Archive for December, 2022

What is money and what is the role of the state in the payments market?

December 23, 2022

Riksbank economists (Stefan Ingves, Eva Julin, Stefan Lindskog, Gabriel Söderberg, and David Vestin) discuss role of the state in the growing digital payments market. They compare digital cash to dematerialisation of physical cash:

In this article, we argue that the state should take its responsibility to ensure that future payment systems work well in a global digital world. Part of this responsibility is to ensure that Sweden issues digital central bank money, if money issued by the state is still to be widely available to the public.

Our conclusion is that the Riksbank should issue e-kronas within the next few years and that these e-kronas need to be usable by the public in everyday life. This is necessary to ensure that fundamental objectives for society, such as confidence in the monetary system, resilience, accessibility and competition can be safeguarded in the payments market in the future.

A regulatory framework is needed to enable the introduction of a new digital payment instrument and to set the scope for it. From a legal perspective, our analysis suggests that electronic central bank money in the form of electronic cash as a complement to physical cash is preferable to electronic central bank money in the form of claims on the state. In other words, this implies a dematerialisation of cash in the same way that paper shares have already been dematerialised into book-entry shares. The central bank is thus modernising the product it has been offering for hundreds of years with the help of new technology.

On some “New” interpretations of Ricardo’s Principle of comparative advantages

December 23, 2022

Sergio Parrinello of Sapienza University of Rome discusses new interpretations of Ricardo’s Comparative Advantage idea:

Different theories of international trade have originated from Chapter VII “On Foreign Trade” of Ricardo’s Principles and particularly from the interpretation of his numerical  example of the gains from trade. In this paper a relatively new interpretation of such example and the resulting implications will be assessed in the light of Sraffa’s writings (1930, 1951) and of the so-called Neo-Ricardian approach applied to the theory of foreign trade. In particular, it will be reconsidered: i) the analogy between the choice of international specialization and the choice of techniques; ii) the conditions under which absolute cost advantages may prevail over comparative advantages and affect the pattern of international trade and the delocalization of the national industries.

The burst of high inflation in 2021–22: how and why did we get here?

December 22, 2022

Prof Ricardo Reis in this BIS research discusses the recent rise in inflation:

The current institutional arrangements for monetary policy delivered more than two decades of low and stable inflation. Yet, central banks failed to prevent a burst of high inflation in 2021-22.

This paper inspects four tentative hypotheses for why this happened.

The first is a misdiagnosis of the nature of shocks during a time of great uncertainty leading to an overly long period of expansionary policy.

The second is a neglect of expectations data driven by a strong belief that inflation expectations were firmly anchored and so inflation increases would be temporary.

The third is an over-reliance on the credibility earned in the past, creating an illusion of too much room to focus on the recovery of real activity and underpredicting the resulting inflation.

The fourth is a revision of strategy that made central banks tolerant of higher inflation because of the trend fall in the return on government bonds, even though the return on private capital stayed high.

Eventually hubris over any macro policy/framework backfires overtime.

Why does the Federal Reserve need a economic historian?

December 22, 2022

Jonathan Rose has recently been appointed as a economic historian at the Federal Reserve.

St Louis Fed’s openvaultblog profiles Rose and his work at Fed:

What does the Fed historian do?

The position, as I understand it, was originally created for the 2013 centennial of the Fed. There has been one historian before, Gary Richardson, who is perhaps the country’s leading historian of the Fed System and a professor at the University of California, Irvine. Among other lasting legacies, Richardson set up the Federal Reserve History website.

There are several components of the current historian role:

    • One is to continue to build out the Federal Reserve History website.
    • Another is to work with the FRASER team here in St. Louis and help them engage with users and add content.
    • And the Fed historian is a member of the committee that oversees preservation decisions, including about what goes into FedPreserve, the internal system used by Reserve banks to store historically significant materials.

I think, in general, historians are pro-preservation as well as pro-accountability and transparency for a central bank in describing the past.


What is the link between your two roles as Fed historian and senior economist?

I’ve done a lot of historical work in the course of being an economist in the Federal Reserve System—for example, writing speeches for governors in D.C. about the history of the Fed, being an on-call consultant for all matters historical, or contributing from the deep expertise you get from long-term history research. I have always found policymakers to be intensely curious about the history of their institutions and about using history to identify salient features of the present.

