Archive for January, 2023

The impact of high inflation on trust in national politics and central banks

January 31, 2023

Carin van der Cruijsena, Jakob de Haanb, and Maarten van Rooija discuss impact of high inflation on Netherlands central bank:

Little is known about the impact of high inflation on public trust. Using a survey in the Netherlands, we find that the recent increase in inflation is associated with a decline in trust in the Dutch central bank and Dutch politics. The higher individuals’ perceived inflation is and the harder it is for them to make ends meet, the lower their trust in the European Central Bank, the Dutch central bank, and Dutch politics. We also find that people trust authorities considered responsible for bringing inflation down less. Quite remarkably, most people think government is responsible for maintaining price stability.

Economic Survey 2022-23: The Period 2014-2022 is Analogous to the Period 1998-2002

January 31, 2023

The government released the Economic Survey for 2022-23.

ONe of the chapters titled India’s Medium-term Growth Outlook: With Optimism and Hope compares 1998-2002 with 2014-22 period:

India’s recent economic history provides a similar parallel to this situation. During 1998-2002, transformative reforms were launched but yielded lagged growth dividends (Table II.3). This phenomenon was attributed to a series of one-off shocks resulting from external factors and the domestic financial sector clean-up, which overshadowed the growth returns from 1998 to 2002. By 2003, when the shocks dissipated, India participated in the global boom and grew at a higher rate. Similarly, in the present context, as the global shocks of the pandemic and the spike in commodity prices in 2022 fade away, the Indian economy is well placed to grow at its potential in the coming decade.

After a long period of balance sheet repair in the financial and corporate sector, the financial cycle is poised to turn upward. As the health and economic shocks of the pandemic and the spike in commodity prices in 2022 wear off, the Indian economy is thus well placed to grow at its potential in the coming decade, similar to the growth experience of the economy after 2003. This is the primary reason for expecting India’s growth outlook to be better than it was in the pre-pandemic years

There is a list of shocks, reforms and growth outcomes in the two periods.

While this comparison and analogy is interesting, it keeps the 2004-14 period completely out of the discussion. Even if one says most economic reforms were in the two periods of 1998-2002 and 2014-22 and very little was done in the 2004-14, one should mention the few reforms done in the 2004-14 period. For instance the aadhar as an idea which is behind much of the digital revolution and digital ecosystem was initiated in the 2004-14 period.


Why European banks adjust their dividend payouts?

January 31, 2023

Marco Belloni, Maciej Grodzicki and Mariusz Jarmuzek in this ECB paper:

Economic literature suggests that banks change their dividend payouts for three main reasons. They may be willing to signal good future profitability to shareholders to address information asymmetry, or use dividends to mitigate the agency costs, or could come under pressure from prudential supervisors and regulators to retain earnings. The COVID-19 pandemic led to introduction of sector-wide recommendation by regulators to suspend dividend payouts in view of prevailing large uncertainty.

Using a panel data approach for two samples of listed and unlisted European banks, this paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the three motivations found in the literature.

The results are robust to selection of alternative variables representing these motivations. Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations shown in the paper suggest that, in the absence of supervisory recommendations, banks would likely have reduced the payouts only slightly in the first year of the pandemic.

Does money growth help explain the recent inflation surge?

January 30, 2023

Claudio Borio, Boris Hofmann and Egon Zakrajšek in this BIS Bulletin article:

  • The strength of the link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high and virtually non-existent when it is low.
  • A link can also be seen in the recent possible transition from a low- to a high-inflation regime. An upsurge in money growth preceded the inflation flare-up, and countries with stronger money growth saw markedly higher inflation.
  • Looking at money growth would have helped to improve post-pandemic inflation forecasts, suggesting that its information value may have been neglected.

Will monetary aggregates make a comeback?

Past Economic Surveys put it best: Private investment is India’s best growth mantra

January 30, 2023

My new piece in moneycontrol summing one key lesson from previous economic surveys.

What are Large Global Banks Doing About Climate Change?

January 27, 2023

A team of economists -Daniel O. Beltran, Hannah Bensen, Amy Kvien, Erin McDevitt, Monica V. Sanz, and Pinar Uysal- in this Federal Reserve research review climate action plans of large global banks:

We review the “climate action plans” of Global Systemically Important Banks (GSIBs) and the progress they are making toward achieving them. G-SIBs have identified the drivers of climate risk and their transmission channels to credit and other risks. Additionally, some have started to measure and model these risks.

While most GSIBs have committed to fully offsetting their emissions by mid-century, they are only beginning to measure financed emissions resulting from their loans and investments, which comprise the vast majority of their emissions. G-SIBs have also committed to increase green finance and have started to do so.

