Archive for March, 2023

Fiscal and monetary policy in emerging market economies: what are the risks and policy trade-offs?

March 31, 2023

Ana Aguilar, Carlos Cantú and Rafael Guerra in this BIS article analyse fiscal and monetary policy in emerging market economies:

  • Since 2021, monetary policy has tightened globally in response to the surge in inflation. Fiscal policies have generally remained expansionary, notably as governments put in place subsidies and  transfers to insulate households, first from the pandemic and then from higher energy and food prices. 
  • Such fiscal support increases governments’ funding needs at a time when tighter monetary policies raise the cost of servicing debts. Financial markets may reassess fiscal sustainability, request higher risk premia or reduce their holdings of sovereign bonds.
  • Although such effects could affect both advanced and emerging market economies, the latter have historically been most vulnerable to a rise in the cost of international financing and a weaker exchange rate.

A tale of a central bank and a central banker

March 31, 2023

My new piece in Deccan Herald.

I reflect on the awards for 2023 which awarded Central Bank of the year award to National Bank of Ukraine and Governor of the Year to Shaktikanta Das.

Insights from Newly Digitized US Banking Data, 1867-1904

March 31, 2023

The NY Fed has digitised banking data from 1867-1904. They share some findings via their Libertystreet blig:

The National Banking Era, which spans the period between the Civil War and the founding of the Federal Reserve System (roughly 1863 to 1913), is an exciting laboratory for empirical banking research. The end of the 19th century was an important phase in world history, with globalization, the modern corporation, and economic growth all taking off at the same time. This was also a period of fast growth and rapid westward expansion for the U.S. banking system, as shown in the animated map below.

Growth of National Banks across Space and Time

Source: Office of the Comptroller of the Currency, Annual Report to Congress (1867-1904).

Unlike modern banks, national banks were able to issue bank notes, but they otherwise operated much as banks do today, taking deposits and making loans. The regulatory regime of the period, however, was decidedly different. For instance, banks’ geographic footprint was heavily restricted, mostly confining them to the local market, and bank capital requirements posed a barrier to entry for potential competitors rather than a restriction on leverage for incumbent firms. In previous research, we exploited both of these regulatory peculiarities to shed light on classic questions regarding the effects of banking competition.

Why Silicon Valley Bank failed? Fed version

March 30, 2023

Fed Vice chair for supervision Michael S. Barr in this testimony unpacks the SVB crisis:

SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours. SVB’s failure demands a thorough review of what happened, including the Federal Reserve’s oversight of the bank. I am committed to ensuring that the Federal Reserve fully accounts for any supervisory or regulatory failings, and that we fully address what went wrong.

Fed will release a detailed analysis on May 1 of the failure:

Our first step is to establish the facts—to take an unflinching look at the supervision and regulation of SVB before its failure. This review will be thorough and transparent, and reported to the public by May 1. The report will include confidential supervisory information, including supervisory assessments and exam material, so that the public can make its own assessment.2 Of course, we welcome and expect external reviews as well.

From the footnote:

2. Typically, the Board does not disclose confidential supervisory information. We are sharing confidential supervisory information in the case of SVB because the bank went into resolution, and its disorderly failure posed systemic risk. 

Look forward to reading detailed analysis of the crisis.

Nomination for Demat Accounts: Nudge gone wrong?

March 29, 2023

Interesting application of nudge in capital markets.

SEBI has asked Demat acocunt holders to appint a nominee for their accounts. Accordingly NSDL (National Securities Depository Ltd) asked all the brokers etc to ask their clients to fill nominees. But there has been a problem as dislcosed by NSDL:

…it has come to the notice of SEBI that the market participants are updating the nomination field on their own and marking the same as opting out of nomination in case the investor has not updated/submitted the choice of nomination. It may be noted that updating the ‘choice of nomination’ without the explicit consent of the investor is against the intention of the circulars and the same has been viewed seriously. Also, this requirement emanates from regulatory requirement and hence no fee may be charged for the same.   

When you dig deeper, you realise there is a choice architecture:

Participants were advised to obtain a declaration of nomination details by clients i.e. “I/We do not wish to make a nomination” at the time of account opening form. Further, Participants were advised to send a communication to their existing clients who have not yet opted for nomination, to submit a declaration specifically stating the following:
• I/We the undersigned wish to make a nomination in respect of my BO account and the nominee details are as follows ______:
• I/We the undersigned do not wish to make a nomination in respect of my BO account

So, policy intention is to nudge people to choose the first option and send nominee details. But what is happening is that brokers are choosing the second choice and sending on behalf oF the clients.

