Archive for April, 2022

Why is Swiss National Bank allowing Swiss Franc to appreciate?

April 29, 2022

Thomas Jordan Chairman of SNB in this speech discusses SNB’s approach to Russia-Ukraine war.

This bit on exchange rates is interesting:

At our most recent monetary policy assessment in March, we decided to leave our policy rate unchanged at −0.75%, and to maintain our willingness to intervene in the foreign exchange market as necessary. However, we had already stressed in December that we would allow the
Swiss franc to appreciate to a certain extent. So how do we put our current monetary policy in context?

We intervene in the foreign exchange market when strong upward pressure on the Swiss franc would lead to persistently negative inflation and weigh heavily on the economy. However, we do not react mechanically to every instance of upward pressure. If you have followed the
Swiss franc closely over the past months, you will know that it has gradually appreciated and has at times even fallen below parity to the euro.

We have quite deliberately allowed this to happen. The reason is that inflation abroad is significantly higher than in Switzerland. This means that our economy can withstand the franc being stronger in nominal terms. The higher prices abroad and the nominally stronger Swiss franc roughly balance one another out, and there has therefore been hardly any change in the real exchange rate over the past quarters. Without the nominal appreciation of recent months, our monetary policy would have become more expansionary.

Given the current development of inflation, that would not have been appropriate. Allowing the appreciation helped us to keep inflation comparatively low in Switzerland.

Real vs nominal..Each economy to its own..


Central African Republic approves bitcoin as legal tender

April 29, 2022

After El Salvador, Central African Republic (CAR) becomes the second country to adopt bitcoin as legal tender.

Case of CAR is even more interesting as it part of a currency union where 6 African States have a common central bank issuing a common currency – CFA.

Central African Republic has adopted bitcoin as an official currency, the presidency said on Wednesday, becoming the first country in Africa and only the second in the world to do so.

Despite rich reserves of gold and diamonds, Central African Republic is one of the world’s poorest and least-developed countries and has been gripped by rebel violence for years.

A bill governing the use of cryptocurrency was adopted unanimously by parliament last week, said a statement signed by Obed Namsio, chief of staff of President Faustin-Archange Touadera.

“The president supports this bill because it will improve the conditions of Central African citizens,” Namsio told Reuters, without elaborating. In the statement, he called it “a decisive step toward opening up new opportunities for our country”.

Central African Republic is one of six nations that use the Central African CFA franc, a regional currency governed by the Bank of Central African States (BEAC).

Two of the country’s former prime ministers last week signed a letter expressing concern about the adoption of bitcoin without guidance from the BEAC, calling it a “serious offence”.

“The BEAC learned at the same time as the public of the enactment of a new law on cryptocurrency in Central African Republic,” a BEAC spokesman told Reuters, adding that the bank did not have an official response yet.

I had just pointed to recent research on El Salvador’s decision to adopt bitcoin which has mostly failed. CAR has poor electricity, internet availability and digital penetration. Unlikely that bitcoin will make any inroads here.

Did regional Federal Reserve Structure promote economic ideas and thinking?

April 29, 2022

Interesting paper by Ed Prescott and Michael Bordo. The paper is the memory of Marvin Goodfriend who spent majority of his career at Richmond Federal Reserve. The authors argues how the regional Fed structure promoted economic ideas and with Goodfriend playing a leading role:

This essay was written in memory of Marvin Goodfriend for a Federal Reserve Bank of Richmond book called Essays in Honor of Marvin Goodfriend: Economist and Central Banker. We discuss his Carnegie-Rochester conference paper titled “The Role of a Regional Bank in a System of Central Banks.” In that paper, Marvin argued that the Federal Reserve’s decentralized structure allowed for competing ideas about monetary and banking policy to develop with the central bank. In our essay, we describe how Marvin demonstrated this argument during his long career at the Federal Reserve Bank of Richmond. We also describe the institutional developments that led to this competition, including reforms that Chairman William McChesney Martin made to the operation of the Federal Open Market Committee in the 1950s and the introduction of monetary policy ideas such as monetarism and rational expectations by the Reserve Banks.



The wild west of crypto finance: New subprime crisis in making?

