RBI to conduct a pilot of Central Bank Digital Currency in the Wholesale segment

RBI joins the Central Bank Digital Currency club.  The central bank has announced that it will conduct first pilot in the Digital Rupee – Wholesale segment (e₹-W):

RBI vide Press Release dated October 7, 2022 had announced that the Reserve Bank will soon commence pilot launches of Digital Rupee (e₹) for specific use cases. Accordingly, the first pilot in the Digital Rupee – Wholesale segment (e₹-W) shall commence on November 1, 2022.

2. The use case for this pilot is settlement of secondary market transactions in government securities. Use of e₹-W is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot.

3. Nine banks, viz., State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC have been identified for participation in the pilot.

4. The first pilot in Digital Rupee – Retail segment (e₹-R) is planned for launch within a month in select locations in closed user groups comprising customers and merchants. The details regarding operationalisation of e₹-R pilot shall be communicated in due course.

 

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The U.S. Postal Savings System and the Collapse of Building and Loan Associations (B&Ls) during the Great Depression

Great depression continues to attract researchers.

In this new NBER research paper, Sebastián Fleitas, Matthew S. Jaremski & Steven Sprick Schuster track the impact of great depression on Building and Loan Associations (B&Ls):

Building and Loan Associations (B&Ls) financed over half of new houses constructed in the U.S. during the 1920s but they lost their predominance within the following decades as they were pushed to convert into Savings and Loans (S&Ls). This study examines whether the U.S. government-insured Postal Savings System attracted funds away from B&Ls precisely when they needed them the most in the Great Depression. Annual town- and county-level data from 1920 through 1935 for 3 states show that the sudden rise in local postal savings was associated with local downturns in B&Ls. Using a panel vector autoregression, we find that postal savings significantly reduced the amount of money in B&Ls, yet B&Ls had no significant effect on postal savings banks. Alternatively, postal savings had no significant effect on commercial banks. The results suggest that this competitive dynamic prevented B&Ls from rebounding in the mid-1930s and helped contribute to Great Depression’s local real estate lending decline.

Central bank digital currency: what has bank of Korea learned from a recent hands-on experiment

Chang Yong Rhee, Governor of the Bank of Korea, in this speech discusses a recent hands-on experiment on cbdcs in South Korea.

Bank of Korea has recently completed its first experiment which lasted for ten months on a retail CBDC based on distributed ledger technology (DLT). We are now working on a follow-up experiment linking our test system to those of commercial banks and also reviewing additional design options for a CBDC. We have learned a lot during the hands-on experiment and I would like to share four lessons  from it with you today.

First, introducing a CBDC involves not just developing technology but also a process of balancing trade-offs between various goals.

Second, developing a successful CBDC is much more complex than anticipated.

Third, it may never be too early to establish effective private-public partnerships for CBDCs.

Lastly, further exploration of wholesale CBDCs is essential.

 

Central banking in the Anthropocene: How to re-embed our economic and financial systems within planetary boundaries?

Sylvie Goulard, Deputy Governor of the Banque de France in this speech:

What should we do, then, to re-embed economic and financial systems within our planetary boundaries? While I do not pretend to have the answer to such a question, let me open up a few avenues.

As central banks and supervisors concerned primarily with price and financial stability, the first thing we can do is delve further into the assessment of financial risks, while being aware of the limitations of such an exercise because of the points I raised earlier. But perhaps we could at least be informed by some of the issues I discussed, and be willing to explore new frontiers. For instance:

• • How could we design scenarios that account for what IPBES experts are telling us, for instance with regards to the different values of nature, the rights of indigenous people and the need to think comprehensively about economic, social and environmental inequalities?
  • How much can the global economy grow while accounting for all planetary boundaries? And how to distribute this “remaining growth potential” between rich and developing countries, as a fair transition is key?
  • What could be the impacts of lower growth rates or potential no growth on global value chains, on employment, on different economic sectors that could win or lose from the transition?
  • Which assumptions do we make about demographic trends? I actually greatly appreciated that in his review Professor Dasgupta mentioned demography. I am aware that this is a delicate issue but it has several ecological and macroeconomic implications and we should be able to assess them.
  • How should we tackle climate change and biodiversity, taking into account the complexity of each of both issues but also their interaction?  