All told, despite some progress by large global banks to address climate change considerations, much work lies ahead to properly measure and disclose climate-related risks, and to better align financing activities with their net-zero targets.

SEBI Study: Analysis of Profit and Loss of Individual Traders dealing in Equity Futures & Options Segment

January 27, 2023

SEBI has released a very interesting study on analysis of retail investors dealing in  Equity Futures & Options Segment.

Key findings:

  • There has been a significant increase of over 500% in the number of individual traders in the equity F&O segment in FY 2021- 22, as compared to FY 2018-19.
  • On average, loss makers registered net trading loss close to ₹ 50,000 in FY 2021-22. The average absolute net loss of a loss maker
    was over 15 times the net profit made by a profit maker.
  • Over and above the net trading losses incurred, loss makers expended an additional 28%* of net trading losses as transaction costs.
  • Those making net trading profits incurred between 15% to 50% of such profits as transaction cost.

Well, whether an investor makes losses or makes profits, the exchanges/brokers which collect majority of the transaction costs make major gains.

Brazil is undergoing a fintech revolution

January 27, 2023

Kate Jaquet is Co-portfolio Manager at Seafarer Capital Partners in this OMFIF article:

Technological innovations are shaking up the world of payments and finance in Brazil. The country has an impressive number of new fintech companies that are disintermediating a very concentrated banking system, serving consumers in ways that the incumbent banks haven’t and offering millions of Brazilians their first bank accounts. Some of these companies are revolutionising the country’s finance industry.

Brazil is well suited to fintech innovations for three main reasons. First, Brazil’s banking system is small relative to the size of the country, and it is heavily dominated by just a few banks. The country’s five bank asset concentration, which is a measure of the five largest banks as a share of total commercial banking assets, has long been around 80%. This bank concentration in the US is around 50%. The rigidity and oligopolistic nature of Brazil’s banking sector has constrained the economy, leaving too many Brazilians unbanked and consumers looking for better and more convenient options.

Second is changing consumer preferences. Brazil’s fintech start-ups identified broad consumer frustration with incumbent banks and quickly jumped in to provide a suite of fintech products, all available via a smartphone and on a comparatively fast time frame. There is also a well-ingrained culture of instalment payments in Brazil. The widespread use of payments for purchases both large and small began in the 1950s with the popularisation of ‘crediários’, whereby consumers could register with a store to purchase items but then pay for them over a series of months. This culture of instalment payments lends itself well to increased digital finance, resulting in a proliferation of payment-orientated fintech start-ups operating in Brazil.

Third, the government has provided several initiatives aimed at fostering greater competition in the banking and payments sectors. The first was in 2010 when Brazil’s regulator ended the duopoly enjoyed by the dominant credit card acquirers in Brazil. By introducing competition and reducing the fees that retailers pay for credit and debit card transactions, savings were passed on to the consumer, ending a period of supernormal profit for the acquirers. The incumbent banks who owned the acquirers were then forced to look for ways to replace these profits and grow in a more consumer-friendly way.

Creative destruction at work:

Another government initiative worthy of note is Pix, launched in November 2020. Pix is an instant payments system operated by the central bank whereby consumers and merchants can send and receive money via a QR code. Pix is a way for ordinary Brazilians to avoid some of the fees that banks have typically attached to standard services such as money transfers and it is very popular. An estimated 118m Brazilians (two-thirds of the population) use Pix.

There are dozens of new companies changing the way Brazilians buy, save, invest and access a myriad of financial services. These new companies are leapfrogging traditional banking, payments, wealth management and insurance services. They are successfully using consumer data and network effects to challenge and disrupt the sleepy incumbent banks and offer millions of Brazilians their first bank accounts and financial products.

However, there have been failures and there will likely be more to come. Companies in this sector have attracted capital with astounding rates of growth. Unfortunately, for some participants that growth was accompanied by mismanagement in the form of sloppy credit expansion. The most blatant examples have seen a reckoning in their share prices and there will most likely be some consolidation in the sector with stronger players scooping up distressed ones.

Consolidation may also occur due to the fact that consumers are unlikely to have more than a couple of payment or digital banking apps on their phones – there can only be a few winners. The companies most likely to thrive in this industry are ones able to successfully grow around deposit-taking and liability-based products (rather than driven by hasty credit growth).

Brazil’s fintech scene is a classic example of necessity breeding innovation. This is a country where millions have gone underserved by traditional banks for decades. The unmet need for basic banking services is a key reason why Brazil has such a vibrant and innovative fintech scene. The improved experience and lower fees are appreciated by Brazilians across the spectrum. Perhaps Brazil offers a partial roadmap to the future of financial innovations in emerging markets.