April 28, 2022

Fabio Panetta of ECB in this speech compares crypto mania with the wild west and gold rush:

170 years ago Americans pushed westward across the frontier to seek their fortune in the gold rush. Greed and lawlessness turned this promised land into the Wild West, where the few exploited the dream of the many.

Fast-forward a century and a half and, amid the global financial crisis, growing distrust of banks, coupled with technological innovation, gave rise to a new dream – a digital gold rush beyond state control.

Satoshi Nakamoto – or rather the software developers using that pseudonym – created the source code of what they thought could be decentralised digital cash. Their 2008 white paper[1] shows a great fascination with technology, notably cryptography, but not necessarily an in-depth understanding of payment and money issues. They aspired to realise an anarchistic utopia of a stable currency free from public scrutiny.

Almost 15 years on, crypto-assets are what everyone’s talking about. Crypto enthusiasts marvel at the rise of the crypto market, with many feeling they should take their chances on the crypto gamble. An ecosystem has emerged, from miners to intermediaries, all seeking to expand into digital finance. Crypto evangelists promise heaven on earth, using an illusory narrative of ever-rising crypto-asset prices to maintain inflows and thus the momentum fuelling the crypto bubble.

But appearances are deceptive. Satoshi Nakamoto’s dream of creating trustworthy money remains just that – a dream.

Crypto-asset transfers can take hours to process. Their prices fluctuate wildly.[2] The supposedly anonymous transactions leave an immutable trail that can be traced.[3] A large majority of crypto holders rely on intermediaries, contrary to the avowed philosophy of decentralised finance. In El Salvador, for instance, which is the first country to adopt bitcoin as legal tender, payments are carried out via a conventional centrally managed wallet.

Crypto-assets are bringing about instability and insecurity – the exact opposite of what they promised. They are creating a new Wild West.[4] To quote Littlefinger from Game of Thrones, “chaos is a ladder”. The story does not end well for this character. However, it only takes a few to climb high on the ladder – even if their gains are only temporary – to convince many others that they are missing out.

Crypto investments has grown to sub-prime market volumes:

Indeed, the crypto market is now larger than the sub-prime mortgage market was when – worth USD 1.3 trillion – it triggered the global financial crisis.[5] And it shows strikingly similar dynamics. In the absence of adequate controls, crypto-assets are driving speculation by promising fast and high returns and exploiting regulatory loopholes that leave investors without protection. Limited understanding of risks, fear of missing out and intense lobbying of legislators drive up exposures while slowing down regulation.

We must not repeat the same mistakes by waiting for the bubble to burst, and only then realising how pervasive crypto risk has become in the financial system. And while some may hope to be smarter and get out in time, many will be trapped.

Now is the time to ensure that crypto-assets are only used within clear, regulated boundaries and for purposes that add value to society. And it is time for policymakers to respond to the people’s growing demand for digital assets and a digital currency by making sovereign money fit for the digital age.

Today I will argue that at present crypto-assets are not only speculative and high-risk investments, but they also raise public policy and financial stability concerns. I will then discuss some elements of the public policy response which is necessary in order to protect investors and preserve financial stability without suffocating innovation.

Crypto markets do not appear as interconnected as sub-prime housing markets. However, one just does not know in finance as interconnections come from nowhere. Sub-prime markets also looked remote till they brought the house down..

Economic inequality and public trust in the European Central Bank

April 28, 2022

Stephanie Bergbauer, Alessandro Giovannini and Nils Hernborg in the ECB research bulletin discuss linkages between rising ineuality and central bank trust:

This article explores the relationship between economic inequalities and public trust in the ECB and other European institutions. Drawing on data from the ECB’s new Consumer Expectations Survey and the Standard Eurobarometer, it analyses the relationship between different forms of economic inequality, perceptions of inequality and public trust in the ECB and other EU institutions in the euro area over the period 1999-2020 and in the context of the COVID-19 crisis. 



