Archive for February, 2023

RBI’s Business Continuity Measures during the COVID-19 Pandemic

February 28, 2023

RBI has released a compendium of the business continutity measures it took during the pandemic:

compendium on Business Continuity Measures undertaken by the Reserve Bank of India (RBI) during the COVID-19 Pandemic was released on February 17, 2023 in the annual conference of the Corporate Strategy and Budget Department of the Reserve Bank of India (RBI) by Dr. Michael Debabrata Patra, Deputy Governor.

To tackle the challenges posed by the pandemic, RBI mobilised on an unprecedented scale and speed to put in place a cross-functional response to safeguard lives and livelihood of the people; insulate the economy and the financial sector; ensuring uninterrupted conduct of its crucial functions and maintaining business continuity; supporting its employees, service providers and other stakeholders. More than one hundred measures, both conventional and unconventional, were undertaken during the period. The effort was to be proactive and innovative, while remaining on guard to preserve financial stability.

The compendium encapsulates the details of RBI’s fight against the COVID-19 pandemic.

Given the nature of the shock, it was commendable that payments, banking and financial markets continued to function without glitches.


Adam Smith’s 300th birth anniversary

February 28, 2023

The year 2023 marks Adam Smith’s 300th birth anniversary.

University of Glasgow is hosting a series of events to celebrate the tercenteenary.

Narayan Ramachandran has a piece in Mint on lessons from Smith.

More to follow.

Commodity prices, the dollar and stagflation risk

February 28, 2023

Boris Hofmann, Taejin Park and Albert Pierres Tejada in this research show that commodity prices and dollar appreciation have led to rise of stagflation risks:

Fluctuations in commodity prices and the US dollar exchange rate significantly affect the risk of stagflation. Using quarterly data from 22 commodity-importing economies for the past 30 years, we find that higher commodity prices and dollar appreciation each raise the odds of weak growth and high inflation. Stagflation risk increases by more when the two drivers rise in tandem – as seen over the past couple of years, in a departure from the historical pattern. Commodity-importing emerging market economies (EMEs) are more affected by changes in commodity prices and in the US dollar exchange rate than are their advanced economy counterparts. This reflects in particular the higher commodity consumption of EMEs and their greater exposure to swings in global financial conditions.

Weighted Median Inflation Around the World: A Measure of Core Inflation

February 27, 2023
Laurence Ball, Carlos Carvalho, Christopher Evans, Luca Ricci propose a better measuure of core inflation:

The standard measure of core or underlying inflation is the inflation rate excluding food and energy prices. This paper constructs an alternative measure, the weighted median inflation rate, for 38 advanced and emerging economies using subclass level disaggretion of the CPI over 1990-2021, and compares the properties of this measure to those of standard core. For quarterly data, we find that the weighted median is less volatile than standard core, more closely related to economic slack, and more closely related to headline inflation over the next year. The weighted median also has a drawback: in most countries, it has a lower average level than headline inflation. We therefore also consider a measure of core inflation that eliminates this bias, which is based on the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.

Lending Apps: Old wine in a new bottle

February 27, 2023

New article in Financial Express on lending apps in India.

The shape of business cycles: a cross-country analysis of Friedman’s plucking theory

February 27, 2023

Milton Friedman’s “plucking theory” of the business cycle, implies that, like a guitar string, the harder an economy is “plucked down”, the stronger it should come back up.

This BIS paper studies the plucking theory in 12 advanced economies:

We test the international applicability of Friedman’s famous plucking theory of the business cycle in 12 advanced economies between 1970 and 2021. We find that in countries where labour markets are flexible (Australia, Canada, United Kingdom and United States), unemployment rates typically return to pre-recession levels, in line with Friedman’s theory. Elsewhere, unemployment rates are less cyclical. Output recoveries differ less across countries, but more across episodes: on average, half of the decline in GDP during a recession persists. In terms of sectors, declines in manufacturing are typically fully reversed. In contrast, construction-driven recessions, which are often associated with bursting property price bubbles, tend to be persistent.


From Mastercard to World Bank, Ajay Banga faces a similar set of challenges

February 27, 2023

The US President has nominated Ajay Banga as President of World Bank.

In my new moneycontol article, I argue how Ajay Banga finds himself facing similr challenges as he faced heading Mastercard.

