CBDC and the operational framework of monetary policy

Jorge Abad, Galo Nuño Barrau and Carlos Thomas in this BIS paper analyse how CBDC will impact operation framework of monetary policy:

What effect would a retail central bank digital currency (CBDC) have on monetary policy implementation in the euro area, and how would this shape the macroeconomic effects of a CBDC? The introduction of a CBDC could affect the operational framework of monetary policy and the conditions in interbank markets if it brings about a sufficiently large decrease in excess reserves due to the reduction in bank deposits. This, in turn, could have important macroeconomic implications, both in the long run and during the CBDC adoption phase.

 

Pension reversal puts focus on financial literacy

My article in Deccan Herald on some State governments choosing to revert to the old pension system.

Violence against female politicians

Gianmarco Daniele, Gemma Dipoppa and  Massimo Pulejo in this voxeu research discusses how violence against female politicians is higher than male ones. The violence keeps women away from participating in political leadership:

Women’s political participation remains low, with women occupying only a quarter of parliamentary seats around the world. This column explores one possible obstacle to political participation: female politicians being more likely to become targets of physical and psychological violence while in office. The authors show that in Italy, marginally elected women mayors are approximately three times more likely to experience an attack than marginally elected men mayors. Women are likely targeted because of their gender identity, as policy choices are not a significant factor in explaining the gender gap in attacks.

Why there is violence against women?

First, although recent studies (Håkansson 2021, Krook 2020, and Bardall et al. 2020) indicate that women are more frequently the targets of political violence, it is still unclear whether gender is causally connected to violence.

Female politicians differ from their male colleagues on several dimensions other than gender. Therefore, women might be attacked more often because they are more likely to be younger, less connected, and more honest.

Second, while qualitative research has begun exploring the institutional factors influencing violence against women in politics, we still lack a comprehensive, quantitative understanding of why female politicians are more subject to violence.

India has recently passed a legislation to reserve 33% seats in Parliament. Even without the legilsation, one sees women politicians being ill-treated and called all kinds of things. A seperate legilsation needs to be passed to have zero tolerance against misbehavior/violence against women.

 

The International Monetary System and International Financial System as an Analogy to the Copernican Heliocentric system

Michael D. Bordo & Cécile Bastidon in this interesting paper draw paralllels between Copernican Heliocentric system and International Monetary & Financial System:

The evolution of the IMS and IFS in the past several hundred years can be viewed through the lens of the Copernican heliocentric system developed over 500 years ago. We trace out the evolution across regimes of the IMS and IFS in terms of network representations of the Copernican system. We provide a simple, fully testable theoretical model whose assumptions are based on these representations. The IMS and IFS are described by a two-layer graph whose three key features (hub, core, distances) are affected by nonlinear joint regime changes linked to a technological, institutional, geopolitical and regulatory environment variable. We conclude with a discussion of some perspectives of the future of the international monetary and financial systems. Our analysis is based on economic history, theory and some resonant concepts from astrophysics.

India gets green light to join JPMorgan bond index

A much awaited and anticipated decision has finally happened.

JP Morgan has decided to include India in its Government Bond Index-Emerging Markets.

JP Morgan (JPM.N) will include India in its widely tracked emerging market debt index, setting the stage for billions of dollars of inflows into the world’s fifth-largest economy and helping it finance its current account and fiscal deficits.

India’s local bonds will be included in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite, benchmarked by about $236 billion in global funds, JPMorgan said on Friday.

CP (Commercial PaperP and CDs (Certificate of Deposits) markets: a primer and a bit of history

BIS economists (Matteo Aquilina, Andreas Schrimpf and Karamfil Todorov) have written this intresting primer on CP and CD markets:

Commercial paper (CP) and certificates of deposits (CDs) are important short-term funding instruments for both financial and non-financial entities. We describe the origins and evolution of these markets in major jurisdictions. We show that money market funds (MMFs) are still significant as investors in CP and CDs, although their footprint has shrunk in response to stricter regulation. Various players have filled the gap left by MMFs, with non-financial companies and banks being particularly important in Japan, and non-bank financial institutions in the United States. Historically, US MMFs’ absorption of short-term paper has tended to fall during stress episodes, creating strains for issuers in search of dollar funding, such as European banks.

History of CP and CD markets:

Markets for unsecured short-term negotiable debt originally developed in the US. As Alworth and Borio (1993) point out, the US CP market was already flourishing in the late 19th century, with non-financial entities dominating issuance at the time. In the years after World War I, the balance shifted. Banks became the main issuers, as they turned increasingly to this market to finance their credit expansion in a booming economy. The growth in CP issuance ground to a halt during the Great Depression but picked up steam again after World War II (Anderson and Gascon (2009)). It was especially strong from the 1970s to the early 1990s, with outstanding CP volumes increasing more than 16-fold to $500 billion. A key catalyst was the advent of MMFs, which broadened the investor base.⁷

CDs are a more recent innovation but have also been spurred on since the 1970s by the rise of MMFs. The first such instrument was issued by First National City Bank of New York in 1961, in response to US regulations that introduced ceilings on banks’ deposit rates. CDs grew quickly over the following decade, and by 1975 there was more than $90 billion in CDs outstanding (OCC (2023)).