If you think that this is too political for central bankers, let me strongly oppose this view: what would be too political is to deny all the evidence gathered by

natural and social scientists for the past decades.

Just one year ago, before the war, it would have been unlikely to think about potential energy constraints linked with a hybrid war. I wish more people had dared to work on disruptions of energy supply (or global value chains) a few years ago.

Likewise, the latest report of the Working Group III of the IPCC (dedicated to climate mitigation) contains a chapter (#5) that places great emphasis on the need for sufficiency and behavioral changes, and it discusses the literature exploring how we could thrive as societies and individuals without depending so much on GDP growth. Professor Dasgupta also invites us not only to acknowledge that GDP growth will be limited at some point even if you are a techno-optimist, but also to think about new approaches to economic value and social well-being that do not rely on GDP.

All this begs us, and especially the young scholars present today, to ask what will be essential in 5 to 10 years from now.

Reserve Bank of Australia incurs annual loss on bond holdings

Over the last 15 years the central banks have faced all kinds of pressure and unexpected developments. The latest in the list is australias central bank. I had pointed to an earlier speech by one of the central bank officials that the central bank expects to face losses this year.

The 2022 annual report released today confirms the loss.

From the Governor’s Foreword:

The combination of higher inflation, a strong labour market and the underlying resilience of the economy has meant the Board has increased interest rates earlier, and more quickly, than previously expected. The monetary policy support implemented over the past couple of years has helped insulate the economy from the worst effects of the pandemic, but the challenge facing monetary policy has now changed. The task ahead is to return inflation to target while keeping the economy on an even keel. It is possible to do this, but the path is a narrow one and clouded in uncertainty, not least because of developments elsewhere in the world.

The rise in bond yields that has accompanied the stronger economy and higher inflation has resulted in significant valuation losses on the Bank’s holdings of government bonds. As a result, the Bank has recorded an accounting loss of $36.7 billion this year, which has reduced its equity to negative $12.4 billion. This negative equity position does not affect the Bank’s operations or its ability to operate effectively or perform its policy functions.

The Board expects that the Bank’s capital will be restored over time due to positive underlying earnings and capital gains when bonds mature. Accordingly, it has not sought a capital injection from the government. Instead, the Board’s strong expectation is that future distributable earnings will be retained by the Bank to restore its capital, rather than paid as dividends to the government. The Treasurer has indicated his support for this approach, noting the situation will be reviewed each year.

 

Archiving 150 years of Zurich Insurance

Zurich Insurance is celebrating 150th anniversary.

On October 22, 1872, 10 men met in the city of Zurich to found a corporate entity with the name Versicherungs-Verein (Insurance Association). The new company would become what we know today as Zurich, the global insurer. It was initially set up as a subsidiary of another marine insurance company that these same men had founded in 1869. In the Zurich region back then, the real money was in textiles. Insurance was, and still, is important for the textile industry. The many textile factories that had sprung up in eastern Switzerland, a region that includes Zurich, relied on cotton from America, India and Egypt, and imported raw silk, sending finished goods abroad. Transport and shipping were their lifelines.

It’s no surprise then that four of Zurich’s youngest founders, Heinrich Emil Streuli- Hüni, Adolf Guyer-Zeller, Carl Abegg-Arter and Robert Schwarzenbach, were running private textile businesses. With the exception of Guyer-Zeller, they took over the family-owned business when they signed Zurich into life. The latest venture was just one of many going concerns. They also engaged in politics, served on boards of several Swiss companies and took speculative bets on the risky growth industry of the age – railroads. The Northern Railway completed its first line between Zurich and Baden in 1840

Lot of stuff on the website.