Using machine learning to measure financial risk in China

January 25, 2023

Alexander Al-Haschimi, Apostolos Apostolou, Andres Azqueta-Gavaldon and Martino Ricci in this ECB paper:

We develop a measure of overall financial risk in China by applying machine learning techniques to textual data. A pre-defined set of relevant newspaper articles is first selected using a specific constellation of risk-related keywords. Then, we employ topical modelling based on an unsupervised machine learning algorithm to decompose financial risk into its thematic drivers.

The resulting aggregated indicator can identify major episodes of overall heightened financial risks in China, which cannot be consistently captured using financial data. Finally, a structural VAR framework is employed to show that shocks to the financial risk measure have a significant impact on macroeconomic and financial variables in China and abroad.


Greenium in India’s sovereign green bonds

January 25, 2023

The Government issued the first green bonds today. There was high investor interest in the bonds.

The government has earned a green premium or greenium on the bonds by around 5-6 bps.

Reserve Bank of New Zealand to build foreign exchnage reserves

January 25, 2023

Before 2008, the consensus was central banks should just target inflation and leave everythig else.  Post 2008 crisis, all kinds of things happening in world of central banking. The objectives are constantly expanding from monetary stability to growth, unemployment, financial stabiliy, climate change and so on.

Reserve Bank of New Zealand which pioneered inflation targeting was seen behind the pre-2008 consensus. All this is changing big time. The objective has been expanded to included financial stabiluty and employment.

As per latest developments, the central bank has signed an agreement with the government to intervene in foreign exchange markets and build foreign exchange reserves

We hold and manage foreign reserves in order to be able to intervene in the New Zealand dollar (NZD) market for financial stability or monetary policy reasons. Foreign reserves are safe and liquid assets held in currencies, such as United States dollars, Euros, and Australian dollars.

Our chairman Professor Neil Quigley says a well-functioning foreign exchange market is critical to New Zealand’s economy with many people — including exporters, importers, borrowers and investors — reliant on these markets to exchange New Zealand dollars for foreign currency.

“While foreign reserves are rarely used, it is important for us to be prepared to support the foreign exchange market in exceptional circumstances to maintain financial stability and ensure essential transactions can continue to occur.”  

As part of the framework, both the Reserve Bank and the Minister of Finance are required to agree to a level of foreign reserves that we should hold in order to meet our objectives. The level of foreign reserves had been largely unchanged since 2007. 

Given the growth in the economy and foreign exchange market since then, the Minister of Finance and our Board have agreed that an increase to foreign reserves holdings is needed. 

“The transition to this higher level of foreign reserves will take place over a number of years, in order to minimise the market impact,” Governor Adrian Orr said.

Due to market and policy sensitivities, we do not intend to make public any further details on the size or composition of this increase. However, our foreign reserves holdings will continue to be published on our website on a monthly basis.  

The Framework maintains the Monetary Policy Committee’s right to intervene in the exchange rate when the New Zealand dollar has moved to exceptionally low or high levels that cannot be justified by economic fundamentals. Interventions are expected to be rare and consistent with the Reserve Bank’s monetary policy objectives.


Tribute to Mr BV Doshi

January 25, 2023

The highly accomplished architect Mr BV Doshi passed away in Ahmedabad yesterday. I am not a student of architecture and have no idea about the subject. However, I have had the privilege to study and work in his designed architectures of excellence. I just want to thank you Sir for imagining the unimagined.

For the unititated, see his video on his thoughts and philosophy on designing campus of IIM Bangalore.  We barely pay attention on what thinking and effort goes into designing fine architecture.

Prof Chinamy Tumbe pays a fine tribute. Mr Bimal Patel of CEPT University shares memories.

Common Currency for Latin American: Neymar and Messi in the same team doesn’t always work

January 25, 2023

My explainer in Moneycontrol on the proposed currency union in Latin America and Caribbean islands.

Austrian Economics as a relevant research program

January 25, 2023

Prof. Daniel J. Smith of Middle Tennessee State University in this paper argues for relevance of Austrian economics:

What is the relevancy of modern Austrian economics? Austrian economics, from its origins, has attempted to push economics towards greater relevance by developing and refining a methodological approach that enhances the operational validity of its scientific conclusions for decision-making in the real world. In a theoretical paradigm, this led to the development of theoretical insights on significant economic phenomena often excluded from static economics models. As the economics profession took an empirical turn, modern Austrian economics has demonstrated its continued relevancy through empirical methods that apply economic theory to pressing, long-standing policy issues.

What is relevancy:

…what I mean by relevance is specifically that we do scientific research with policy relevance and that we arrive at scientific conclusions that do not rely on limiting assumptions to the extent that would lead to potentially adverse unintended consequences if used today or in the future, as a basis for real-world decision-making (see, for instance, Munger 2022). It is the distinction, according to Radomysler (1946, p. 198), “between theory that does apply to reality and theory that does not.” An academic can eschew public policy and be wholly concerned only with long-standing problems in political economy but still seek to produce relevant research under this definition.