NSDL cautions/warns brokers:

Participants are hereby advised that ‘choice of nomination’ is required to be updated either by the investors or by the Participant by obtaining their explicit consent. In any other case, the field of ‘choice of nomination’ shall not be updated by the Participants on their own.

What could be a better way to first nudge brokers/participants to not fill the form by themselves and then investors filing nominations?

ECB starts disclosing climate impact of its portfolios on road to Paris-alignment

March 28, 2023

European Central Bank (ECB) has started disclosing the climate impact of its portfolios:

The European Central Bank (ECB) has today published its first climate-related financial disclosures, which provide information on its portfolios’ carbon footprint and exposure to climate risks, as well as on climate-related governance, strategy and risk management.

Presented in two reports, the disclosures cover the Eurosystem’s corporate security holdings under the corporate sector purchase programme (CSPP) and the pandemic emergency purchase programme (PEPP), as well as the ECB’s euro-denominated non-monetary policy portfolios (NMPPs), including its own funds portfolio and its staff pension fund.

“These disclosures are a further piece of the puzzle in our efforts to contribute to fighting climate change,” says President Christine Lagarde. “They give us a clear view of our progress in decarbonising our portfolios and, over time, they will help us to chart the most effective course towards the goals of the Paris Agreement.”

The disclosures show that the corporate bonds held under the CSPP and PEPP are on a decarbonisation path. Although the portfolios’ absolute greenhouse gas emissions have increased in recent years because the Eurosystem has purchased more securities for monetary policy purposes, issuers’ carbon intensity has gradually declined. This is partly due to the fact that the companies in our portfolio have lowered their emissions for every million euro of revenue they earn, reflecting their efforts to significantly reduce their emissions and boost carbon efficiency.

A second factor reducing the relative emissions associated with corporate sector purchases since October 2022 is the ECB’s decision to tilt its holdings towards issuers with a better climate performance, which is helping to decarbonise the Eurosystem’s corporate sector portfolios on a path in line with the goals of the Paris Agreement.

ECB executive borad members Frank Elderson and Isabel Schnabel in this blogpost discuss the findings and way ahead:

So how are we progressing in decarbonising our portfolios?

Between 2018 and 2022, as part of our accommodative monetary policy, the Eurosystem purchased significant amounts of corporate bonds under its CSPP and PEPP programmes. However, the data show that despite these corporate sector holdings growing by 123% from 2018 to 2022, the total carbon emissions[5] increased by much less, namely by 62% in the same period (Chart 1). This means that the portfolios became less emissions-intensive in relative terms, as their growth was almost double the growth of the associated emissions.

The total emissions of our corporate sector portfolio have increased because the portfolio itself has grown. To assess how the carbon footprint has evolved relative to the greater size of the portfolio, we need to look beyond absolute emissions and consider normalised metrics like carbon intensity.[6] Overall, the portfolios’ carbon intensity gradually decreased by about 26% from 2018 to 2022 (Chart 1), mainly because of companies’ own efforts to reduce their emissions. This shows that although they still need to do more to become Paris-aligned, the efforts of the companies in our portfolios to cut their emissions and become more carbon-efficient are already yielding positive results.


Policy Responses to High Energy and Food Prices

March 27, 2023

New IMF paper by a team of economists (David Amaglobeli ; Mengfei Gu ; Emine Hanedar ; Gee Hee Hong ; Celine Thevenot):

The surge in energy and food prices, which was amplified by Russia’s invasion of Ukraine, has prompted a flurry of policy responses by countries during 2022. The aim of these policy responses was to mitigate social and economic impact of higher prices. In this paper we document announcements of policy measures based on the Database of Energy and Food Price Actions (DEFPA), which was developed based on two rounds of survey responses of IMF country teams conducted in March/April and June/July of 2022. The paper also provides discussion on policy trade-offs when considering appropriate policy responses both for countries with strong and weak social safety nets. Key policy message is that providing targeted support to households in the form of cash transfers is the most cost-effective way of alleviating the burden on vulnerable households and have to be preferred over broad-based mechanisms that prevent international prices to pass through to domestic consumers.