For me, bringing history to policy effectively has always meant I need to have one foot in the past and one in the present. I never want to fall in the trap of not knowing about anything that happened after 1950. So that’s my Chicago half: I continue to be involved in policy because I enjoy serving our country in that way, and also so that I can be effective as the historian.

The opposite is also true, that policy happening today informs my history work. I have a friend who’s a professor of economic history, and he likes to toy with people by saying that he only reads the news so that he can better understand the past. It’s a good reminder, though, that the past is more alive than you think. In policy settings, it can be useful to remember that the path our history has taken was not inevitable, but a series of contingencies and idiosyncratic events. In this way, historians ironically can help envision the future, as we are maybe not too stuck in the present.

Understanding past is understanding future.

Indian Big Business The transformation of India’s corporate sector from 2000 to 2020

December 22, 2022

Jairus Banaji in this essay documents transformation of India’s cororate sector particularly big business:

In what follows, I present a precis of the evolution of Indian big business over the last two decades, starting with a fact which is hardly ever foregrounded, namely, that the business families who formed the mainstay of industrial capitalism in the country for a whole three or four decades after Independence have either disintegrated or have been disintegrating and will soon cease to exist as coherent entities, let alone cohesive ones. Next, I shall present the results of an exercise that involves looking at the biggest non-banking companies in the country (both listed and unlisted) in terms of who actually owns them and of the different categories of ownership we can divide them into. Here the chief result is that since the 1960s, when both R. K. Hazari and Mike Kidron wrote fine studies of big business, there have been massive changes in the Indian corporate sector.4 Dominance no longer lies with the fabled large business houses of the past but with an entirely new breed of capital.

In section three, I shall turn to the cycles that span first a major boom (one of the most rapid periods of growth in Indian manufacturing) in the 2000s and then the slowdown that came to grip most areas of private business for the greater part of the last decade. The slowdown began in 2011 and shows no obvious sign of letting up even today. As the quote from Venu suggests, the banks are central to this sharply fluctuating picture, and their abject prostration before private capital casts doubt on whether any such thing as “finance capital” can even be said to exist in India’s economy. In the final section, I offer an alternative perspective that breaks with the shallow characterization of “crony capitalism” in favor of a deeper reflection on what we are up against.

Maggie Lena Walker: How the daughter of a former slave became a banking pioneer

December 21, 2022

John Mullin of Richmond Fed in this article pays tribute to Maggie Lena Walker the first Black woman to establish a bank in the United States:

Maggie Lena Walker built the St. Luke Penny Savings Bank to last. When it opened its doors in Richmond’s Jackson Ward district in 1903, Walker became the first Black woman to establish a bank in the United States. She would stand at its helm as president for nearly 30 years, safely steering it through periodic bouts of economic turmoil, eventually increasing its assets more than tenfold. To cap off her career, she would solidify the bank’s long-term prospects by orchestrating mergers with two other banks during the depths of the Great Depression.

“The merged firm, the Consolidated Bank and Trust Company, didn’t just outlast the Great Depression,” says Ethan Bullard, curator at the Maggie L. Walker National Historic Site in Richmond. “It lasted into the 21st century and became the nation’s longest continuously run Black-owned bank.”

After founding the bank, Walker became a prominent public figure. A charismatic orator who infused her speeches with evocative biblical references, she addressed audiences throughout the country, championing Black racial pride and economic empowerment. She associated with the most important Black intellectuals and reformers of her time, including Booker T. Washington, W.E.B. Du Bois, and Marcus Garvey. These leaders, each in his or her own way, attempted to chart a path toward Black success during what many historians regard as the low point in post-Civil War race relations — the period after Reconstruction’s end in 1877 through the early part of the 20th century, an era that saw the expansion of Jim Crow segregation and Black voter disfranchisement.

Walker’s practical vision — much in line with that of Booker T. Washington — helped place her at the center of a Black business boom in Richmond. The ascent of Jim Crow laws reinforced a desire among Black Americans to form their own businesses and to practice the dictum “don’t shop where you can’t work.” Under these conditions, Richmond’s Jackson Ward district developed into what historians in a Works Progress Administration report later called the most important center of Black American business activity in the world.