Credit to the archivist team for putting things together:

Zurich’s archive team are a dedicated and fun crew that has done a lot behind the scenes to bring the 150th anniversary to life. So slip on your white gloves, break out those 19th century ledgers and get ready to belt out ‘I Will Survive’!

Thomas Inglin and Christofer Stadlin are approaching an ultra-modern, nondescript building, about the size of an airport hangar, outside Zurich’s city limits on a recent weekday morning. It’s in the middle of nowhere really, where exactly in the middle of nowhere, I can’t say; I’ve been sworn to secrecy. Direction Ikea, let’s call it.

You can understand why they are overprotective. This high-security fortress – out of a Bond film, and one of the recent Daniel Craig variety – is the new, year-old home for the archives of Zurich Insurance Company Ltd. (Zurich), which marks its 150th anniversary this month.

Considering that Thomas is Head of Corporate Archives and Christofer is the Records Manager, the anniversary is their Super Bowl, their World Cup, their Olympics, all rolled into one. This building, despite its sterility, houses the soul of Zurich – their Wembley – and they can’t stop talking about it.

The facility, they tell me, is one of only three in the world that could withstand a magnitude 10 earthquake, even if there’s never been such a thing. It’s fireproof and, apparently, could withstand a nuclear attack.

“There could be Armageddon and this building will remain,” says Christofer, a native of the nearby town of Zug, though he’s been in the city so long he considers himself a Züricher. “Aliens will come down and only find the Zurich archives.”

Zurich insurance is making all effirts to insure its history,,,,

Project Aurum: a prototype for two-tier central bank digital currency (CBDC)

BIS innovation hub has completed Project Aurum which is a prototype for two-tier central bank digital currency (CBDC).

The BIS Innovation Hub has completed its first retail central bank digital currency (CBDC) system. Project Aurum was carried out by the Innovation Hub’s Hong Kong Centre in partnership with the Hong Kong Monetary Authority and the Hong Kong Applied Science and Technology Research Institute.

It was dubbed “Aurum”, the Latin word for gold, to reflect the starting point that digital currency issued under the auspices of a central bank must be as robust and trustworthy as gold. The prototype system was successfully completed in July 2022, following the core principles of safety, flexibility and privacy.

The project created a technology stack comprised of a wholesale interbank system and a retail e-wallet system, setting up two different types of tokens: intermediated CBDC and stablecoins backed by CBDC in the interbank system. The latter is unique in the study of CBDC to date. While intermediated CBDC is a direct liability of the central bank, CBDC-backed stablecoins are liabilities of the issuing bank, with its backing assets held by the central bank.

The project represents an in-depth exploration of a prototype CBDC system. The Aurum system is accompanied by technical manuals totalling over 250 pages that, together with the source code, are made accessible to BIS member central banks on BIS Open Tech to serve as a public good for the further study of retail CBDC by the central banking community.

hmm..

the new system will be lot like the existing system

Turn From ‘Public Finance’ to ‘Public Economics’

Steven Medema of Duke University in this paper traces how the narrower field of Public Finance was broadened to becom Public Economics:

In a paper delivered at the December 1955 meeting of the Econometric Society, Paul Samuelson noted that though economists had done “work of high quality and great quantity in the field of taxation,” the theory of public expenditure had been “relatively neglected” (1958, 332). Anglo-American treatments of the subject, which in the late 19th century began to take the form of the self-contained treatise, typically opened with a brief, almost obligatory statement of the proper functions of the state before launching into their extensive disquisitions on sundry aspects of taxation, public debt and, eventually, fiscal policy. The operative point here is that these roles assigned to the state were asserted, and typically briefly, rather than demonstrated, even if the tasks ascribed—e.g., national defense, a system of justice, public works—resonate with modern theoretical sensibilities.