New Evidence on the Foreign Wealth of U.S. Households

March 27, 2023

What Silicon Valley Bank and Credit Suisse tell us about financial regulations

March 27, 2023

Jon Danielsson  and Charles Goodhart in this voxeu research article draw lessons from failure of SVB and Credit Suisse:

The downfall of Silicon Valley Bank and Credit Suisse has exposed failures in how we regulate the financial system. This column argues that the problems we now see in the system have arisen because the financial authorities have been trying to do the impossible: maintain growth while keeping inflation under control and financial stability high. The best way forward would be to focus on shock absorption and moral hazard, not the current approach of buffers and risk measurements.

Explainer: The US Federal Reserve’s Bank Term Funding Program

March 24, 2023

Post Silicon Valley Bank (SVB) failure, the Federal Reserve announced a new liquidity program named Bank Term Funding Program.

I explain the economics of the BTF program in moneycontrol.

The two-regime view of inflation

March 23, 2023
Claudio Borio, Marco Jacopo Lombardi, James Yetman and Egon Zakrajšek in this BIS research analyse what happens when the regime shifts from high to low and low to high:

This study provides a view of the inflation process that is complementary to the one captured in standard models, such as those based on the Phillips curve. It characterises the process as two regimes – a low- and a high-inflation regime – with self-reinforcing transitions from the low- to the high-inflation one. The study documents the stylised facts describing the two regimes and the transitions between them based on disaggregated price dynamics and the joint behaviour of wages and prices. Two implications for monetary policy stand out. First, the desirability of conducting monetary policy in a flexible manner in a low-inflation regime, tolerating moderate, even if persistent, deviations from narrowly defined targets. Second, the importance of being pre-emptive when the risk of a transition to the high-inflation regime increases, even though assessing this transition in real time remains challenging.

Central banks continue to tighten monetary policy

March 23, 2023

Central Banks have almost shrugged off the ongoing banking crisis and continue to increase interest rates and tighten monetary policy.

Ayn Rand vs. Elinor Ostrom: The Fight for the Future of Social Media

March 22, 2023

Pia Malaney in this interesting INET article says the fight for social media can be seen from Rand vs Ostrom lenses.

How did social media transition from decentralised platforms to centralised ones?

Elon Musk’s recent takeover of Twitter paralleled, in some sense, the 2016 earthquake when Donald Trump unexpectedly took over the Oval Office. In both cases, a populist billionaire put an existing entity with millions of members under radically new management. Unsurprisingly, whereas alarmed Americans had signaled a desire to escape to Canada in 2016, alarmed tweeters in the fall of 2022 signaled their trepidation by announcing their intention to move as well. But the most commonly threatened exit was to a structure of which few had ever heard: Mastodon.

Mastodon is but one of many new social media sites, alongside Post, Steemit, Planetary, or the Dorsey-funded Nostr, that are drawing attention in the face of Musk’s inscrutable decision-making with respect to the banning of journalists, the firing of personnel, and algorithmic changes. Many of these new sites focus specifically on shifting away from the centralized architecture of today’s tech behemoths like Twitter and Facebook.

It can be difficult to remember that a mere quarter century ago, the very social networks that have now demonstrated the terrible pitfalls of the social media revolution known as Web 2.0, were the objects of fanfare and genuine idealism. Facebook set out to “Connect the World,” while Google sought to make available all human knowledge for everyone at no cost. The latter went so far as to embrace the unofficial slogan of “Don’t be Evil.” In the spring of 2018, it was finally deliberately removed and retired from the preface to Google’s code of conduct when the obvious absurdity of the statement coming from an enormous hierarchical corporate leviathan made it more of an embarrassment than an asset.

These social media sites are perhaps the best example of the destruction of the idealism that characterized the development of the internet in the late 1960s. A time of flourishing countercultures, there was a belief, captured effectively in Richard Brautigan’s poem, “All watched over by machines of loving grace,” that we were entering a technological utopia, where machines would protect humans, and “mammals and computers (would) live together in mutually programming harmony like pure water touching clear sky.”

Rand vs Ostrom?

In the end, the issue with social networks comes back precisely to the question of scaling. At a technical level, decentralized networks have the advantage of being more robust; when faced with attacks that destroy some nodes, other nodes, and links can be decoupled, limiting damage.

At an ideological level, they attempt to break from the capitalist, profit-driven models that lie at the heart of many of the current problems of social media. But the economics of the platforms cannot get around the fundamental issue of the economies of scale. Each of the links in a network cost something to run. While these costs can be distributed among users or a non-profit structure can be created to raise resources to support networks, it will require very creative architecture to push back against the inherent tendency towards a monopolistic structure.

