrowski in OMFIF summarises lessons from a recent CATO conference on digital currencies:

‘Just because you’ve been relevant for the last 100 years does not mean you’ll be relevant for the next 100 years.’

Sunayna Tuteja’s reflections stood out at a digital currency conference in Washington DC last month for two reasons. First, because few people challenge central bankers so directly on the threat posed by digital currencies and second, because this challenge came from a serving central bank official.

As the chief innovation officer of the Federal Reserve System, Tuteja brought some of the Silicon Valley mentality of her former career as head of strategic partnerships and emerging technologies at TD Ameritrade to a room full of central bankers, who are beginning to see the first outlines of a new digital financial landscape.

Though the menace of real macroeconomic harm from cryptocurrencies remains small and remote, a move to a trustless, decentralised economic model is the greatest threat to central banks’ operating models in centuries. It’s therefore reassuring to see so many central banks applying time, resources and intellectual firepower to understand the risks and opportunities posed by the overlapping and unstoppable forces of cryptocurrencies, blockchain and Web 3.

It is hard to imagine two communities with less in common than central bankers and those working in Web 3. The traditions, culture, priorities and even psychology of both groups could scarcely be further apart. But as Covid-19 restrictions lift, there will be more opportunities for central bank policy-makers and Web 3 technologists to meet in person. We are likely to see central banks innovating with digital money in ways that seemed unimaginable before the 2020s.


Chris then points why collaboration and learnings between the two is crucial:

It would, however, be a mistake of historic proportions if society stopped using public money and threw away ‘trust’ as a concept. The challenge for central banks and other actors in the existing financial architecture is to create a form of public money on a blockchain that can deliver the promises of a decentralised digital economy.

Just as at the beginning of the internet, it can be hard to envisage how the Web 3 world of non-fungible tokens, decentralised finance and cryptocurrencies can be anything more than just a niche fad, but the promise is real and the changes will be far-reaching.



Why the IMF is Updating its View on Capital Flows

March 31, 2022

IMF has released a series of policy papers on capital flows.

Tobias Adrian, Gita Gopinath, Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, and Rhoda Weeks-Brown explain IMF policy stance on capital flows:

Capital flows can help countries to grow and to share risks. But economies with large external debts can be vulnerable to financial crises and deep recessions when capital flows out. External liabilities are riskiest when they generate currency mismatches—when external debt is in foreign currency and is not offset by foreign currency assets or hedges.

The dramatic capital outflows witnessed at the start of the global pandemic and recent turbulence in capital flows to some emerging markets following the war in Ukraine are stark reminders of how volatile capital flows can be—and the impact this can have on economies.

Since the beginning of the pandemic many countries have spent to support the recovery, which has led to a build-up of their external debt. In some cases, the increase in debt in foreign currency was not offset by foreign currency assets or hedges. This creates new vulnerabilities in the event of a sudden loss of appetite for emerging market debt that could lead to severe financial distress in some markets.

In a review of its Institutional View on capital flows released today, the IMF said that countries should have more flexibility to introduce measures that fall within the intersection of two categories of tools: capital flow management measures (CFMs) and macroprudential measures (MPMs).

Today’s review said that these measures, known as CFM/MPMs, can help countries to reduce capital inflows and thus mitigate risks to financial stability—not only when capital inflows surge, but at other times too.


Alternative Inflation Forecasting Models for India – What Performs Better in Practice?

March 30, 2022

Jibin Jose, Himani Shekhar, Sujata Kundu, Vimal Kishore and Binod B. Bhoi of RBI in this paper evaluate different approaches of forecasting inflation in India:

This study develops a suite of inflation forecasting models for India and examines their forecasting performance over one-quarter ahead and four-quarters ahead horizons. Besides testing the suitability of a Phillips curve relationship in India for forecasting Consumer Price Index (CPI) inflation, it also uses relevant autoregressive integrated moving average (ARIMA) and structural vector autoregression (SVAR) models. Out
of sample forecasts suggest that seasonal ARIMA (SARIMA) models outperform others for one-quarter ahead forecasts, whereas variants of Phillips curve work better for four-quarters ahead forecasts in the case of inflation excluding food and fuel.

