Archive for July, 2022

Hurtling to 80 and beyond: Netaji’s weight vs Indian Rupee

July 29, 2022

Manasi Phadke in another humor-filled column:

The Rupee valuation and Netaji’s weight have been both breaching the 80 mark. Clever Guptaji is worried about the former whilst Netaji is busy worrying about his weight. Read the conversation that never happened about hurtling to 80 and beyond in my humour column Tweakonomics 2.0 in the Hindu Business Line! Pasting it here for you! Enjoy!


The Fed Tackles Kalecki: Thinking about Kaleckian Philips Curve

July 29, 2022

Mario Seccareccia and Guillermo Matamoros Romero in this INET article review one of the 2022 Federal Reserve papers which wrote about Kaleckian Philips Curve:

A recent US Federal Reserve staff working paper written by David Ratner and Jae Sim (2022) has captured widespread attention, especially among economists, who, like ourselves, believe that a repeat of the anti-inflation policy scenario of the early 1980s of sharply raising central bank interest rates might prove inappropriate, if not catastrophic, as solution to dealing with the current inflationary environment. While inflation is hurting the poor disproportionally more because of their low incomes, a steep across-the-board rate hike may be a remedy that is worse than the disease, particularly since, as it has been well established (see, for instance, Storm 2022), we are not primarily facing with a demand-side inflation.

Indeed, not only might the inflation rate be quite insensitive to falling aggregate demand pressures, but sharp and persistent increases in interest rates could devastate many poor working households which would face the specter of increasing unemployment. This concern is amplified by the fact that, unlike the situation in the early 1980s, these poor households now tend also to be very heavily indebted as a proportion of their personal disposable incomes and may face even greater risk of insolvency both because of higher interest rates and because of the increasing unemployment (see Costantini and Seccareccia, 2020).

The US Fed working paper on Kalecki’s economics, dated September 2021, but which appeared only recently, is a breath of fresh air. Ratner and Sim (2022) claim that the Phillips curve in the United States and the United Kingdom has been almost flat since the 1980s because of the significant erosion of the bargaining power of workers. This began during the Reagan and Thatcher years, and which was especially reflected in declining union density rates over the last four decades. Thus, the supposed triumph over inflation for roughly four decades, until the surge during this last year of Covid-19, cannot be fully attributed to the conduct of monetary policy by the US Fed and the Bank of England. The Fed working paper, therefore, casts serious doubt on the mainstream narrative, which posits that the policy of the late Fed Chairman Paul Volcker of large hikes in interest rates was responsible for taming the 1980s inflation. If the Volcker shock was actually not what caused the long-term change in the dynamics of the inflation rate since the 1980s, and until the current Covid-19 crisis, then what was the culprit that flattened the Phillips curve?

The main takeaway of their paper is clear: interest rate hikes could have helped but it was rather the class conflict — particularly the offensive against the working class — that stood behind the inflation debacle of the Great Moderation, which had long-term consequences. Putting it that way, this could sound quite subversive to many mainstream economists. Indeed, as Nick Peterson (2022) writes in the Financial Times: “coming from deep inside the Fed this is near heresy. After all, central banks have naturally long been in thrall to theories that made them the heroes of the story.”


We believe that their main contribution is the introduction of the “Kaleckian” Phillips curve to the canonical Two-Agents New Keynesian (TANK) model with monopolistic competition (in this case, the two agents are workers and firms). This tweak implies that, apart from the usual bargaining over wages, there would be bargaining over the product price (or monopoly rents). Workers through labor unions would try to keep the markup as low as possible so that wages and the labor share would be larger, whereas firms would try to do the opposite. The degree of bargaining power would determine the winners and losers in the distribution of monopoly rents. It follows that the “Kaleckian” Phillips curve explains why the inflation and unemployment rates have been relatively low since the 1990s — without considering the recurrent crises and the most recent inflationary episode — because the bargaining power of workers has been extremely limited.