The last third of the twentieth century, though, saw a significant structural change in this pattern. While the analysis of taxation and other financing issues did not disappear (and, in the case of taxation, continue to expand in scope), the cursory treatment of the functions of the state slowly gave way to deeper and more systematic inquiries.

Indeed, by the mid-1980s the ‘public expenditure theory’ lacuna lamented by Samuelson had largely been filled with the theories of public goods, externalities, marginal-cost cum peak-load pricing.

This paper documents and attempts to explain this transformation, locating its origins in Richard Musgrave’s normative theory of the public household and the adoption by subsequent thinkers of new developments in welfare theory, which was seen to offer a theoretically sophisticated a vision of the state’s role as a response to the problem of market failure.

 

Evolution of Indian financial system

First of all, wishing all the visitors and well wishers a very happy diwali.

Shri M. Rajeshwar Rao, Deputy Governor, Reserve Bank of India in this speech traces evolution of financial system:

Since independence, our country has taken giant strides in growth and development in all sectors. The GDP of India rose from a meagre Rs. 5 lakh crore (1950-51) to about 147 lakh crore (2020-21) at constant prices of 2011-12, growing about 27 times with a CAGR of about 4.8 per cent. But in the shadow of this growth story lies a duality which attracts the attention of every policymaker and concerned citizens. Even as the GDP has grown 27-fold in last seven decades, the per capita income has grown merely seven-fold from about Rs.14,000 (1950-51) to about Rs. 1 lakh (2020-21) at constant prices of 2011-12, with a CAGR of about 2.9 per cent². This duality highlights the importance and requirement of inclusive growth of our country – a goal we all should aspire for and contribute towards in our respective professional capacities.

The evolution of the financial system, too, has been dotted with several twists and turns, reflecting the policy choices made in a given socio-economic and political context. As is generally said, policy making is not amenable to corner solutions. The outcomes more often than not lie somewhere in the hazy middle, reflecting the contextual trade-offs. In my remarks today, I intend to dwell on some of these tradeoffs, the idea being not to judge them for their existence, or to contemplate about their counterfactuals but just to bring forth the specific structural paths our financial system has journeyed over the course of last seven decades whilst bolstering the ever-evolving Indian growth story.

I will therefore briefly touch upon some of such structural and regulatory dualities of Indian financial system which are integral to addressing some of the key questions that I highlight, while venturing with a few thoughts of my own on the way ahead.

He touches on 4 themes:

II. Bank-led vs market-led financial intermediation in India  Is it possible to envision a transition from a bank-dominated financial system to a non-bank intermediation channel?

III. Ownership – Public vs Private Does there exist a middle ground in the debate?

IV. Business models – Diversified vs Specialised Does the promise of niche, specialised banking still hold?

V. Innovation vs. Customer Protection

In the end:

I have tried to briefly highlight the critical dualities of Indian financial system. As mentioned earlier, I do not intend to judge any of these categories. The only intention to bring forth these dualities is to emphasize the largely organic evolution of Indian financial system in response to our growing economy and highlight that the regulatory frameworks of RBI have facilitated meeting the ever-changing needs of the country. At every juncture of growth in financial system, at every kink, there are innumerable policy choices for a regulator. The decisions we make today have the potential to shape the present and future of our economy and our nation. But sometimes, we can wonder on what could have been the counterfactual and answering such a counterfactual is difficult. But it can be most certainly stated that the depth, size, and resilience of Indian financial system owes much to such decisions in past taken at various crossroads. One may well argue that these policy choices were not necessarily pro-active but sometimes reactive as well. True! Central Bankers do not have liberty to innovate freely, we have to put our mandate and financial stability first. There have been times when we are appreciated for our prudent policies and times when we are criticised for being conservative. But let me assure you, whatever we do, we strive to do in broader public interest. Every policy stance of ours is customised to the need of our growing economy and preserving financial stability, and that remains our guiding principle.