To account for significant variations in inflation characteristics across CPI components, disaggregated level (food, fuel and excluding food and fuel inflation) forecasts are also generated and then combined to compare with aggregate level forecasts. The results show that disaggregated inflation forecasts based on univariate models generally underperform in comparison to aggregate level forecasts. Disaggregated level forecasts that incorporate Phillips curve dynamics, however, perform better vis-à-vis direct forecasts over a longer forecast horizon, validating the utility of disaggregated level analysis of inflation in India. While SVAR models do not score well on forecasting performance, they provide useful insights for evaluating the impact of different shocks on inflation.

Climate change and its economic impact on Indian coastal states

March 30, 2022

Saurabh Ghosh, Sujata Kundu and Archana Dilip of RBI examine the impact of climate change on Indian coastal states:

The paper attempts to analyse the causal impact of natural disasters on output growth, agricultural productivity, inflation, tourism, fiscal parameters, and the cost of borrowing of Indian coastal states. It considers five states along the western coastline, i.e., Gujarat, Maharashtra, Goa, Karnataka and Kerala, and four states along the eastern coastline i.e., West Bengal, Odisha, Andhra Pradesh and Tamil Nadu and
their eight neighbouring inland states in order to assess the impact.

Difference-indifference regression results covering the sample period 2011-12 to 2019-20 indicate that natural disasters lower output growth, raise inflation and dampen tourist arrivals, while borrowing costs largely remain unaffected.

Some of these adverse effects also persist in the subsequent years. Eastern coastal states appear to have learnt and adapted better, given their long history of dealing with fierce natural disasters.

For enhancing resilience of those directly affected, it is necessary to strengthen disaster management capabilities, incentivise green projects, undertake scenario analyses for effective policy preparedness and promote green finance.



India moves towards 100% self-sufficiency in banknote production and much of Africa prints banknotes in Europe

March 29, 2022

One of the public policy objectives of India is to achieve 100% self-sufficiency in banknote production, We moved closer to this goal yesterday:

Shri Shaktikanta Das, Governor, Reserve Bank of India (RBI), dedicated Varnika, the Ink Manufacturing Unit of Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of RBI to the nation today (March 28, 2022) in Mysuru. In his address, Governor recognised the substantial progress made towards achieving self-reliance in banknote production ecosystem in India. He emphasised the importance of continuously building capacity (in terms people, process, and technology), research and development and innovation to achieve 100 per cent self-sufficiency in banknote manufacturing in the near future.

BRBNMPL has set up Varnika with an annual ink manufacturing capacity of 1,500 MT to enhance the security of banknotes. It is a boost to ‘Make in India’ initiative. It ensures that the entire requirement of banknote printing inks is produced in-house. This unit also manufactures Colour Shift Intaglio Ink (CSII) and meets the entire requirements of banknote printing presses in India, which has resulted in cost efficiency and self-sufficiency in banknote ink production. Further, commissioning of varnish plant for manufacturing different types of varnishes and production of medium and special additives indigenously in-house has helped the currency ecosystem in achieving twofold goals of cost efficiency and reduced import dependency.

This is in line with India’s march towards achieving complete self-reliance to commence manufacturing of all critical and key raw materials used in printing banknotes.


While in 40 African countries banknotes are produced in Europe raising questions about self-sufficiency.

There are obvious ironies in this aspect of money.  While most countries would want their money to be a global currency but production of banknotes should be local for all kinds of security and self-sufficiency reasons.