Nonetheless, the contrasting ideologies at play in this tech sector mirror, to a surprising extent, the conflicting ideologies in economics between the most extreme, Ayn Randian version of libertarianism and its reflection in the neoliberal economic models of the Chicago School and the more heterodox, community-oriented approach of Ostrom. It is possible, and perhaps likely, that what we are watching is the nth iteration of a cycle that we seem powerless to exit.

In this view, Ayn Rand might represent the thesis that the power of atomized market selfishness is sufficient and optimal for converting greed into a catalyst for pro-social greatness through the counterintuitive genius of the market’s invisible hand. By contrast, Elinor Ostrom represents the antithesis, as market failures due to monopoly, public goods, principal-agent problems, regulatory capture, etc. pile up until they torture the honest market argument into a form where it is almost no longer recognizable or easily defensible. What we are missing now is a synthesis into a harmonized model combining the insights of two existing schools.


Subnational Borrowings in India – Volatilities and Determinants of State Government Securities Spread

March 22, 2023

Suraj.S, Amit Pawar and Subrat Kumar Seet in this Mar-23 RBI Bulletin article analyse the volatilities and determinats of spread of State Givt securities:

The article outlines the impact of the pandemic and policy measures undertaken by the Reserve Bank on the primary and secondary markets for State Government Securities (SGS). It studies the linkages between G-Sec and SGS yields and factors driving the pricing of SGS in primary markets.


    • The Reserve Bank’s special Open Market Operations (OMO) in SGS during the pandemic was effective in stabilizing the yields.
    • Developments that have a bearing on the benchmark G-sec yield eventually weigh on SGS yields. Prevailing growth and liquidity conditions explain the variation in SGS spreads over G-sec across States.
    • Higher yield spreads with larger cash balances accompany significant negative carry costs, which is the interest rate differential between the high borrowing costs and low investment returns of States. It highlights the need for improved fiscal marksmanship in cash management by States.

Global banking crisis leaves a trail of unanswered questions

March 22, 2023

My new opinion piece in Deccan Herald on the 2023 global banking crisis.

The Dollar’s Imperial Circle

March 21, 2023


Capital Controls in Times of Crisis – Do They Work?

March 21, 2023

A team of IMF economists (Apoorv Bhargava, Romain Bouis, Annamaria Kokenyne, Manuel Perez-Archila, Umang Rawat and Ratna Sahay) in this new paper:

This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017.

Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows.

A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises.

In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.

How and why did New Keynesian macroeconomics dominate macroeconomics?

March 20, 2023

Insightful lecture by  Jan Frait, Deputy Governor of the Czech National Bank. He questions the dominance of New Keynesian macroeconomics in central banking policy:

I joined the Faculty at a time when New Keynesian macroeconomics (NKM) and its approaches, immodestly referred to as “the science of monetary policy”, had become the official mantra in the central banks of developed countries and had subsequently been translated into a monetary strategy referred to as inflation targeting (or inflation forecast targeting). It was an era characterised by optimistic expectations about long-term economic developments. Macroeconomists spoke of a “Great Moderation” and predicted that we would see decades of low and stable inflation amid brisk economic growth with no significant cyclical fluctuations. With the benefit of hindsight, these expectations were not fulfilled. The low inflation that took hold globally in the 1990s was largely a product of globalisation, not super-smart monetary policy.


Just after the GFC, a heated debate erupted about the merits of mainstream macroeconomics. By that we mean the NKM presented in DSGE models. I will thus refer to it as NK-DSGE throughout my lecture, although today this term covers a wider range of approaches than it did 10 or 15 years ago. State-of-the-art NK-DSGE approaches introduced rigour and strong microeconomic foundations into macroeconomic thinking. They became an important tool for simulating the effects of monetary policy and other macroeconomic shocks. But nothing is for free. The positive features of this framework came at the cost of what is described as a high degree of model stylisation. Put simply, these models, especially at their beginnings, were very narrow in terms of the specification of the economy and its behaviour, and omitted a number of important linkages and processes. Despite much progress in the academic literature over the last 10 years, the variants used by central banks remain suitable mainly for analysing small deviations of macroeconomic variables from their long-term trends. They represent a highly imperfect description of the economy and are not able to cope with shocks or structural changes that deflect it from these trends for lengthy periods.