Comparing Participation in Formal Financial Services across Two Nationally Representative Surveys: CPHS vs. AIDIS

April 27, 2022

Dvara Foundation researchers (Niyati Agarwal, Rakshith S. Ponnathpur & Sahana Seetharaman) compare the findings of the two surveys:

To summarise the findings, we find numbers on bank account ownership as well as incidence of indebtedness to be comparable across both the surveys. However, CPHS reports significantly higher participation in other formal financial assets like post-office savings, pension/PF accounts, and life and health insurance, compared to AIDIS. Whether this is due to any inherent limitation of the CPHS sampling strategy as critiqued by Jean Dreze and Anmol Somanchi merits further investigation.

We hope this comparison enables survey designers and researchers to deliberate on what can make both CPHS and AIDIS richer sources of information on Indian households than they already are. For instance, we see merit in CPHS adding questions about the participation in and usage of e-wallets and other digital financial services, that AIDIS has captured in this round. Similarly, CPHS has shown that shops are a major source of informal credit among Indian households, and this calls for other surveys like AIDIS to consider shops as a legitimate source of informal credit to get a more comprehensive and accurate picture of indebtedness among Indian households.

Economists want to see changes to their peer review system. Let’s do something about it.

April 26, 2022

Gary Charness, Anna Dreber, Daniel Evans, Adam Gill and Severine Toussaert have surveyed 1400 economists on peer review research system. They summarise findings in this voxeu research:

Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador

April 25, 2022

Fernando E. Alvarez, David Argente & Diana Van Patten study the bitcoin experiment in El Salvador:

This paper studies the potential of a cryptocurrency to become a medium of exchange. We use evidence from a natural experiment: In September 2021, El Salvador became the first country in the world to make bitcoin legal tender, and all economic agents were required to accept bitcoin for all payments.

The Salvadorean government also launched an app, “Chivo Wallet,” which allowed users to digitally trade both bitcoin and dollars, and gave major incentives to download it.

We conduct a representative national face-to-face survey to obtain information on bitcoin’s usage and effects.

Leveraging this data, we document how, despite the government’s “big push” and a large fraction of people downloading Chivo Wallet, usage of bitcoin for everyday transactions is low and is concentrated among the banked, educated, young, and male population.

We also estimate the fixed cost of adopting the new payment technology, the importance of strategic complementarities for users, and the elasticity of substitution between mobile payments and other payment methods.

IMF statement on Sri Lanka and Pakistan

April 25, 2022

IMF released statements on Sri Lanka and Pakistan economies.  The policymakers from these two economies have met IMF for financial support and aid.

Most of the South Asian economies are facing a crisis. My article in moneycontrol on what South Asian economies can learn from South East Asian counterparts which faced a major crisis 25 years ago.



25 years of South East Asian crisis: Is South Asia following suit?

April 23, 2022

Until 1997, the South East Asian economies were called tigers for their high growth  and potential. However fortunes soon turned as a massive economic crisis rocked the region in July-1997.

25 years later, another Asian region – South Asia – is facing an economic crisis.

My piece in moneycontrol on the lessons South Asian economies can learn from SE Asian crisis.


World order may fragment following Ukraine conflict and new cold war

April 22, 2022

Lord Meghnad Desai in this OMFIF article says possibility of a nuclear weapons in Ukraine war is rising:


As Russia-Ukraine war rages on, remembering Andha Yug by Dharamvir Bharti

April 22, 2022

It is so sad and tragic to see pictures/videos of Russia-Ukraine war killing hapless people and spreading misery.

The war images made me remember the landmark play – Andha Yug – by Dharamvir Bharti. The play is based on the aftermath of the Mahabharata War.  Despite different geographies and contexts, the main lesson that wars should be avoided at all costs is not lost. Yet humans find and invent reasons to fight wars.

One can even watch the play on youtube.

Increased work from home poses risk for commercial real estate and financial stability

April 22, 2022

Gustav Alfelt, Niclas Olsén Ingefeldt and Martin Regnér in this Riksbank (Sweden Central Bank) research point how increased work for home will lead to decline in demand for commercial real estate. The decline in demand will in turn pose risks towards financial stability as banks give large loans to this sector:

Companies in the commercial real estate sector have large loans and in recent years their loans have grown rapidly. All in all, this makes real estate companies vulnerable to disruptions that may affect their ability to pay off their loans. It also means that problems in the real estate sector could rapidly spread to the financial system.