Measuring India’s Digital Economy

December 21, 2022

in this new RBI bulletin article, a team of RBI economists (Dhirendra Gajbhiye, Rashika Arora, Arham Nahar, Rigzen Yangdol anf Ishu Thakur) measure the size of Indian digital economy. They estimate that the share of digital economy is around 22 percent. It is also growing at a faster pace than the physical economy:

India has emerged as a leader in the digital revolution taking place globally but there are few credible estimates on the size of digital economy which hampers evidence-based policy making. This article tries to fill that void by measuring the size of India’s digital economy using Input-Output tables and provides estimates on employment generated by the digital economy.


    • India’s core digital economy (hardware, software publishing, web publishing, telecommunication services, and specialized and support services) increased from 5.4 per cent of Gross Value Addition (GVA) in 2014 to 8.5 per cent in 2019. Including the sectors that have witnessed digital disruptions, the share of digitally dependent economy hover around 22 per cent in 2019.
    • India’s digital economy grew 2.4 times faster than the Indian economy, with strong forward linkages to the non-digital sectors. The digital output multiplier has increased over time, highlighting the role of digital economy investments to drive growth.
    • The employment estimates show that 4.9 million people were employed in the core digital sector. Considering the total digitally dependent economy, around 62.4 million workers are employed in digitally disrupted sectors.

Very interesting.

Employment effect of citizenship acquisition: Evidence from the Belgian labour market

December 20, 2022

Sousso Bignandi and Céline Piton of Belgium central bank in this research paper study the impact of acquiring citizenship on labour markets:

This paper investigates whether citizenship acquisition affects immigrants’ employment in Belgium. To do so, we rely on a longitudinal database, over the period 2008-2014, coupling administrative data from the Crossroads Bank for the Social Security (CBSS) and survey data from the Labour Force Surveys (LFS).

During this period, citizenship was open to all immigrants who have been legally resident for at least 7 years, without any language or integration requirements. This allows us to study naturalisation in a liberalised context, avoiding part of the selection bias.

The econometric analysis has been carried out using panel data fixed effects techniques applied to a programme evaluation model. We find that citizenship acquisition increases immigrants’ employment by 7 percentage points after naturalisation. Furthermore, the analysis by type of employment shows that citizenship has a positive effect on migrants’ entrepreneurship as well as on their probability of finding a better and more stable job.


The Curious Case of the Rise in Deflation Expectations

December 20, 2022

A team of NY Fed economists (Olivier Armantier, Gizem Kosar, Jason Somerville, Giorgio Topa, Wilbert van der Klaauw, and John C. Williams ) in this research paper note that consumers think inflation in recent months is likely to revert to the mean. They in a way have deflationary expectations and are more optimistic about the economic outlook.

We study the behavior of U.S. consumers’ inflation expectations during the high inflation period of 2021-22 using data from the Survey of Consumer Expectations. Short- and, to a lesser extent, mediumterm inflation expectations rose as inflation surged in 2021. Disagreement and uncertainty about future inflation increased significantly. Then, in 2022, even as inflation continued to climb, medium- and longerterm inflation expectations unexpectedly fell and medium- and longer-term deflation expectations increased. We find that respondents with deflation expectations tend to expect prices to mean revert and are more optimistic about the economic outlook.

Regulating big techs

December 20, 2022

Luigi Zingales lays out a framework for regulating bigetchs:

Digital markets are global in nature and prone to “tipping”. The combination of these two factors makes the distortions of the inevitable monopolies in these markets very large, but it also undermines any effort at dealing with these distortions at a national level. I argue that the problem can only be solved by structural interventions that restore conditions for competition. Yet, no national regulator will have the ability to do so. Regulation can only arise in an international context. Paradoxically, the increasing international tension can create political opportunities for such international regulation.