In a conventional set-up, the banking regulation has some pre-specified toolkits which are time tested and globally adopted. Every financial crisis offers some insights to the regulators, and the toolkit is accordingly modified in response to the lessons learnt. But, with a dynamically evolving financial system, regulators do not have liberty to rely excessively on existing means because many of the potential challenges emanating from the emerging financial order are not foreseeable. Worldwide, regulators are striving to remain ahead of the curve, because they simply cannot afford to be reactive in this environment. The changes we feel to be insignificant can now grow manifold in a very short span of time posing threat to the stability of financial system. Therefore, we have to be cognisant of all the financial changes happening around and respond appropriately to such changes. As the regulatory perimeter gradually extends to uncharted domains – climate finance, regulation of digital lending, etc. some of these issues will become even more relevant.

To guide us in this transition, we have tried to fix some broad principles that make the policy stances adaptive enough to cope up with any present and future challenges, while creating enabling environment for innovations with positive externalities. At a broad level, three guiding principles that would be helpful in framing financial regulation going ahead are – principle-based, proportionate and activity-based regulations. In an uncertain business environment, it is very difficult to predict and then prescribe all possible scenarios of a financial transaction. Therefore, such complex superstructure warrants that regulator should move away from rule-based prescriptive regime to principle-based regime and the principles of regulation should always have the financial stability and interests of consumers at its core.

The second principle for present and future regulation should be a differentiated regulatory system based on size, complexity and contribution to systemic risk. Further, as the interconnectedness, scope of activities and harmonisation of financial intermediation increases, entity-based regulatory architecture may create arbitrage between different entities undertaking similar activity. Therefore, going forward, activity should form a common regulatory thought for future regulations.

How does Reserve Bank of Australia conduct its monetary policy?

Michele Bullock, Deputy Governor of Reserve Bank of Australia discusses how the central bank conducts and decides on its monetary policy:

There are two parts to our ongoing analysis. The first is understanding the current economic situation and trends. For this, we use many different data sources. Central to our analysis of domestic economic activity is data produced by the Australian Bureau of Statistics (ABS). The ABS produces high-quality data on all aspects of the Australian economy – income, production, the labour market, trade, investment, consumption, inflation and so on – which provides us with a good view on where the economy is at and the trends within it.

There is also a large variety of data produced by other public agencies and the private sector, and we use many of these partial indicators to supplement the official data. For example, we obtain data on loan commitments from the Australian Prudential Regulation Authority (APRA) as well as data that allows us to measure credit and deposits. Surveys of business and consumer sentiment, and job advertisements are also important partial indicators that we follow closely.

Over recent years, there has been an increasing availability of very timely information that has supplemented the traditional data. Many of these data sources are artefacts of the online and digital lives we all now lead. They come from both the public and the private sector. And it turns out that many of these are valuable for understanding what is going on in the economy.

….

The second part of our ongoing analysis of output and inflation for the monetary policy process is the outlook – that is, given what we know about the current economic conditions, what does this imply for the future? This is important because, while we know monetary policy has ‘long and variable lags’, we need to form a view about how interest rate moves now might impact the economy and inflation in the future.

The forecasting process is an amalgam of a number of things. First, we need to understand where the economy currently is, its direction of travel and any emerging trends. This process of data monitoring and analysis that I have just described is the bedrock. From here, we use a mix of formal models and judgement.

Recognising that no single model can provide us with all the answers, we draw on a variety of models to make our forecasts. For most of the key macroeconomic variables – such as consumption, inflation, wages or the unemployment rate – we have formal econometric models. Comprehensive econometric models – including the full system economic model, MARTIN – are used to underpin our forecasts, develop alternative scenarios and perform sensitivity analysis.

All this analysis and forecasting ultimately finds its way to the Board. But, before it gets there, it goes through a rigorous internal process of testing and challenge.