Lessons from history for our response to Ukrainian refugees

March 29, 2022

As tragedy continues to confront Ukrainian refugees, Sascha O. Becker of Univ of Melbourne seeks lessons from history:

Our economic system is making us mentally ill

March 29, 2022

Lynn Pyramore in this INET article:

The neoliberal economy was supposed to bring about a utopian world order. Instead, it gave us crippling psychological stress and social breakdown. How can we ever recover?
If you’re unlucky enough to reside in a town where data centers house computer servers storing everything from financial data for giant corporations to military secrets, you’re likely to find that a loud, whining noise becomes life’s agonizing background. The sound peaks and subsides, but it’s always there, never allowing you to fully relax. Eventually, the stress of this kind of ambient noise can wear you down, doubling your risk of mental illness, as well as increasing your risk of diseases like heart attack and stroke.
Living in an economy dominated by neoliberal principles can feel kind of like that: a background hum of constant psychological stress.
The sense of precariousness never really goes away. Instead collectively of sharing the risks of life, we’re increasingly saddled with the heavy burdens of existing in an overwhelmingly complex, modern world. We’re lonely individuals, fighting to stay afloat no matter what our situation. There are a few lucky winners, sure (and even many of them are psychically damaged), but most of us are forced to battle in an unrelenting struggle and competition for rewards. Hunger games, status games, power games, the list goes on and on.
In the big picture, the cumulative impact of shoddy safety nets, rapacious business practices, money-driven politics, and severe economic inequality is crushing our hope for the future, which we need to survive. Our trust in one another and in our institutions is dissolving. Our mental and physical health can’t stand up to this.
Well, what can one say?

The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies

March 28, 2022

Interesting IMF paper by Serkan Arslanalp ; Barry J. Eichengreen ; Chima Simpson-Bell. It says there is a stealth decline in share of US Dollar in foreign exchange reserves. The share is being replaced by China Renminbi and other currencies which have not played a reserve role so far:

We document a decline in the dollar share of international reserves since the turn of the century. This decline reflects active portfolio diversification by central bank reserve managers; it is not a byproduct of changes in exchange rates and interest rates, of reserve accumulation by a small handful of central banks with large and distinctive balance sheets, or of changes in coverage of surveys of reserve composition.

Strikingly, the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen and euro, other long-standing reserve currencies and units that, along with the dollar, have historically comprised the IMF’s Special Drawing Rights.

Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.

A characterization of the evolution of the international reserve system in the last 20 years is thus as ongoing movement away from the dollar, a recent if still modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies. These observations provide hints of how the international system may evolve going forward.


Central banks, the monetary system and public payment infrastructures: lessons from Brazil’s Pix

March 28, 2022

Some of the Central banks are busy developing instant retails payment system on its own platform.

Team of BIS researchers in this article look at how Brazil’s central bank is developing Pix, the retail instant payment system:

  • Public payment infrastructures build on the central bank’s foundational role in the monetary system by promoting competition and interoperability between payment platforms. They can reduce costs for users and promote financial inclusion.
  • Brazil’s recent experience with the Pix retail instant payment system illustrates the potential gains. In little over a year since its launch in November 2020, Pix has signed up 67% of adults in Brazil, with free payments between individuals and low charges for merchants.
  • The two key ingredients in the success of Pix are, first, the mandatory participation of large banks to kick-start network effects for users, and second, the central bank’s dual role as infrastructure provider and rule setter.


Dr C Rangarajan turns 90: video of his felicitation ceremony

March 25, 2022

Dr C Rangarajan turned 90 years. Skoch India did a felicitation ceremony on the occasion.

Wishing Dr Rangarajan many more to come.

100 years of Central Bank of Peru

March 25, 2022

Central Bank of Peru was established in 1922 and the year 2022 marks its centenary.

BIS and the central bank organised a conference to commemorate the centenary.



RBI Innovation Hub based out of Bengaluru

March 25, 2022

IN 2019, I had written an article asking whether RBI should have a Deputy Governorship position in Bangalore? As new technology solutions on banking and payments were happening mostly in Bangalore, perhaps it was time that RBI looked to tap into this talent. RBI already has office in Bangalore but its main work (like of other offices) is supervision etc of branches. What the article argued for was policy driven work out of Bangalore.

In 2020 RBI decided to establish Innovation Hub to promote innovation across the financial sector by leveraging on technology and creating an environment which would facilitate and foster innovation.

Interestingly, RBI has decided to base its Innovation Hub in Bengaluru.