In terms of value, offices comprise the largest part of the real estate sector. If the demand for office space were to decline, real estate companies could suffer financially as a result of higher vacancies. The Commentary concludes that there are many factors that affect the demand for office space and that it is uncertain whether increased teleworking will lead to higher vacancies. However, it is wise to investigate the consequences this might have for both real estate companies and financial stability in general right now.

If vacancies in office buildings are accompanied by lower expectations of future rent levels, this could have implications for both real estate companies and lenders. However, the assessment is that real estate companies have sufficient rental income and thus earnings to cope with such a situation. The conclusion is therefore that the risks to financial stability are small, a from more people working from home. If, however, companies reduce their office space through more efficient use of the premises, this may, through higher vacancies and poorer key ratios, lead to financing challenges for property companies. In such a situation, this could lead to substantial risks to financial stability.


If Banks use Artificial Intelligence/Machine Learning, will it impact their capital levels?

April 21, 2022

Hyacinthe Buisson, Henri Fraisse and Matthias Laporte in this Banque de France blogpost discuss how usage of AI will impact Bank capital levels:

The increasing use of artificial intelligence (AI) or machine learning (ML) techniques could allow banks to develop new credit risk models. These techniques could lead to substantial reductions in capital requirements. However, the opaque nature of these algorithms and the governance challenges they raise might make their adoption less attractive.


Mastering ML techniques – which is part of the curriculum of freshly graduated statisticians or data scientists – makes it possible to re-estimate these models, since the skills and economic incentives are there. Yet, while the industry maintains that it uses ML models for lending, banks seem reluctant to use these techniques in the models developed for calculating capital, citing regulatory barriers (“Machine learning in credit risk – 2nd edition summary report” – IIF (2019)).

Regulatory impediments include the explainability of ML techniques – which are less transparent than traditional parametric techniques – while banking regulations require models to produce an intuitive measure of credit risk. Furthermore, when using models, banks have to use human judgement in addition to the analysis, which is more difficult to do with ML techniques and the result is hard to explain. The complexity of some ML techniques can also raise governance concerns as regulations require that a bank’s senior management have a clear understanding of how the model is designed and how it works. The last difficulty is that some models using ML techniques are updated frequently, whereas the regulations require prior authorisation from the supervisor before any changes can be made to the model. 

To further the debate, the European Banking Authority has therefore recently published a discussion paper (EBA, 2021) which proposes to explore in greater depth the issue of regulatory barriers to the use of ML techniques in IRB models by asking European institutions to comment on some key questions.


Two casualties of war: truth and debt

April 21, 2022

Mojmír Hampl, member of the Czech Fiscal Council and a former Deputy Governor of the Czech National Bank, in this OMFIF article:

As the ancient Greek playwright Aeschylus observed, the first casualty of war is truth. Leaving aside for now the most dreadful casualties – human life, health and dignity – the second casualty of any war is public finance.

This is particularly the case for western countries, whose average public debt-to-gross domestic product ratio had already reached levels comparable with the end of the second world war during the Covid-19 crisis. These levels are a way above the World Bank’s famous ‘tipping point’ (public debt-to-GDP above 77%) where public debt endangers economic growth.

So now we have a war on our hands, and countries are more financially stretched than they were two years ago. Although the West is not directly present on the battlefield, things are likely to get worse.


While we can see rising debt as a casualty, but will we see the truth?

Central bank of Ukraine commits to return to inflation targeting with floating exchange rate when conditions normalise

April 21, 2022

The National bank of Ukraine (its central bank) in this press release commits to go back to inflation targeting + floating exchange rates as things normalise:

On 15 April, the NBU Council adopted its Monetary Policy Guidelines for the Duration of Martial Law (hereinafter the Monetary Policy Guidelines), which will apply until the economy and financial system are back to normal. The document has been published today on the NBU’s official website.

Under the Monetary Policy Guidelines:

The NBU has committed to resume the pursuit of its inflation targeting regime with a floating exchange rate as the Ukrainian economy and financial system return to their normal mode of operation.