Kaleckians will not be happy with certain aspects of the Kaleckian Philips Curve:

Finally, we suspect that Kaleckians might be uncomfortable in calling the paper’s curve a “Kaleckian” Phillips curve. While it is true that the degree of bargaining power affects the Phillips curve in the authors’ model, the former is just a parameter exogenously determined, i.e., given the bargaining power of workers, the NAIRU and the natural rate of interest are pinned down and are unique, which is inconsistent with Kaleckian economics. Kaleckians, and more generally post-Keynesian economics, explicitly reject the existence of a NAIRU or a natural rate of interest. Therefore, a genuine Kaleckian Phillips curve would portray a horizontal segment that might depend on the bargaining power of workers, among other institutional factors but, as remarked by Kalecki (1943) in his “Political Aspects of Full Employment”, the bargaining power depends on the rate of employment and monetary policy, which is itself influenced by class conflict as well.

As we have already discussed above, the shape of a genuine Kaleckian/Post-Keynesian Phillips curve could depict a flat part but surrounded by downward-sloping segments or even an upward-sloping segment given by a hypothetical full-employment situation, as suggested by Seccareccia and Khan (2019). It is also very likely that the trends in the unemployment rate have affected the bargaining power of workers and the conflict over the distribution of income (Seccareccia and Matamoros Romero 2022). Last, partly as a result and since monetary policy is embedded in the class conflict, the Volcker shocks, and the subsequent high-interest rates policies — up to the financial crisis of 2008-09 — should be seen as part of the policies that eroded the bargaining power of workers and not as an independent phenomenon, as Ratner and Sim seem to posit. Central banks would themselves be taking sides in the class struggle.

What Happens when Big Brother Meets Big Tech

July 29, 2022

Lynn Parramore of INET interviews University of Tennessee law professor Maurice Stucke who has has been critical as tech firms have grown into giant “data-opolies” profiting from surveillance and manipulation. He warns that legislative inaction and wider government complicity in this surveillance are eroding fundamental rights to privacy along with the ability of federal agencies to regulate Big Tech.

Lynn Parramore: Concern over privacy is increasing right now, with people worrying about different aspects of the concept. Can you say a bit about what privacy means in a legal context? With the digital revolution, privacy obviously means something different than it did 50 years ago.

MS: Yes, privacy is not a single unitary concept. There are different strands. There’s bodily privacy and decisional privacy – the right to make important decisions about one’s life, like whether to have a child or not, without governmental interference. Within the bucket of decisional privacy would also be marriage, contraception, and things of that nature. There’s intellectual privacy (such as what one reads, watches, or thinks) and associational privacy (such as the freedom to choose with whom one associates). Informational privacy is another strand, where you can control your personal information, including the purpose for which it is used.

There used to be the idea that data protection and privacy are fundamental human rights.

Numerous supporters of privacy rights have argued that U.S. Constitution should protect an individual’s right to control his or her personal information. One of the earlier Supreme Court cases involving informational privacy tested that belief. New York passed a law requiring doctors to disclose to the government their patients’ name, age, and address when they were prescribed certain drugs. All of this information was collected in a database in New York. A group of patients and their prescribing doctors challenged the law, contending that it invaded their constitutionally-protected privacy interests. The case was decided in 1977 — before the Internet and cloud computing. The Supreme Court, however, did not perceive any threat to privacy implicit in the accumulation of vast amounts of personal information in computerized data banks or other massive government files. The Court instead noted how the mainframe computer storing the data was isolated, not connected to anything else. Today, the data are not collected and maintained on some isolated mainframe. A torrent of data is being collected about us that we may not even have thought about. When you go to purchase gas at the local station, for example, you may not think of the privacy implications of that transaction. But there are powerful entities that collect vast reservoirs of first-party data from customers, and also sources that are reselling it, like the data brokers.