The Governor, Reserve Bank of India (RBI), Shri Shaktikanta Das inaugurated the Reserve Bank Innovation Hub (RBIH) today (March 24, 2022) in Bengaluru. The RBI has set up the RBIH as a Section 8 company under Companies Act, 2013, with an initial capital contribution of ₹100 crore to encourage and nurture financial innovation in a sustainable manner through an institutional set-up.

The Hub has an independent Board with Shri Senapathy (Kris) Gopalakrishnan as the Chairman and other eminent persons from industry and academia as members. RBIH aims to create an ecosystem that focuses on promoting access to financial services and products for the low-income population in the country. This is in line with the objective behind establishment of RBIH i.e., to bring world class innovation to financial sector in India, coupled with the underlying theme of financial inclusion.

RBI Governor Shaktikanta Das in his address:

The recent phenomenon of technological innovations transforming the experience of availing financial services, be it banking, non-banking, payment services or being part of the financial markets has raised greater expectations from RBI to act as an innovation enabler as well.

To promote and facilitate an environment that accelerates innovation across the financial sector, the Reserve Bank Innovation Hub (RBIH) has been set up as a wholly owned subsidiary of the RBI.

Taking into consideration the availability of skilled personnel, innovation eco-system, linkages with academia / incubation centres etc., it was decided to set up the Hub at Bengaluru, Karnataka.


RBI has played this developmental and institutional builder role for a while now:

Central Banks are often viewed as traditional institutions that set monetary policies, issue currencies and regulate and supervise the financial sector segments and entities. For every economy to grow steadily and efficiently, this characteristic of a central bank is very important. Being a full service central bank, the RBI also plays a developmental role and is looked upon as a residual regulator as well.

RBI has been able to perform its varied roles with required professionalism and pragmatism. The ability to combine traditional functions with innovation has been critical to ensure orderly growth of the financial sector. To achieve specific end goals, apart from its own initiatives, the RBI has been an institution builder and has nurtured the setting up and development of many institutions1 like NABARD, CCIL, NPCI, IDRBT, IGIDR and ReBIT.

Will be interesting to see these developments..

Saving Banks from a Black Swan: Options and Trade-offs

March 24, 2022

Saurabh Ghosh, Pawan Gopalakrishnan, and Abhishek Ranjan in this RBI working paper looks at trade-offs that emerge when policies try to save banks from blackswan events such as pandemic:

Banking sector plays a crucial role in resource allocation and economic recovery. Considering its importance, several initiatives have been taken by public policy makers across the world to ensure the resilience of the banking sector during a black swan event (including the COVID-19 pandemic). These include capital infusions, loan moratoria, and restructuring.

This paper looks at the role of capital infusions as they provide a cushion to banks against adverse shocks that could result in large defaults. It evaluates the efficacy of capital infusions under different scenarios that include sticky or flexible deposit rates.

The findings from the paper indicate that a bank recapitalisation is best done in a flexible deposit/ lending rate environment, as it leads to better transmission.

But flexible interest rates (during an easing cycle) may result in lower spending by consumers due to a decline in interest income.

Therefore, public policy may need to balance this trade-off, and it may be important to simultaneously carry out demand revival policies along with appropriate and calibrated supply-side reform measures, such as banking capital infusion, to achieve an optimal policy mix.

Well policy is never easy. There are just so many trade-offs & unseen issues which come up…

100 years of Anand Bazaar Patrika

March 23, 2022

Anand Bazaar Patrika started on 13 March 1922 and the year 2022 marks its centenary. The paper started on the day of holi and the first edition was written in red ink. This gave a signal of protest to British colonial power

Anandabazar Patrika started its journey on March 13, 1922. Anandabazar was launched on the day of Dolayatra. The first issue was printed entirely in red ink. What the Englishman, the mouthpiece of the British government, thought was a ‘danger signal’. There is no way to appreciate this foresight of the Englishman. Because, Anandabazar newspaper shook the foundations of the British Empire with its fearless and uncompromising attitude towards the independence of the country.