To maintain financial stability in Ukraine, the NBU was forced to fix the exchange rate and impose a number of administrative restrictions, including those on FX transactions and capital movements. Amid these restrictions and elevated uncertainty, market-driven instruments are having only a limited impact on the functioning of the money market and the FX market. The NBU has therefore temporarily postponed its key policy rate decisions.

The NBU will continue to ease the FX and capital constraints and gradually go back to the floating exchange rate regime as the FX market regains its ability to self-balance. An important prerequisite for this is a significant increase in FX supply, in particular by exporters as they revive production and revitalize their logistical routes. The gradual retreat from the fixed exchange rate and the easing of restrictions will allow Ukraine to avoid an accumulation of significant macroeconomic imbalances.

When uncertainty clears and the effectiveness of monetary transmission channels increases, the NBU will be able to reinstitute its traditional inflation-targeting regime. The NBU will resume its forecast cycle and return to using the key policy rate as its main monetary instrument in order to reduce inflation to its 5% target and keep inflation expectations in check.

But this will take sometime to happen…

The importance of technology in banking during a crisis

April 20, 2022

Nicola Pierri and Yannick Timmer in this Federal Reserve paper show that more tech oriented banks do better in a crisis:

What are the implications of information technology (IT) in banking for financial stability? Data on US banks’ IT equipment and the background of their executives reveals that higher pre-crisis IT adoption led to fewer non-performing loans and more lending during the global financial crisis. Empirical evidence indicates a direct role of IT adoption in strengthening bank resilience; this includes instrumental variable estimates exploiting the historical location of technical schools. Loan-level analysis shows that high-IT banks originated mortgages with better performance, indicating better borrower screening. No evidence points to offloading of low-quality loans, differences in business models, or enhanced monitoring.

Economic spillovers from the war in Ukraine: The proximity penalty

April 20, 2022

Jonathan Federle, André Meier, Gernot Müller and Victor Sehn in this voxeu research show that countries which were nearer to Ukraine were impacted more:


Freedom For Sale: How We Made Money and Lost Our Liberty

April 20, 2022

John Kampfner, Editor of the New Statesman magazine from 2005-2008, wrote a book in 2010 titled:  Freedom For Sale: How We Made Money and Lost Our Liberty. Other editions also titled differently as: Freedom for Sale: Why the World Is Trading Democracy for Security.

I just came across the book and it makes for a riveting read. Book abstract:

Democratic liberalism v. authoritarianism — the ideological divide that defined the twentieth century. But when the cold war ended, “the end of history”; was proclaimed. Soon the fire of freedom would burn worldwide, the experts said. And where markets were freed, human rights would inevitably follow.

Or not. In the last twenty years, nations including India, Russia, China and the United Arab Emirates have disproved the idea that capitalism and democracy are inextricably linked. Emerging middle classes have proven themselves all too willing to sacrifice certain democratic rights — including free speech, an open media, and free elections — in exchange for prosperity. But they are not alone. We are all doing it. Alarmingly, Western democracy has adopted some of the attributes of that authoritarianism.

Combining boots on the ground reporting with incisive analysis, award-winning journalist John Kampfner describes this alarming trend — one which has only been exacerbated by the global economic meltdown — and what citizens must do to counter it.

Despite being written more than a decade ago, the book remains relevant to understand today’s times and how we got where we are today..

Turning in the widening gyre: monetary and fiscal policy in interwar Britain

April 19, 2022

David Ronicle in this Bank of England paper looks at fiscal and monetary policy in interwar Britain:

This paper brings together modern empirical techniques, a sign-restricted structural vector autoregression, with contemporary high frequency data to answer an old question – what role did macroeconomic policy play in Britain’s high unemployment and deflation in the years 1919 to 1938. Its specific innovation is to draw on a previously little-used weekly publication of public finance statistics, allowing the roles of taxation, public spending and monetary policy to be assessed side-by-side in a coherent framework.

In a period of particularly unsettled policy the paper finds that policy shocks, both monetary and fiscal, made a material contribution to variation in prices and unemployment – and these played a central role in the two great recessions of the period, modern Britain’s most severe.

Other policy choices could have delivered better outcomes for prices and unemployment – but these would have required making different choices in the face of conflicting objectives and some sharp trade-offs.


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