Congress, unlike the Supreme Court, recognized in the 1970s that the privacy of an individual is directly affected by the government’s collection, use, and dissemination of personal information and that the government’s increasing use of computers and sophisticated information technology has greatly magnified the harm to individual privacy. The preamble of the Privacy Act of 1974, enacted by Congress, states that privacy is a fundamental right protected by the Constitution. It was a landmark law in seeking to provide individuals greater control over their personal data in government files.

But the Supreme Court, on two occasions when it had the opportunity, declined to hold that the Constitution protects informational privacy as a personal and fundamental right. A majority of the justices just punted. They said that even if one assumed that such a right existed, it did not prevent the government from collecting the information it sought in both cases. Justices Scalia and Thomas were blunter in their concurring opinion: they simply argued that there is no constitutional right to informational privacy.


Social media and mental health

July 29, 2022

Luca Braghieri, Ro’ee Levy and Alexey Makarin in this voxeu article analyse the impact of social media on mental health.

Links between government bond and futures markets: dealer-client relationships and price discovery in the UK

July 28, 2022

Domenico Di Gangi, Vladimir Lazarov, Aakash Mankodi and Laura Silvestri in this Bank of England paper analyse linkages between spot and futures markets in bond markets:

We use transaction-level data to study trading and clearing relationships between dealers (ie, Gilt-edged Market Makers and clearing members) and their clients, and price discovery in the UK gilt cash and futures markets in 2016. Using a network approach we analyse the distribution of trading and clearing relationships between dealers and clients, the concentration of the associated volumes and how these change over time. We find that volumes in each market are concentrated in a few key dealers, that clients tend to have relationships with a limited number of dealers and that such relationships and volumes were resilient during most of 2016, including around the EU referendum and subsequent policy announcements. We also assess the systemic risk that could be caused by the inability of those dealers operating across the two markets to perform their roles as clearing member and market maker, finding that there may be some scope for spillover effects from potential disruption in the cash market to the futures market through this channel. Finally, we find that order flows (that we proxy using net volume traded) of clients in the UK gilt futures market can affect cash prices, suggesting that the futures market plays a role in price discovery in the cash market. 

Cross-border financial centres

July 27, 2022

Cross border financial centres are those which provide services mainly to the non-residents.

Pamela Pogliani and Philip Wooldridge in this BIS paper find 12 such centres:

Financial centres that cater predominantly to non-residents – which we refer to as cross-border financial centres (XFCs) –are important intermediaries of cross-border financial flows. For analysing capital flows and international interconnectedness, it can be useful to distinguish countries that are home to XFCs from other countries. We improve on previous methodologies for identifying such centres by constructing a measure focussed on the intermediation activity inherent to XFCs and explicitly taking into account the non-normal distribution of this measure across countries when detecting outliers. We also minimise volatility in the set of countries identified as XFCs over time by de-trending the data and pooling years. Our methodology identifies a core set of 12 countries as XFCs over the 1995-2020 period, but the countries vary with time and different measures of activity.

We find that the group of countries identified as cross-border financial centres varies over time and with different measures of financial intermediation. In 2020, we identify a core set of seven countries as cross-border centres: the British Virgin Islands, Bermuda, the Cayman Islands, Guernsey, Jersey, Luxembourg and the Marshall Islands. Another five countries were included in this set at one point or another over the 1995–2020 period: The Bahamas, Curaçao, Gibraltar, Liberia and Mauritius. A somewhat different set of countries is identified when the focus is narrowed to intermediation through the interbank channel.


How to design carbon pricing schemes?