When the music stops – holding bank executives accountable for misconduct

February 24, 2023

Rita Oliveira, Ruth Walters and Raihan Zamil in this BIS note discuss accountability of banking executives. They pick regulatory framework in three countries- Australia, Singapore and UK:

The Great Financial Crisis and its aftermath exposed a wave of banking scandals, triggering financial instability and eroding public confidence in banks. Amid economic uncertainty, societal frustration mounted at regulators’ perceived inability to hold executives accountable for failures within their banks. In pursuing cases of misconduct, supervisory authorities found it difficult to pinpoint the role of high-level executives because they were often distant from the day-to-day activities where the alleged wrongdoing occurred.

This paper reviews the evolution of regulatory frameworks that govern the accountability of banking executives and outlines their implementation challenges. Some authorities have introduced individual accountability regimes that impose specific responsibilities on senior bank executives, while others rely on broader regulatory frameworks to pursue corporate wrongdoing. Regardless of approaches taken, all frameworks are ultimately reliant on robust supervision and enforcement.   

A multi-faceted approach, that we label the “accountability stack”, is needed to get in “all the cracks” that drive senior executive behaviour. That stack includes layers of seemingly disparate regulatory and supervisory instruments that interact in such a manner where the whole may be more effective in fostering individual accountability than the sum of the parts.  Above all, the stack needs to be supported by the institutional will to act.

Rawls and the Economists: The (Im)possible Dialogue

February 24, 2023

Herrade Igersheim of , University of Strasbourg in this very interesting paper discusses Rawls engagemnt with economists and then distancing himself:

Although falling within the scope of political and moral philosophy, it is well known that A Theory of Justice has also had a great impact on economists. As such, Rawls put great emphasis on his desire to combine economics and philosophy, and particularly to deal with rational choice theory, notably and famously claiming that “the theory of justice is a part, perhaps the most significant part, of the theory of rational choice” (1971, 15).

After the publication of A Theory of Justice, aspects of it came in for criticism – often very vehement – by economists such as Arrow (1973), Musgrave (1974), Harsanyi (1975) and later by Sen (1980).

Rawls’s immediate answers (1974a,b in particular) showed that he first wanted to maintain a dialogue with the economists, but the later evolutions of his works (1993, 2001) clearly demonstrated that he had removed himself from the economic realm, returning to his initial philosophical territory in order to overcome the internal inconsistencies of A Theory of Justice.

In this paper, by focusing extensively on the letter exchanges between Rawls and the economists before and after the publication of A Theory of Justice, I attempt to shed light on other (complementary) elements which can explain Rawls’s retreat from the realm of economics, and his progressive disenchantment regarding the possibility of a dialogue on equal footing between economists and philosophers.


Digital history of macroeconomics

February 23, 2023

Aurélien Goutsmedt and Alexandre Truc have put up digital history of macroeconomics:

The Mapping Macroeconomics project is an online interactive platform displaying bibliometric data on a large set of macroeconomic articles. It aims at offering a better understanding of the history of macroeconomics through the navigation between the different bibliometric networks.

The point of departure of the project is the observation of an exponential increase in the number of articles published in academic journals in economics since the 1970s. This phenomenon makes it harder for historians of economics to properly assess the trends in the transformation of economics, the main topics researched, the most influential authors and ideas, etc. We consider that developing collective quantitative tools could help historians to confront this challenge. The opportunities that a quantitative history brings are particularly useful to the recent history of macroeconomics.

Practicing macroeconomists are eager to tell narratives of the evolution of their field that serve the purpose of intervening on current debates, by giving credit to particular authors and weight to specific ideas. Historians who go into this area find plenty of accounts by macroeconomists and have to handle the vast increase in the macroeconomic literature since the last quarter of the past century. The Mapping Macroeconomics platform aims at helping historians to empirically check macroeconomists’ narratives on the discipline, to explore interesting patterns on the evolution of macroeconomics, and eventually to write new histories of macroeconomics.