 

Current challenges to central banks’ independence

Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank in this speech raises concerns over central bank independence:

In this lecture, I will argue that threats to central banks’ independence, and thus to their ability to fulfil their monetary policy mandates, are ever present and take various forms. While some are obvious, others lurk beneath the surface. Such threats are particularly acute in the current economic environment. Taking a Swiss perspective, I will discuss the pitfalls that must be avoided in order to make certain that monetary policy is set independently and that central banks have the freedom to pursue policies that ensure price stability in the medium to long term.

A plain-speaking central bank: contradiction in terms?

Gabriel Glöckler and Simon Mee of European central bank in this post on International Plain Language Day (13 October 2022):

Communication is a tool that helps central banks in preserving price stability. But are central banks clear enough and properly understood? On International Plain Language Day, we look at where the ECB stands in its efforts to communicate clearly and accessibly.

….

While there is still a long way to go, there are limits to how plainly a central bank can speak. Consumers and financial markets desire completely clear communication from central banks. But there are moments when more detailed wording is needed to reflect nuance or to mark precision. Central banks also need to be mindful of the inevitable uncertainty about the future. Delivering too simple a message might give people a false sense of certainty about the ECB’s power over future events. If those events do not come to pass, that could damage the central bank’s credibility with the wider public.^[9]

Being simple does not mean being simplistic. It means using more accessible language, less jargon, and fewer abstract terms. For example, instead of referring to “robust employment growth”, we could speak more accessibly about “more people having jobs”.^[10]

That is why the ECB is making every effort to continue along this path, to foster understanding and enhance its ability to influence expectations. It means living up to the commitment given by President Christine Lagarde to be ‘’constantly working on making ourselves better understood by people living in the euro area whose everyday lives are directly affected by our measures’’.

Knowledge flows from public labs to private firms

Antonin Bergeaud, Arthur Guillouzouic, Emeric Henry and Clément Malgouyres in this article document the knowledge flow from academia/  public labs to private firms:

How knowledge spillovers operate between academia and private firms remains an open question. This column exploits the Laboratoire d’Excellence, or LabEx, a large-scale funding programme of public research in France implemented in 2010–2011, to understand the spillover process. The authors find strong spillovers through the contracting channel, the mobility channel, and the informal channel, with the contracting channel playing the central role. As financing public research is an indirect way to spur private sector activity, comparing it with more direct instruments would be interesting.

Building a New Scotland: A stronger economy with independence

The Scottish Government is proposing that an independence referendum is held on 19 October 2023.

The government is trying to inform its ctizens about Scotland’s future before a referendum takes place. The govt has put together a series of papers, titled ‘Building a New Scotland’:

• Paper 1: Independence in the modern world. Wealthier, happier, fairer: why not Scotland?
• Paper 2: Renewing democracy through independence
• Paper 3: A stronger economy with independence

in Paper 3:

We will use the full powers of independence to build an inclusive, fair, wellbeing economy that works for everyone in Scotland. The proposals in Building a New Scotland: A stronger economy with independence are designed to allow you to:

• • have lower energy prices and security of supply by increasing and diversifying our electricity-generating capacity, making better, greener use of Scotland’s abundant natural energy resources
  • have a better, fairer working life, including improved access to flexible working, greater job security through strengthened workplace rights and, if you are a young person, the same minimum wage as everybody else
  • escape a UK economic model that concentrates wealth in London and the South East of England, while producing inequality, low investment, and low productivity
  • regain your European citizenship and the right to study, work and live across the European Union
  • benefit directly from investments from the Building a New Scotland Fund, with an investment of up to £20 billion in major infrastructure only possible with independence. This would be designed to give Scotland the best start as an independent country, including investment in more energy-efficient homes, greener transport, better digital and mobile connectivity, and more affordable housing
  • keep using the pound sterling, until the time is right to move to a Scottish pound
    • retain free movement across these islands, including in the UK and Ireland
  • take part in new ways for communities to own and steer the economy, including through direct stakes in local developments
  • live in a country where decisions about how we use our assets, talents and resources reflect our values and democratic choices, allowing Scotland to develop the kind of inclusive, consensus-driven economic policies that serve other European countries so well.