July 27, 2022

Ian Parry, Simon Black and Karlygash Zhunussova of IMF in voxeu post:


Banking in Layers: Five Cases to Illustrate How the Market Structure for Financial Services is Evolving

July 27, 2022

A new CGAP paper by Aiaze Mitha, Faith Biegon, and Peter Zetterli look at 5 cases to understand how financial services are evolving:

Digital innovations have changed the financial inclusion space for nearly 15 years. Today, a powerful new wave of digital innovation is gathering on the horizon. One of the most profound may be a shift toward a more modular financial sector and there is good reason to be hopeful that this “modularization” could help expand financial inclusion while also profoundly altering the financial industry in ways that make it both more competitive and more efficient. This working paper explores the market-level modularization of financial services by studying the following illustrative examples of the new models that are emerging, how they are coming about, and what they mean for the financial inclusion of low-income people in emerging markets and developing economies: Grab in Southeast Asia; Paytm in India, M-Pesa in Africa, Daviplata in Colombia, and Kaleidofin in India.

American Agriculture, Water Resources, and Climate Change

July 27, 2022

Gary D. Libecap & Ariel Dinar in this NBER paper analyse how American farming community has responded to changing climatic conditions:

This paper highlights the role of agriculture in the American economy and society over time and points to farmer historical and contemporary responses to varying climatic conditions. It indicates the importance of water as an input to agricultural production and identifies possible impacts of climate change on access to water. It then summarizes a set of eleven papers from an NBER research project on water, climate change, and the agricultural sector.


The studies focuses on a subset of adaptation options and provides examples of possible directions available for varying farm types, regions, and water situations. Overall, the research indicates that the responses examined lead to positive changes in the performance of the
agricultural sector at the region or state level analyzed either in terms of yield or net revenue. A complete benefit-cost assessment of farmer adaptation strategies, however, would include any external costs associated with new crop and seed varieties, water efficient irrigation
technologies, resort to common groundwater, investment in water conveyance systems, and design and implementation of new institutional arrangements.

In the case of groundwater, where property rights are relatively complete, such as with tradable extraction rights to Southern California’s Mojave Aquifer (Ayres et al 2021) or where management institutions exist, such as in groundwater management districts in Nebraska (Edwards 2016), the losses may be minimal. Externalities are more significant where these conditions are lacking. Increased fertilizer application and associated downstream runoff is an example, and when costs are not privately internalized, fertilizer use may be excessive within a cost/benefit framework. Alternatively, where farmers adopt easements with downstream benefits, not all gains are privately captured, resulting in under adoption. In these respects, the research can be seen as part of an emerging and critical agenda for analysis of adaptation in the agricultural sector to greater water scarcity resulting from climate change.

How New Zealand central bank’s mostakes after 2019 led to inflationx`

July 26, 2022

Graeme Wheeler, former Governor of the Reserve Bank of New Zealand, and Bryce Wilkinson, Senior Research Fellow at The New Zealand Initiative released a research note. The paper mainly attributes the outbreak of inflation in many economies to six central bank mistakes.

  • were too confident about their monetary policy framework;
  • were too confident about their models;
  • were too confident they could control output and employment;
  • lost their focus on price stability and took on too many mandates;
  • faced conflicts in some cases with conflicting ‘dual mandate’ objectives; and
  • were distracted by extraneous political objectives, such as climate change.

Michael Reddel, the goto person on NZ economy, rebuts the paper point by point.

In the end there simply isn’t a great deal there. It is good to have more voices sheeting home responsibility for high core inflation to the central banks. If you accept the assignment of responsibility for achieving an objective, you are responsible when things fall short (even if, as Wheeler argues was true of his own stewardship) you’ve done the best job possible with the information to hand at the time. How much that sort of explanation is sufficient to the current situation can and should be debated, but it probably needs much more engagement with data, and forecasts etc, than WW have room for in their piece.

The optimal inflation target: Views from 600 economists

July 26, 2022

Gene Ambrocio, Andrea Ferrero, Esa Jokivuolle and Kim Ristolainen in this voxeu article:

Times have changed when most economists prefer central bank to have objectives other than price stability.

Rethinking our external sector policy

July 26, 2022

Of late, Indian external sector policy has been following an odd strategy. While it is getting more protectionist on current account front, it has shown a liberal attitude towards the capital account.