In the pre-independence era, Anandabazar Patrika was the originator of nationalism. In the post-independence period, it stood for the overall development of Bengal and its people. Impartial views, constructive criticism, indomitable courage and uncompromising attitude are just a few of the aspects that have made Anandabazar a ‘Bangla language’.

Rudrangshu Mukherjee pays a fine tribute in BS to the iconic brand from Bengal. Apart from the main paper, the ABP group has supported so many media publications. What a story!

Hoping the group releases a centenary volume..

Profile of Peter Nicholl: How former governor of Bosnia’s central bank helped rebuild an economy ravaged by civil war

March 23, 2022

I just posted about how Ukraine central bank is fighting the ongoing war. has awarded Peter Nicholl, former Governor of Central Bank of Bosnia and Herzegovina for his contribution to central banking. The award citation discusses how Nicholl stabilized the economy after a serious civil war.

One day in the late 1990s, an International Monetary Fund official walked into the Washington office of his colleague Peter Nicholl. The official asked Nicholl if he would like to be a central bank governor. Nicholl had come to the IMF after a distinguished career at the Reserve Bank of New Zealand (RBNZ), where he last served as deputy governor. He said he was certainly interested: “And then [the IMF official] said: ‘It’s Bosnia.’ And I said: ‘Ahh … I might have to think about that.’”

Between 1992 and 1995, the ethnic conflict in Bosnia had killed approximately 100,000 people. In December 1995, the warring parties signed the Dayton Accords, under strong pressure from the US. The agreement set out protocols for reconstructing the shattered country, including the creation of a central bank. They specified that, for the first six years, the central bank governor must be a foreigner, appointed by the IMF.

Several fund officials, including economist Warren Coats, began looking for a governor. “Appointing [Nicholl] in Bosnia-Herzegovina seemed ready-made,” Coats tells Central Banking. Nicholl’s previous career had included chairing the working group that advised New Zealand’s government on giving the RBNZ operational independence on monetary policy. Nicholl agreed to take the job. 

At the end of his 7.5 year tenure:

The CBBH started off undercapitalised, with few staff, in a divided country. In its first years, it significantly reduced inflation, helped rebuild the banking sector, and introduced a new currency and payment system. The central bank built up its own staff of dedicated officials. Perhaps most importantly, it became an institution that was trusted across the divides.

“It happened probably 20 or 30 times that I could be walking down the street or [sitting] in a restaurant and someone I didn’t know would come up to me and thank me for giving them low inflation and a stable exchange rate,” says Nicholl. He laughs: “Never happened to me in New Zealand.”

Nicholl himself praises the contributions of the Bosnian staff and international experts who helped him in his time as governor. But his leadership was crucial to the central bank’s success in deeply unpromising circumstances, and represented an outstanding contribution to capacity building.

Perhaps the most satisfying praise comes when people see the difference you made…

How Ukraine central bank is coping with the crisis?

March 23, 2022

Yevhenii Skok and Oliver de Groot of Univ of Liverpool in this voxeu article:

The Ukrainian economist who is fighting the Russians with logistics

March 22, 2022

Tyler Cowen on Marginal Revolution blog profiles Tymofiy Mylovanov, a Ukrainian economist fighting the Russians with logistics.

This Bloomberg piece by Scott Duke Kominers is an interview with the heroic Tymofiy Mylovanov.  He is an economist, also of the University of Pittsburgh, who is organizing many of the logistics in Ukraine and also running the Kyiv School of Economics.  I am honored to know Tymofiy, here is one bit of a much broader story:

Mylovanov: Within the first couple of days, you see how people respond differently. Some people get traumatized; some become dysfunctional; others become almost super-efficient, like me and my team. But you have to figure out how to function in war or you die. Your loved ones will die. And we had a plan — war-time protocols at the university. We even had a war committee, and everyone was responsible for specific tasks, and they have to start executing them. Otherwise we collapse.

If someone doesn’t show up to a meeting, that doesn’t matter. Decisions are made without them. No wavering, no trembling hand. You either do it or you don’t do it and you accept the consequences. So we managed to shut down our facilities and put security in our buildings and the people there had food and water, and they’ve been staying there for two weeks.