Central Bank of South Sudan asks people to use Sudan Pound as legal tender

January 24, 2023

The Bank of South Sudan is the central bank of the Republic of South Sudan. It was established in 2011 and is the youngest member (?) to enter the central bank club.

The central bank recently asked the public to use South Pudan as legal tender. People are using foreign currencies for their transactions and the central bank has warned that any sich foreign currency transaction will be penalised.

Well as Minsky famously said “Everyone can create money; the problem is to get it accepted“.  It is not as if people will not like to use South Sudan Pound, it is just that they dont see it is a stable currency.

Open Market Operations in India – An Appraisal

January 24, 2023

Abhilasha, Bhimappa Arjun Talwar, Krishna Mohan Kushwaha and Indranil Bhattacharyya in this RBI Bulletin article discuss changes in OMO:

In a modern market-based monetary policy operating framework, open market operation (OMO) is the principal instrument of liquidity management by central banks. This article reviews the Indian experience on OMOs and examines their impact on the central bank’s balance sheet. It also examines the role OMOs play in a world with significant spillover effects.


  1. Globally, the scale and extent of OMOs – both sales and purchases – have increased significantly over the past fifteen years. By augmenting/mopping up systemic liquidity, OMOs help in modulating yields which transmit to other financial market instruments.
  2. In the Indian context, OMOs are instruments for altering durable liquidity conditions in the system barring special transactions such as Operation Twist (OT). OMO purchases increase the domestic assets in the balance sheet of the Reserve Bank, and also the reserve money, and vice versa for OMO sales.
  3. An empirical examination in the Indian context reveals that external / exogenous factors such as movements in the US Treasury yields have a significant impact on domestic long-term yields. Given this, our empirical results show that OMOs remain a potent tool to steer long-term interest rates in alignment with the stance of monetary policy.

When central banks lend to banks whose board members are shareholders of the central bank: Case of Banque De France

January 24, 2023

Kris James Mitchener & Eric Monnet in this paper look at this very interesting case of connected lending by Banque De France in 1930s:

More Roads or Public Transit? Insights from Measuring City-Center Accessibility

January 23, 2023

Lucas J. Conwell, Fabian Eckert & Ahmed Mushfiq Mobarak in the new NBER paper research whether the cities should have more cars/roads or more public transit :

The Technology of Decentralized Finance (DeFi)

January 20, 2023

Raphael Auer, Bernhard Haslhofer, Stefan Kitzler, Pietro Saggese and Friedhelm Victor in this BIS paper:

Decentralized Finance (DeFi) is a new financial paradigm that leverages distributed ledger technologies to offer services such as lending, investing, or exchanging cryptoassets without relying on a traditional centralized intermediary. A range of DeFi protocols implements these services as a suite of smart contracts, ie software programs that encode the logic of conventional financial operations. Instead of transacting with a counterparty, DeFi users thus interact with software programs that pool the resources of other DeFi users to maintain control over their funds.

This paper provides a deep dive into the overall architecture, the technical primitives, and the financial functionalities of DeFi protocols. We analyse and explain the individual components and how they interact through the lens of a DeFi stack reference (DSR) model featuring three layers: settlement, applications and interfaces. We discuss the technical aspects of each layer of the DSR model. Then, we describe the financial services for the most relevant DeFi categories, ie decentralized exchanges, lending protocols, derivatives protocols and aggregators.

The latter exploit the property that smart contracts can be “composed”, ie utilize the functionalities of other protocols to provide novel financial services. We discuss how composability allows complex financial products to be assembled, which could have applications in the traditional financial industry. We discuss potential sources of systemic risk and conclude by mapping out an agenda for research in this area.

What Drives Startup Fundraising in India?

January 20, 2023

Rajas Saroy, Ashish Khobragade, Rekha Misra, Sakshi Awasthy and Sarat Dhal in the RBI Bulletin article:

This article presents an analysis of fundraising by the Indian startups over the past decade, along with an overview of the venture capital financing model. The article empirically derives the important factors that determine the quantum of start-up funding at the economy-wide level as well as at the firm level.


    1. There has been an upward level shift of fundraising by the Indian start-ups post-2014. This has been contributed to by the Startup India initiative, along with other enabling policies and the increasing digitalisation of the economy. COVID-19 provided a temporary boost to fundraising.
    2. At the aggregate level, long-run start-up funding is largely driven by the excess return offered by the domestic equity market over the global benchmark, and by the level of domestic economic activity.
    3. At the firm level, unconventional factors like the educational background of founders, pre-existing relationships with institutional investors and popularity matter for fundraising, in addition to the scale already achieved and the sector of operation.


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