Hydrogen’s decade

December 20, 2022

Prof Thijs Van De Graaf of Ghent University, Belgium in this IMF article

If the 1990s were the decade of wind, the 2000s the decade of solar, and the 2010s the decade of batteries, the 2020s could launch us toward a next frontier of the energy transition: hydrogen. Hardly a week goes by without a major new hydrogen project or breakthrough. In just the past five years, more than 30 countries have developed or started to prepare national hydrogen strategies (IEA 2022). The Paris climate goals have been a key driver, but Russia’s war in Ukraine and soaring gas prices have also driven a shift to greener fuels. Economic development and industrial policy loom large as well.

Clean hydrogen has the potential to upend the geopolitics of energy as we know it. New geographies of trade may emerge around clean hydrogen and its derivatives, such as ammonia. Countries blessed with abundant sun and wind could emerge as major exporters of green fuels or sites of green industrialization. Industrial competition could intensify as countries aspire to technology leadership around key segments of the hydrogen value chain. In general, scaling up clean hydrogen could foster intense geo-economic competition, spur new alliances and collaboration, and beget new nodes of power along future centers of hydrogen production and use. 

Deep Reinforcement Learning: Emerging Trends in Macroeconomics and Future Prospects

December 20, 2022
Doing and understanding macro is going to be really tough going forward.

New IMF paper by Tohid Atashbar and Rui Aruhan Shi:

The application of Deep Reinforcement Learning (DRL) in economics has been an area of active research in recent years. A number of recent works have shown how deep reinforcement learning can be used to study a variety of economic problems, including optimal policy-making, game theory, and bounded rationality. In this paper, after a theoretical introduction to deep reinforcement learning and various DRL algorithms, we provide an overview of the literature on deep reinforcement learning in economics, with a focus on the main applications of deep reinforcement learning in macromodeling. Then, we analyze the potentials and limitations of deep reinforcement learning in macroeconomics and identify a number of issues that need to be addressed in order for deep reinforcement learning to be more widely used in macro modeling.

RBI Releases Fifth Volume of Reserve Bank History (1997-2008)

December 19, 2022

RBI releases fifth volume of its history which covers the period 1997-2008:

The fifth volume of the Reserve Bank of India’s history is released today. This volume encompasses the 11-year period from 1997 to 2008. With this volume, the history of the Reserve Bank of India is now updated up to 2008. The Reserve Bank had initiated the process of preparation of this volume in 2015 under the guidance of an Advisory Committee chaired by Dr. Narendra Jadhav, former Member of Parliament and former Principal Adviser & Chief Economist of the Reserve Bank. The volume has been prepared by a team of writers led by the economic historian Dr. Tirthankar Roy. Other members of the team were K. Kanagasabapathy, N. Gopalaswamy, F. R. Joseph and S.V.S. Dixit.

The volume, published by the Cambridge University Press, contains the institutional history of the Reserve Bank documented on the basis of official records, publications and oral discussions with persons who were closely associated with the working of the Reserve Bank during the period. This volume covers the developments in policies and operations in major functional areas during the period which was marked by two major crises in the global economy, i.e., the Asian financial crisis and the global financial crisis. It covers the tenures of three Governors – the latter part of Dr. C. Rangarajan’s tenure, the complete tenure of Dr. Bimal Jalan and a major part of Dr. Y. V. Reddy’s tenure.

The previous four volumes are available on the below links:

Hoping RBI puts up the fifth volume on its website as well.

London as a financial centre since Brexit

December 19, 2022

Jakub Demski, Robert N McCauley and Patrick McGuire in this BIS research article analyse the impact of Brexit on London international financial centre:

  • Historically, London has enjoyed an outsized role in euro-denominated financial transactions. We examine the latest evidence on whether Brexit has affected its central role in trading of interest rate derivatives, foreign exchange, international banking and bond underwriting.
  • The 2022 BIS Triennial Central Bank Survey shows that London remains dominant in FX trading, but has lost share in euro interest rate swaps to euro area centres after five Surveys showing gains.
  • London retains its pre-eminence in international banking, but its banking ties to the euro area have loosened in part owing to the shift of euro repo clearing from London to Paris.

That said, the full adjustment to Brexit is ongoing, and our findings should be viewed as provisional and subject to change. The ECB’s requirement that some euro area affiliates of banks headquartered outside the EU should rely on local trading and risk management could further shift activity.