My new piece in Financial Express on what is odd about this external sector policy.

Central Bank Communication with the general public: Promise or false hope?

July 25, 2022

Alan Blinder, Michael Ehrmann, Jakob de Haan & David-Jan Jansen in the new NBER paper:



A Central Bank Digital Currency For India?

July 25, 2022

Barry Eichengreen, Poonam Gupta  and Tim Marple in this IPPR paper look at pros and cons of CBDC in India:

We review arguments for CBDC issuance in India. These include facilitating payments, enhancing financial inclusion, enabling the central bank and government to retain control of the payments system, facilitating cross-border transactions, reducing dependence on the dollar-dominated global payments system, and providing an encompassing platform for digital financial innovation. We then compare progress in India with other countries. In setting an end-2022 target date for issuance, India is in line with the other BRICS, but not with other countries with comparable levels of per capita GDP, which have been more reluctant to commit to a date. Nor is it in line with other countries with comparably independent central banks, which have been more cautious about setting a deadline. Finally, we sketch a roadmap and timeline for India’s CBDC project going forward.

The return of macroeconomic imbalances in Africa: adapting to life on the edge

July 25, 2022

IMF African Department Director Abebe Aemro Selassie in this speech discusses the outlook for Africa. The macro outlook is again on the edge.

First, imbalances are back and this creates a very difficult situation for policymakers in the region, with more uncertainty, more social tensions, and ever-decreasing policy space to respond.

Second, we have to rethink traditional policy prescriptions to meet the imbalances we are facing. And this is something we must not be afraid to do. Many economic targets and anchors of the past now seem unrealistic and obsolete. Thinking through these issues will help countries living on the edge to undertake much-needed reforms and eventually move away from it.

And finally, despite the difficult path ahead—marked by constraints, imbalances, and growing challenges—I remain deeply optimistic about the region’s prospects. I returned to my country in 1992 as a would-be technocrat at a similarly difficult time for the region. And if anybody had said to me then that Accra, Kampala, and Addis would 30 years on look anything like what they do today, I would have thought they were under the influence of more than just a cup of strong Ethiopian coffee. And of course, the changes as I said go well beyond just the shiny new buildings that we see in these cities: there has been fundamental development progress that has shifted the opportunity set of a generation. I have no doubt that, from this stronger foundation, progress over the next 30 years will be more remarkable still. But only if, as the generation of policy makers from the 1990s did, we take the necessary bold decisions.

Explainer: Should RBI opt for a multi-tier excess reserve system?

July 22, 2022

In the minutes of RBI Monetary Policy Committee (MPC) meeting of June 2022, MPC member Ashima Goyal mentioned:

Under the external benchmark system, as it works currently, banks may not need to raise deposit rates commensurately until excess liquidity is sufficiently absorbed so that they have to borrow at the repo. If excess liquidity persists, yet policy rates rise, the ECB multi-tier excess reserve system2 is an option. Higher rates paid on a part of reserves held at the central bank could be conditional on banks passing on a share of this to depositors.

In this moneycontrol explainer, I discuss the what and why of the multi-tier excess reserve system.

Digital Banks: A Proposal for Licensing and Regulatory Regime for India

July 21, 2022

A new NITI Aayog Report proposes licencing and regulatory regime for digital banks in India:

Suman Bery, Vice Chairperson of Niti Aayog on the report:

The Report on licensing and regulatory regime for Digital Banks released by NITI Aayog aims to cement India’s place as a trailblazer in fintech industry. The report highlights the promise that full-stack Digital banks hold as a potential solution for the persistent policy challenge of credit deepening. It is the next stage of financial inclusion. Technology and increased digitalisation are bound to be disruptive for the incumbents impressing the need to provide a level playing field between different business entities for holistic growth of the sector.