The macroeconomic instability we have seen over the last 20 years is essentially inconceivable in these models. Despite these limitations, NK-DSGE models have for quite some time been strongly dominant in academic macroeconomics and been the main tool used for analysis and forecasting in some central banks. In a scientific discipline in which scholars have always held different views and argued heatedly among themselves, such a situation was by definition strange. It is good that after the GFC, the fundamental debate on different approaches to macroeconomic modelling was revived and the seemingly irreconcilable camps were able to reach some common conclusions. The current inflationary wave will undoubtedly give a new impetus to this debate.

How did one rather narrow and quite technical approach come to dominate macroeconomics? It’s hard to say. Personally I think it mainly reflects psychological factors. From my experience of more than 30 years in both the academic and financial sectors, I see a rather strong conflict between the exact scientific thinking in the ideal of the natural sciences and the excessive uncertainty associated with the unpredictable behaviour of social systems.

I have met many very smart people, including winners of what is inaccurately referred to as the Nobel Prize in Economics, and I have observed that even extremely intelligent people tend to simplify situations dramatically in the face of high levels of uncertainty. They simply cling to a highly stylised economic model, abstract from many theoretical and practical inconveniences, and then offer a clear answer that can be claimed to be “scientifically” derived. Without this, they would probably have to say, “I don’t know, it depends on this, that and the other”.

He questions the singleminded focus on inflation:

A persistent challenge for inflation-targeting central banks is the phenomenon of inflation itself. We recognise that the CPI or some similar inflation measure, which lies at the heart of this monetary policy framework, may not be an ideal representation of what is meant by inflation in traditional monetary theory. Personally, I still adhere to the monetarist definition that inflation means a steady and continuous rise in the price level, that is, a situation where different price categories and nominal variables generally show a similar trend. CPI inflation does not quite fit this definition, and it is not always desirable to regard its short-term fluctuations as genuine inflation or deflation. This is partly because CPI inflation tends to change quite frequently as a result of shocks of a non-macroeconomic and non-monetary nature. If the central bank were to try to slavishly keep CPI inflation at a certain target level at all times, it would have to change interest rates or other instruments frequently and significantly, and would probably not be successful in doing so. After all, NKM itself recommends focusing on the narrower price indices of so-called core or super-core inflation, which consist mainly of items whose prices are rigid. But there is no doubt that targeting a specific and narrow price index would not be very comprehensible to the markets and the public. For this reason, central banks tend to choose pragmatically to target a broad index close to the CPI and explain sophisticatedly in their communications why they sometimes react less or more strongly than the observed or forecasted CPI inflation would imply.

Under inflation targeting as practised in reality, central banks then set their rates to meet the CPI inflation forecast in the relatively short term. The problem is that we cannot reliably forecast CPI inflation and its twists and turns. Virtually every major shock to inflation, in one direction or the other, has more or less surprised central banks this century. On the other hand, we are undoubtedly quite capable of understanding that inflationary potential is being generated in the economy.

But again, we cannot reliably predict how this potential will manifest itself over time, through what channels it will enter the economy and whether or not it will show up as overt inflation at some point in time. Particularly in small open economies, where shocks to the exchange rate and other shocks from abroad have a significant impact on inflation, it is quite likely that the generation of inflationary potential may initially translate into asset price growth or, in some cases, current account deficits rather than into overt CPI inflation. The latter may then stay quite low for a long time even when the economy is overheating. As a result, rather than inflation-forecast targeting, central banks may slide towards a response-to-recent-inflation-numbers regime.

Solution? Move to broader set of developments:

What is the solution to this situation? I offer no simple one. The above dilemmas need to be reflected in our thought processes. In monetary policy decision-making, in addition to model-based forecasts of highly variable CPI inflation, we need to give equal weight to the longer-term fundamental inflationary pressures generated by macroeconomic, monetary and financial developments. I understand the arguments that we have no reliable indicator of these pressures and that few people outside the central bank itself would pay heed to an index of fundamental inflationary pressures. But you can’t escape reality. It doesn’t pay to put everything on one card. It’s better to have a broader set of models and, on top of that, a set of indicators to allow for cross-checking.

How and why do certain ideas become dominant?

Global High-Resolution Estimates of the United Nations Human Development Index Using Satellite Imagery and Machine-learning

March 20, 2023
Luke Sherman, Jonathan Proctor, Hannah Druckenmiller, Heriberto Tapia & Solomon M. Hsiang in this new NBER paper used satellite images to provide a clearer picture of HDI at local levels:

Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?

March 20, 2023
Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorski & Amit Seru in this NBER paper analyse the 2023 banking crisis in US:

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