There is much more detail in the article, which is interesting throughout.  And:

Mylovanov: One specific thing: We need 307,000 medical kits. I have the specification. Let’s say Israel can only supply 30,000 and Canada probably can supply 20 or 30,000. But we have suppliers who can provide the medical kits. We give this specification to [Ukraine’s] Ministry of Health, and our charitable foundation will pay. So tag me or email me or ping me on Twitter — and then donate, please donate.

All the fundraising goes directly to logistics. I have a website at the university of the charitable foundation [Kyiv School of Economics Humanitarian Relief Fund], and there is a Twitter post at my account. If I get a hundred dollars on that charitable foundation, it goes towards medical kits and it’s likely going to save a life.

By the way, Tymofiy Mylovanov is widely published in economics journals, including Econometrica and JET.  Here is Tymofiy on Twitter.

Discussion with Lant Pritchett: Where did development economics go wrong?

March 22, 2022

Shruti Rajgopalan has a conversation with Prof Lant Pritchett on the IdeasofIndia podcast.

In this episode, Shruti speaks with Lant Pritchett about economic convergence, academic skepticism about growth, flawed methodologies in development economics, the shortcomings of India’s educational system and much more. Pritchett is a development economist from Idaho. He is currently affiliated with Oxford’s Blavatnik School of Government as the research director of the RISE Programme, is the Research Director at LaMP (Labor Mobility Partnerships) and is a fellow at the London School of Economics. He previously worked with the World Bank from 1988 to 2007, living in Indonesia 1998-2000 and India 2004-2007. His publications span a wide range of development topics including economic growth, state capability, education, labor mobility and development assistance.

The earlier problem was how much to read. Now it is how much to hear!

How interconnected are cryptocurrencies and what does this mean for risk measurement?

March 22, 2022

Fillippo Ferroni of Chicago Fed in this paper:

My goal in this Chicago Fed Letter is to examine how cryptocurrencies are interconnected via prices and volatility spillovers. By spillover, I mean the propagation of variations in the price or volatility (a proxy for risk) of a digital currency to all the remaining cryptocurrencies in the market, and vice versa, the propagation of price variations in the market to a specific digital currency. It is important to understand the level of interconnectedness because it allows us to quantify the amount of risk that characterizes the cryptocurrency market. I carry out these analyses by considering a large set of digital currency prices and volatilities and by using the dynamic network connectedness measures developed by Diebold and Yilmaz (20092012).

I find that, perhaps unsurprisingly, the cryptocurrency market is extremely interconnected. For example, the connectedness index values I compute using different specifications, sample sizes, and time windows range between 86% and 97% (where 100% indicates maximum connectedness). This means that most of the variations in the prices in the cryptocurrency market are the results of the market’s spillovers and only a small fraction can be ascribed to the idiosyncratic characteristics of individual digital currencies.

In other words, most of the market volatility is the result of the linkages that amplify and reverberate any price movements in the market. These strong spillovers could be the results of aggregate or common shocks influencing the market as a whole, e.g., the downward trend in 2018 and the upward trend in 2020.

From this perspective, the total cryptocurrency market capitalization is more important than the price or the market cap of single currencies. Finally, from a risk-management perspective, this also suggests that it would be very difficult to create a diversified portfolio of cryptocurrencies.

Cryptos rise and fall together..

Herding Behaviour: Does it Exist in the Indian Stock Market?

March 22, 2022

RBI researchers – Aniket Ranjan, Suman Sourav and M. Sreeramulu – in the Mar-22 RBI Bulletin analyse whether there is any herding in Indian stock market:

This article examines the herding behaviour in the Indian stock market for the period January 2019 to March 2020. For testing the herding activity, we use three independent datasets viz., small-cap, mid-cap, and large-cap stocks. Our findings suggest that herding behaviour exists in mid-cap stocks. Further, it is confirmed that herding activity is more prominent during the periods of negative market returns and days with net negative foreign institutional inflows.

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