The Report addresses the feedback received from 24 organisations, large-scale multistakeholder round table discussion, and a series of consultations with industry leaders and experts. I extend my support to all the Ministries, Fintech organisations, platforms, and others who can work on the implementation of the Report’s recommendations for a “full-Stack” digital Bank.

The rise and fall of global currencies over two centuries

July 21, 2022

Vicquéry Roger of Banque De France in this paper look at rise and fall of global currencies over 2 centuries.

This paper quantifies the relative dominance of global currencies and the competitive structure of the international monetary system since 1825. I find the post-1945 experience of dollar hegemony to have no historical precedent. No currency has ever maintained such a large, long-lasting lead over global currency rivals. Close competitors frequently challenged the previous hegemon, the pound sterling.

I confirm the dollar temporarily overtook the sterling for the first time in the mid-1920s. Among previously overlooked episodes of monetary competition, I highlight the rise of the French franc in the 1850s and 1930s as well as of the German mark in the 1870s.

In light of the recent debate on the costs and benefits of a multipolar international monetary system, I document a positive correlation between higher global currency competition and the prevalence of financial crises, which is however highly dependent on specific sub-periods.

Deposit Insurance in India – Journey; Milestones; Challenges

July 20, 2022

Michael Patra, DG of RBI in this speech discusses the changes in deposit insurance in India. The speech features in RBI July-2022 Bulletin.

During the year 2021-22, the DICGC has achieved remarkable progress in the settlement of claims for deposit insurance. With the amendment to the Act coming into force from September 01, 2021 claims amounting to Rs 3,457 crore have been settled between December 2021 and March 2022 in the case of 22 UCBs under AID. As I mentioned earlier, this feat was commemorated by the Hon’ble Prime Minister in the Udyog Bhavan in Delhi. In the case of liquidated banks, claims settled amounted to Rs 1,268 crore. Turning to mergers, a major achievement of the Corporation was the financial assistance of Rs 3,791 crore it provided to Unity Small Finance Bank for making payments to depositors of the much-sensationalised Punjab and Maharashtra Cooperative Bank Ltd or PMC Bank.

Overall, the claims settled under these three channels amounted to `8,517 crore, which is a commendable achievement when seen in comparison with the total of claims of `5,763 crore settled since the establishment of the DICGC up to 2020-21.

On future of DICGC:

In closing, it is important to closely monitor the impact of financial innovations like e-money and digital products on the scope and coverage of deposits and constantly recalibrate definitions and parameters of deposit insurance cover. Public awareness about the actions of the DICGC need to be given sufficient coverage in the public domain through different channels of regular communication.

I have always wondered why an institution like the DICGC with strong fund positions still resides in RBI premises and does not have an office of its own. I am sure such an  independent office will boost morale and pride in the institution to which you belong.

Furthermore, why does the DICGC with so many achievements under its belt need to be staffed almost exclusively by the RBI? I would look for a healthy mix that includes lateral hires of domain experts.

There is also a pressing need to regularly upgrade knowledge and skill exposures through deputations to leading deposit insurers around the world, secondment programmes and technical agreements for knowledge sharing. Upgradation of IT infrastructure on a continuous basis for integrated solutions is a minimum in today’s fast changing technological environment.

The rise of the ‘Invisible Hand’ metaphor

July 20, 2022

Kwok Ping Tsang of Virginia Polytechnic Institute & State University in this SSRN paper:

This article explains the rise of Smith’s metaphor near the end of the nineteenth century. I provide evidence that the reappearance was partly triggered by the rise of the Moral Sciences Tripos at Cambridge, as exemplified by a publication by Maitland. Against the backdrop of liberal trade policies and wealth inequality, most references to the “invisible hand” metaphor at the turn of the twentieth century are against the idea of laissez faire and unregulated pursuit of interests, and the metaphor was invoked to argue that Smith does not treat economy harmonies as an a priori truth that always and everywhere applies.


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