Looks interesting…

The trauma of the European currency crises in the 1990s and the consequences until today

February 23, 2023

Giancarlo Corsetti , Galina Hale and Beatrice Weder di Mauro in this voxeu research reflect on 30 years of European currency crises:

September 2022 marked the 30th anniversary of the Exchange Rate Mechanism crisis, a seismic event which shook the continent and caused a severe recession to spread rapidly across European economies. The crisis also arguably produced the intellectual and political impulse needed to reinforce the ultimate adoption of a single, common currency in the form of the euro. The essays in a new CEPR eBook discuss the origins of the crisis and frame it within a broader European historical and political perspective.

The CEPR e-book is here.
Europe keeps going through currency crises whether they have own currencies or a unified currency Euro.

Original Sin of Economics and Original Sin of macroeconomics

February 22, 2023

Lynn Parramore in this INET article writes that we need to discuss original sin of economics:

When you think of original sin and the fall of Adam and Eve, an economics class probably isn’t the first thing that comes to mind. After all, economics is a secular discipline. Or is it?

Maybe not entirely, considering that the earliest economic thinkers had religion very much in mind when they laid down its tenets. Economist A.M.C. Waterman notes that economics was a branch of moral theology in the Christian West until the eighteenth century, while ethics professor Michael S. Northcott holds what we now call “economics” or “political economy” was the province of moral philosophers and theologians until the mid-nineteenth century.

Adam Smith was the son of a devout Presbyterian mother and lived in a world dominated by the Kirk. As economist Paul Oslington notes, his writings, despite a certain amount of personal skepticism of religion, are strewn with religious concepts, such as his view of nature as demonstrating “providential care” and the “wisdom and goodness of God” (Theory of Moral Sentiments). And, as Oslington attests, Smith’s work was often interpreted theologically by early economic enthusiasts like Scottish minister and political economist Thomas Chalmers and Richard Whately, holder of the first chair in economics at a British university. Both saw God’s will in the conversion of self-interested actions into the greatest economic good.

This God, it appears, was a classical economist.

According to Northcott in “Political Theology and Political Economy,” economics developed with a Christian perspective that can be traced to a particular time and place. This view held that human beings, and nature in general, were forever tarnished by the Fall and Original Sin. He points to the Reformation, which swept through Europe in the 1500s, as the catalyst for a widely accepted view of hopelessly sinful humans capable of redemption only through individual faith. The combination of pessimism and individualism, Northcott argues, is the key innovation of this period of Christian theology, which manifests in the work of Thomas Hobbes, who depicted wicked humans who would run amok unless the State protected them by underwriting private property, law enforcement, and contracts.

Economic individualism is born, with the State as its guarantor


In macroeocnomics, origial sin applies to countries that can’t raise debt in their own currency.

Mert Onen, Hyun Song Shin and Goetz von Peter in this BIS article say emerging markets have made progress towards overcoming original based on new data:

This paper introduces a new dataset on emerging market sovereign bonds, distinguishing between the currency of denomination and the residence of investors. Our dataset is on long-term government bonds and provides a more complete coverage of bonds issued in domestic markets. We document several salient trends. While a preponderance of foreign currency bonds is associated with greater holdings by foreign investors, the correlation is weak at best. Over time, emerging market governments have enhanced their ability to borrow abroad in their own currency, reducing their reliance on foreign currency debt. In this sense, EME sovereigns have made progress toward overcoming original sin. Nevertheless, the greater role of market and duration risk and the activity of foreign non-bank financial intermediaries (NBFIs) mean that emerging markets remain subject to fluctuations in global financial conditions.


Carbon Dioxide Emissions from India’s Manufacturing Sector: A Decomposition Analysis

February 22, 2023

Shashi Kant, Madhuresh Kumar, Shahbaaz Khan and Somnath Sharma of RBI in this paper analyse Carbon Dioxide Emissions from India’s Manufacturing Sector:

This paper decomposes the increase in annual carbon dioxide (CO2) emissions from the registered manufacturing sector in India during the period 2009-10 to 2017-18 into contributions from output growth, structural changes, energy intensity changes and fuel mix changes. The paper finds that carbon intensity, measured in terms of how much CO2 is emitted when one rupee of Gross Value Added (GVA) is generated by the manufacturing sector, has reduced from 46g CO2 per rupee GVA in 2009-10 to 36g CO2 per rupee GVA in 2017-18 at 2011-12 constant prices. It also finds a mild structural shift in the manufacturing sector, with cleaner industries contributing a greater share of the aggregate GVA and the share of carbon-intensive industries posting a fall. It shows that the change in the fuel mix has increased CO2 emissions as the share of coal and electricity in the total fuel inputs in the manufacturing sector has increased, while the share of natural gas has reduced. It is also observed that electricity is a major contributor to CO2 emissions. Hence, electricity generation through renewable sources can aid in faster green transition of the economy.