So too could the expiration of the EU equivalence designation of UK clearing of euro interest rate swaps in 2025. If the effect of European policy remains to be seen, the same is true of the effect of UK efforts to make London more competitive in financial services. London’s long-standing advantages of scale, scope and time zone may well sustain its pre-eminence as an IFC (Cassis (2010); Schenk (2019)). Those holding this prior have limited call to update it based on the observations above.


Poland’s decision to pursue energy independence from Russia

December 16, 2022
Piotr Naimski, Former Deputy Minister of Economy of Poland explains how Poland decided to pursue energy independence from Russia. Thinking on energy independence started way back in 1991:

F&D: In 1991, when your government was elected, you decided that the country needed to free itself from dependence on Russian natural gas. How did that decision come about?

NAIMSKI: We entered office by the end of the year, and suddenly at the beginning of January, supplies of [Russian] gas started to be lower and lower. At that time, gas was already a substantial part of our energy supplies. We convened a special committee to evaluate which industrial installations should be cut off from our energy supplies in case of necessity.

The Russians at that time were very disorganized, because in December 1991, they had dissolved the Soviet Union. In Moscow, they kept telling us, “Don’t worry, this is only because of our organizational problems.” And by mid-January they resumed supplies.

But this was really a sign for us of what could happen in the future. At the time that Russians had decided about a certain new strategy for central European countries—which were going out of the Soviet sphere of influence—they decided on this plan to “replace tanks with pipelines.”

So we started to look for other solutions for diversification of the supplies.

F&D: After a few false starts and changes in government, in 2016 you started talks on the construction of the Baltic Pipe. How important is that for Poland’s energy security, and for Europe’s?

NAIMSKI: The Baltic Pipe will have 10 billion cubic meters of  capacity per year. This is about half of  Polish demand and will replace 100 percent of Russian deliveries.  Together with an already operational LNG [liquefied natural gas] terminal and recently commissioned interconnectors with Lithuania and Slovakia, Poland will be free of Russia’s hostile gas maneuvers. This is especially important today, when Europe has to confront Russia’s weaponizing of hydrocarbon deliveries.

Need for a new pipeline from north to south:

F&D: Most existing gas pipelines run east to west. You have talked often about the need for north-south pipelines. What is the rationale?

NAIMSKI: This is important because, if we want to really diversify our sources and means of transportation for central Europe, we have to construct transmission lines completely differently from what was executed by Russian—or Russia-dependent—institutions, governments, or economies. 

This is why we are commissioning a pipeline interconnected between Poland and Slovakia. And the Slovaks, they have already interconnected with Hungary, and they have plans to finally complete a link with the Romanian system. And actually, this idea of linking Świnoujście [on Poland’s Baltic Coast] with Krk Island [on the coast of Croatia] was the basis for these north-south gas transmission strategies. The Baltic Pipe is part of this new possibility. 

Most countries need to think seriously about energy requirements and dependence.

Sweden central bank to make losses amidst rising interest rates

December 16, 2022

I had pointed to how Reserve Bank of Australia has made losses this year.

Sweden’s central bank joins the Australian central bank. Sweden central bank Deputy Governor Martin Flodén in this speech discusses the impact of rising interest rates on the central bank:

Calculations indicate that the purchases of government bonds may have reduced government borrowing costs by approximately SEK 15 billion during 2015-2022. But interest rates are now rising rapidly, and this means that the value of the assets we have purchased falls. Like many other central banks, the Riksbank will therefore in all probability report a large financial loss for 2022, and our equity may become negative as a result. “This may lead to the Riksbank having to request capital injections from the Riksdag. There is a risk that this may affect the Riksbank’s financial independence in the future. Another risk is that market participants will begin to expect the Riksbank to enter in as a buyer in tough times,” concluded Mr Flodén. 

Profile of Emi Nakamura: Questiong Assumptions

December 15, 2022

Peter Walker profiles Prof Emi Nakamura of Univ of Berkeley.

One of Emi Nakamura’s favorite movies growing up in Alberta, Canada, was the 1987 docudrama The Race for the Double Helix. Fast-paced and infectious in its enthusiasm for the scientific method, it tells the story of how James Watson and Francis Crick discovered the structure of DNA. “There’s nothing worse than a wrong fact,” quips Crick in the movie, exasperated by all the incorrect theories clouding his thinking (before Rosalind Franklin’s X-ray images of DNA led him and Watson down the right path). It is a quote that Emi recalls her economist parents repeating to emphasize the importance of sound data.