Understanding the bitterness of Wassily Leontief: Postwar success and failures of input-output techniques

Vincent Carret of University of Lyon in this paper:

Although Leontief was and still is one of the most recognized names in economics, inextricably linked to the development of input-output techniques, he remained fiercely critical of other economists’ works and of the state of economic science during his whole life. To understand his bitterness, we go back to the root of the split between Leontief and the rest of the economics profession, through an examination of the debates that took place in the late 1940s. From his input-output model, conceived as an operational theory of economic interdependencies, Leontief drew a specific approach to economic policy and planning which had a lot of success with government agencies, explaining how he could durably sustain his split from the profession.

 

Estimation of Green GDP for India

Anupam Prakash, Kaustav K. Sarkar and Amit Kumar of RBI in the october 22 monthly bulletin article estimate the green GDP in India:

The adverse effects of economic growth on environmental sustainability have come into focus particularly in the post- COVID period. Considering limitations of GDP- based growth accounting in capturing the impact of climate change, the significance of Green GDP which adjusts for environmental deterioration and waning natural resources into estimates of national income accounts, has grown manifold. Using variables on sustainable development indicators and resource consumption indicators, this article attempts to provide estimates of
Green GDP for India. The trajectory of Green GDP for India displays an upward movement with visible improvements since 2012.

The political U: A new perspective on democracy and growth

Nauro Campos, Fabrizio Coricelli and Marco Frigerio in this post show that intermediate regimes whch are neither democracies nor autocracies perform worse than the two regimes.

The relationship between economic and political development is at the centre of political economy. This column argues that there is a causal U-shaped relationship between political development and economic development. Using panel data from 1960 to 2018, it finds that ‘intermediate’ regimes decrease long-run GDP per capita by around 20%, and that these effects are mainly driven by political instability. The policy implications throw light on populism today and provide an economic rationale for the European Parliament’s recent decision to consider an EU member state, Hungary, a ‘hybrid electoral autocracy’.

Understanding the Strength of the Dollar from 2011 to 2019

Zhengyang Jiang, Robert J. Richmond & Tony Zhang in the new NBER research:

We link the sustained appreciation of the U.S. dollar from 2011 to 2019 to international capital flows driven by primitive economic factors. We show that increases in foreign investors’ net savings, increases in U.S. monetary policy rates relative to the rest of the world, and shifts in investor demand for U.S. financial assets contributed approximately equally to the dollar’s appreciation. We then quantify the impact of potential future demand shifts for U.S. assets on the value of the dollar.

How digital payments are trying to solve Africa’s multiple currencies problem?

Chris Wellisz of imf in this article:

Making payments from one African country to another isn’t easy. Just ask Nana Yaw Owusu Banahene, who lives in Ghana and recently paid a lawyer in nearby Nigeria for his services.

“It took two weeks for the guy to receive the money,” Owusu Banahene says. The cost of the $100 transaction? Almost $40. “Using the banking system is a very difficult process,” he says.

His experience is a small example of a much bigger problem for Africa’s economic development—the expense and difficulty of making payments across borders. It is one reason trade among Africa’s 55 countries amounts to only about 15 percent of their total imports and exports. By contrast, an estimated 60 percent of Asian trade takes place within the continent. In the European Union, the proportion is roughly 70 percent.

“When the payments are unlocked, invariably you are unlocking trade between African countries,” says Owusu Banahene, the Ghana country manager for AZA Finance, which handles foreign currency transactions for companies doing business in Africa.

Cross-border payments are just one of the many barriers to trade in Africa. Others range from high tariffs and cumbersome border procedures to divergent commercial regulations and congested roads.