Do Bank Mergers Improve Efficiency? The Indian Experience

February 21, 2023

Snehal S. Herwadkar, Shubham Gupta and Vaishnavi Chavan of RBI evaluate bank mergers in India since 1997:

The findings of the paper suggest that mergers have been beneficial to the banking sector as the financial performance and efficiency of acquirers improved post-merger. Findings of data envelopment analysis (DEA) for the period 1997-2017 suggest that the mean technical efficiency of acquirers increased from 90.88 in the pre-merger period to 93.80 three years post-merger, and 94.24 five years post-merger.

The results are valid for both public and private sector banks, even after controlling for industry-wide impact. Relatively low managerial and organisational competencies in acquiree banks were not a hindrance for preserving efficiency of the merged entity and the benefits to acquirers from mergers on account of increased scale of productive capacity were statistically significant.

A deep dive into factors that may have led to efficiency gains identifies post-merger geographical diversification and increased reliance on interest income as the significant contributors to the improvement. DEA and financial ratio analysis confirm that even the recent mergers during 2019-20 led to improvement in acquirers’ efficiency. The event study analysis on these mergers indicates an increase in acquiree banks’ shareholder wealth.

A Recalibrated Quarterly Projection Model (QPM 2.0) for India

February 20, 2023

The RBI had had developed its Quarterly Projection Mode in 2016.

Team of RBI researchers (Joice John, Deepak Kumar, Asish Thomas George, Pratik Mitra, Muneesh Kapur and Michael Debabrata Patra) update the RBI’s Quarterly Projection Model (QPM 2.0) in the new article in Feb-23 Bulletin.

This article presents the details of the updated quarterly projection model for India. The article revisits the model structure and coefficients with more India-centric characteristics to enrich its performance and relevance. It generates medium-term projections of inflation and growth, and undertakes policy analysis consistent with achieving targets/mandate set under the flexible inflation targeting (FIT) framework. The revised and updated model is dubbed as QPM 2.0. This project was carried out under UTKARSH 2022, the medium-term strategy of the RBI.


    1. The major enhancements brought about in QPM 2.0 are inclusion of (i) fiscal-monetary policy interaction in the model, (ii) a more nuanced modelling of India-specific fuel pricing, (iii) capital flows, exchange rate dynamics and central bank’s forex market interventions.
    2. For major macro variables like inflation, the analysis shows that the forecast performance of QPM 2.0 is better than alternate time series models for the medium-term horizon (5-8 quarters) – the horizon that matters most for the monetary policy decision.
    3. QPM 2.0 analysis also shows that the FIT framework helped in anchoring inflation expectations post introduction of FIT, leading to lower headline inflation as well as core inflation. The disinflation during this period was also supported by favourable shocks emanating from the supply side, both food and fuel, as well as from a prudent fiscal policy. In the post-COVID period, persistent supply chain disruptions and sustained input cost pressures, amidst a negative output gap have led to inflationary pressures.

Quite a paper this..

Similarities and Differences in the Adoption of General Purpose Technologies

February 20, 2023

Ajay K. AgrawalJoshua S. Gans Avi Goldfarb in the new NBER paper discuss adoption of GPTs:

Central Bank Independence in Banking Regulation and Supervision

February 20, 2023

Federal Reserve Governor Michelle Bowman in this speech says that cenntral bank independence is often seen as in terms of monetary policy. It The independence applies to Banking Regulation and Supervision as well:

Most often, the independence of the Federal Reserve is discussed in terms of independence in the setting of monetary policy. While the value of independent decision making in monetary policy is vital, and research shows that it leads to better policy outcomes in the long run, it is also important to emphasize the value of independence in banking supervision and regulation.