Now a professor of economics at the University of California, Berkeley, the 42-year-old Nakamura is best known for investigating macroeconomic questions using micro data—data that provide information about characteristics of individual people, households, and businesses. She has long been seen as a rising star in economics. In 2018, The Economist listed her among the decade’s eight best young economists. A year later she won the John Bates Clark Medal—awarded to the most influential American economist under the age of 40—for her research on fiscal stimulus and price stickiness, a measure of how often prices change.


Cricket and money: Barbados’ $5 banknote pays tribute to the man who united West Indian cricket

December 15, 2022

Analisa Bala of IMF writes on Frank Worrell who features on Barbados’s $5 note:

When the central bank of Barbados was thinking through which features to prioritize as part of the redesign of its banknotes debuting this month, the top priority was that the notes be authentically Barbadian. “Each note talks about our history, geography, and culture,” says Octavia Gibson, director of the bank’s currency and payments oversight department.

And what could be more Barbadian than cricket? It’s a sport the country has traditionally excelled in.


With cricket so much a part of the culture, it’s fitting that the Barbadian $5 note features cricket legend Frank Worrell. Together with Everton Weekes and Clyde Walcott, Worrell was one of the famous “Three W’s”—the strongest middle-order batters in the world at the time. All three were born in Saint Michael, Barbados.

Worrell was the first Black man to captain the West Indies cricket team for an entire series and was an exceptional manager, insisting on fair play, both on and off the field. The team lost just 3 of the 15 tests under his leadership, making him one of the most successful skippers in its history. Shortly after retiring, he was knighted by the late Queen Elizabeth II for his contribution to the game and was the first sportsman to be honored with a memorial service at Westminster Abbey when he died in 1967 of leukemia at age 42.

International trade in the time of climate crisis

December 14, 2022

Ankai Xu and José-Antonio Monteiro in this voxeu aricle discuss a new WTO report which argues that greater trade openness can help alleviate climate risks:

Climate change is having a profound impact on people’s lives around the world. This column summarises analysis from a recent WTO report on the complex relationship between climate change and international trade. It shows that countries with greater trade openness tend to be less vulnerable to climate shocks. In addition, although international trade generates greenhouse gas emissions, it can also help accelerate the transition to a low-carbon economy. Ultimately, international cooperation on climate-related policies will be a key ingredient to limiting climate change in the future

The Best Economics Books of 2022 recommended by Jason Furman

December 14, 2022

The time of the year where people give lists for 2022 and for 2023.

Jason Furman, a Harvard economics professor and former adviser to Barack Obama, picks out five of the best economics books of 2022 and book topics he will like to see in 2023.

five books for 2022

  • The Journey of Humanity: The Origins of Wealth and Inequality by Oded Galor
  • Slouching Towards Utopia: An Economic History of the Twentieth Centuryby Brad DeLong
  • Streets of Gold: America’s Untold Story of Immigrant Succes by Leah Boustan & Ran Abramitzky
  • Of Boys and Men: Why the Modern Male Is Struggling, Why It Matters, and What to Do about It by Richard V Reeves
  • Chip War: The Fight for the World’s Most Critical Technology by Chris Miller

on 2023:

Humans are always the most important driver of economic growth, and they were an important part of the story in every one of the five books that I recommended. There is almost no limit to the study that can be done to try to understand the human aspects of economic growth.

In 2023, the spotlight will grow on the levelling-off and potential reduction of globalization that we’re going through. This will be a big issue going forward. Fifteen years ago, there was a whole raft of books about globalization. We might start to want to read or research and write about de-globalization, as we might be in the beginning of that process.

And finally, the rehabilitation of industrial policy is an area of increasing importance. ‘Industrial policy’ used to be an insult levied against ill-conceived government plans; now, governments around the world are increasingly comfortable getting directly involved in industry. I’m not sure if that is a good thing or a bad thing, but it is one of the many things worth reading about in 2023.

Industrial policy…hmmm

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