Timothy Taylor on his conversable economist blog

What are the options here? In theory, it would be possible for countries across Africa to unite with a single currency of their own. In practice, this seems pretty unlikely. At present, there are 14 countries in Africa that use the “CFA franc” as their currency: six in central Africa (Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea and Gabon) and eight in west Africa (Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo). Indeed, there are technically two different CFA francs, one for each of these regions, but their exchange rate in terms of euros is always the same. Together, these countries comprise about one-eighth of Africa’s GDP.

Current perceptions of the CFA franc are, at best, only partially favorable. It has provided monetary stability, but at times the exchange rate value of the currency has been so high that it strangled exports from these countries. It’s also a legacy of colonialism by France. The current plan seems to be that the west African version of the CFA franc will be phased out in favor of a shared currency called the “eco,” which may be more widely used across other nations of west Africa. But the potential transition is scheduled for a few years away, and it’s unclear (at least to me), whether the countries using the central African version of the CFA franc will join in. There’s a lot of talk about “taking back control of the currency,” but the current proposals for the “eco” would continue to have a fixed exchange rate with the euro.

In short, the existing currency unions in Africa are being sharply question and seem to be in transition. A even broader currency union isn’t on the table. And frankly, it’s not obvious that a broader currency for Africa is a good idea at this moment in time. A shared currency across a geographic area works best when the economy of that area is already somewhat united by flows of goods and services, finances and people, and shared government programs. Obviously, the question of whether, say, Greece should share a currency with Germany, has posed real problems for the euro.

Solution?

So the current plan, as Wellicz describes it, is to create a Pan African Payment and Settlement System (PAPSS):

The system aims to link African central banks, commercial banks, and fintechs into a network that would enable quick and inexpensive transactions among any of the continent’s 42 currencies. … PAPSS aims to solve such problems by settling transactions in local African currencies, obviating the need to convert them into dollars or euros before swapping them for another African currency. In essence, PAPSS would eliminate costly overseas intermediaries. The system aims to complete transactions in less than two minutes at a low though unspecified cost.

The careful reader will note that this description makes heavy use of “aims to.” PAPSS was apparently formally launched in January 2022, but had not cleared any commercial transactions through this summer. The success of Africa’s efforts to promote trade across the continent may well depend on whether PAPSS or a similar arrangement can succeed.

 

Bernanke v. Kindleberger: Which Credit Channel?

Perry Mehrling points to Charles Kindleberger’s comments on Bernanke’s paper which led to the Nobel Prize:

In the 1983 paper cited as the basis for Bernanke’s Nobel award, the first footnote states: “I have received useful comments from too many people to list here by name, but I am grateful to each of them.”

One of those unnamed commenters was Charles P. Kindleberger, who taught at MIT full-time until mandatory retirement in 1976 and then half-time for another five years. Bernanke himself earned his MIT Ph.D. in 1979, whereupon he shifted to Stanford as Assistant Professor. Thus it was natural for him to send his paper to Kindleberger for comment, and perhaps also natural for Kindleberger to respond.

As it happens, the carbon copy of that letter has been preserved in the Kindleberger Papers at MIT, and that copy is reproduced below as possibly of contemporary interest. All footnotes are mine, referencing the specific passages of the published paper, a draft copy of which Kindleberger is apparently addressing, and filling in context that would have been familiar to both Bernanke and Kindleberger but may not be to a modern reader. With these explanatory notes, the text speaks for itself and requires no further commentary from me.

This comment says it all

Dear Dr. Bernanke,

Thank you for sending me your paper on the great depression. You ask for comments, and I assume this is not merely ceremonial. I am afraid you will not in fact welcome them.

I think you have provided a most ingenious solution to a non-problem.

Ouch…

further

The necessity to demonstrate that financial crisis can be deleterious to production arises only in the scholastic precincts of the Chicago school with what Reder called in the last JEL its tight priors, or TP.[2] If one believes in rational expectations, a natural rate of unemployment, efficient markets, exchange rates continuously at purchasing power parities, there is not much that can be explained about business cycles or financial crises. For a Chicagoan, you are courageous to depart from the assumption of complete markets.

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