You may have seen Chair Powell’s recent speech on this topic, in which he noted that independence in our bank regulatory function helps to ensure that our decisions are driven primarily by the goals of promoting a safe and sound financial system and safeguarding the stability of the U.S. financial system stability.2 In this context, independence also means that we are not influenced by political considerations in making policy decisions. The Federal Reserve’s independence in bank regulation also provides stability and consistency to regulated institutions. I am not suggesting that bank regulation remain static in the face of change. To the contrary, the Federal Reserve’s regulatory approach must be capable of addressing and adapting to new activities and new risks but also must be constantly directed towards furthering our statutory objectives.


The Fed’s role as a banking supervisor is not to replace a bank’s management and board of directors in adopting a banking strategy and risk appetite. Instead, it is to apply appropriate, targeted regulation and supervision, in order to be able to assess that when a bank engages in an activity, it does so in compliance with applicable laws and in a safe and sound manner. This can be a difficult balance to strike but it is something I believe we must always bear in mind whenever the Fed uses or proposes using its regulatory or supervisory tools. Banking regulation and supervision should not be the place to implement new policies that are not mandated by Congress.

In the past, I have shared my views about the Fed’s rulemaking agenda, which remain the same today. I continue to support changes based on our experience applying existing rules or prompted by new and emerging issues. However, any incremental changes to regulation should yield significant improvements to safety and soundness at reasonable cost, in consideration of the tradeoffs between cost and safety. And of course, any changes should be to further our regulatory responsibilities as mandated by Congress.

I argued similar points in MInt in 2019.

The Long Shadow of Federal Reserve’s Actions: Monetary Policy and Uncertainty Spillovers to India

February 20, 2023

Bhanu Pratap and Thangzason Sonna in the Feb-23 RBI Bulletin analyse the impact of Federal Reserve policy on Indian economy:

Cross-border transmission of economic shocks arising from changes in the macroeconomic policy stance in major advanced economies has emerged as a key challenge for emerging market economies in today’s world with complex trade and financial linkages. This article analyses the impact of monetary policy actions of the US Federal Reserve on the Indian economy over the last two decades.


    1. In line with international evidence, changes in the monetary policy stance of the US Federal Reserve tend to impact the Indian economy, altering domestic output and inflation.
    2. Changes in the US monetary policy worked like a cost-push shock in the pre-2008 period, consistent with the exchange rate channel of global spillovers. In the post-2008 period, however, the transmission of US monetary policy shocks has been mainly through the financial channel, i.e., by altering the financial conditions, thereby impacting growth and inflation in India.
    3. Heightened uncertainty around the stance and actions of the US Federal Reserve is estimated to reduce aggregate demand in the Indian economy.

International Financial Services Centre Authority on recruitment drive

February 20, 2023

International Financial Services Centre Authority started in 2020 and started recruiting human resources from September 2020 onwards. THis was pandemic year and recruitment drive was hit multiple times.

Initially, it recruited junior officers based on Civil Services exam and asked those with work experience to apply directly.

The Authority is now recruiting officers at Assistant Manager level through an open exam and for officer level through IBPS (Institute of Banking Personnel Selection).

Interested candidates could take a look at these positions.

Gold Rush vs. War: Keynes and the Economics of Digging Holes

February 17, 2023

Michele Bee (Universidade Federal de Minas Gerais) and Raphaël Fèvre (Université Côte d’Azur) in this paper on Keynes digging holes arguement:

This paper aims to fully exploit the heuristic virtues of Keynes’ famous ‘old bottles’ story, deploying a multi-layered argument and drawing out its broadest implications. We show that with this story Keynes was making a very serious point about anti-crisis policies: the need for authorities to stimulate animal spirits by relying on people’s natural impulse to action.

Rather than taking the place of entrepreneurs and paying people to dig holes, Keynes seems to be arguing that public authorities should put entrepreneurs in a situation where they are so enthusiastic that they go into debt to dig holes, just like during a gold rush. At the same time, it is a question of restoring the banks’ willingness to lend for these over-optimistic projects in a period of depression.

This article explores the conditions that make public intervention as effective as possible through the enthusiasm and individual initiative that can be generated by an artificial gold rush. Such intervention therefore can be as minimal as possible, without having to resort to the opposite authoritarian solution of war.

Since the gold rush builds cities and wars destroy them, Keynes spent considerable energy convincing his contemporaries that liberal-democratic countries would have to take the former path if they wanted to avoid the latter.



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