Outside the US, CP and CD markets started developing in the 1960s and 1970s, particularly in Europe and Japan. The zeitgeist of liberalisation and deregulation was a key factor, leading to private sector calls to emulate US developments and allow financial intermediaries to flexibly expand their balance sheets. The nucleus of the market in Europe was the issuance of a Eurodollar CD by the London office of First National City Bank of New York in 1966 – five years after the first issuance in the US (Morris and Walter (1998)).⁸ In Japan, the first CD was issued in May 1979, with CP following somewhat later, in the 1980s.

Falling household financial savings will hurt investment and growth

My article in moneycontrol on the hot topic of decline in household financial savings of India.

Liquidity: one word, three meanings

Reserve Bank of New Zealand, Assistant Governor Karen Silk in this speech says there are three kinds of liquidity. And all three are important and interconnected:

In my remarks today I will differentiate between three types of liquidity and how at Te Pūtea Matua we have an interest in each of them. I will also talk to how these forms of liquidity interact with one another and how efforts to improve some can have an adverse effect on others. The three forms of liquidity I will cover are:

• • Funding Liquidity: which for our purposes today, will refer to how well banks are funded and their ability to meet their financial obligations as they fall due
  • System Liquidity: which refers to the amount of settlement cash in the banking system.
  • Market Liquidity: which refers to how easy it is to transact in markets without moving prices

Hot temperatures: A new player in housing markets (and general economics too.)

Michele Cascarano  and Filippo Natoli of Bank of Italy in this important research point how hot temperatures are shaping housing preferences:

Climate change is shaping housing preferences. This column uses data on online housing advertisements and in-person appointments of buyers and sellers with estate agents in Italy to show that a higher number of hot days in a month temporarily shrinks online and physical search, and leads to a permanent fall in average house prices. The latter effect is driven by a decrease in the price of houses that are not considered climate-resilient, suggesting a preference shift towards energy-efficient, cost-saving housing.

Not just housing, but temperatures (and other climate variables) are impacting economics generally too.

RBI revamps the Online Database (almost like St Louis Fed’s FRED database)

I had blogged last year on RBI giving a new look to its online database.

The central bank has once again not just given a new look but also revamped its online database completely. The new database also has a new web address (https://cimsdbie.rbi.org.in/) compared to the older web address (https://dbie.rbi.org.in/).

Do check it out. It is getting closer to the St Louis Fed’s iconic FRED database.

Fiscal Costs of Reverting to the Old Pension System by the Indian States – An Assessment

A team of RBI researchers (Rachit Solanki, Somnath Sharma, R. K. Sinha, Samir Ranjan Behera and Atri Mukherje) in this very important research article discuss the costs of shifting to the old pension scheme:

As part of the pension reforms initiated in India during the first decade of this century, most State governments adopted the National Pension System (NPS), which is a defined contribution scheme. Against the backdrop of recent discussion in public space about reversion to the Old Pension Scheme (OPS) and with some States actually doing so, this study has been undertaken. It analyses the NPS contribution data of State government employees to estimate the likely fiscal costs that could arise if all State governments revert to the OPS.

Highlights:

• • Short-run reduction in States’ pension outgo on account of reverting to the OPS would be eclipsed by the huge rise in future unfunded pension liabilities in the long-run. Pension burden in case of OPS will outpace the NPS contribution for most of the States by the 2030s.
  • Under OPS, the estimated actual pension burden will increase by around 4.5 times of the estimated pension outgo under the NPS, with the additional OPS burden rising to 0.9 per cent of GDP annually by 2060.
  • At a time when most of the countries are moving towards defined contribution plans, reverting to OPS by the Indian States will be a major step backwards, undermining the benefits of past fiscal reforms.
  • Any reversion to OPS by the States would be fiscally unsustainable.

4.5 times!

To know more about pensions and its importance, also hear this Seen and Unseen podcast with Ajay Shah and Renuka Sane

Lessons from 15 years of Lehman crisis

16 Sep 2023 marked the 15 years of Lehman crisis. My article in Financial Express reflecting on the lessons learnt and unlearnt so far.

Panic-driven bank runs and public communication

Olivier Coibion, Yuriy Gorodnichenko, Francesco Grigoli and Damiano Sandri study whether policy communication helped contain bank runs in US:

In response to the March 2023 collapse of Silicon Valley Bank, President Biden and Federal Reserve Chair Powell delivered public addresses championing the stability of the US banking sector. This column examines whether a large bank crash triggers other panic-driven runs, and the effectiveness of public communication in containing such risk. Using household surveys conducted following Silicon Valley Bank’s collapse, the authors find that households were likelier to withdraw deposits from their own banks in the aftermath and while communication from the Federal Reserve contained the risk, communication from politicians influenced only their electoral base.

Life Long Learning for Inclusive Sustainable Development: Study of Mann Deshi Bank and Mann Deshi Foundation

National Institute of Bank Management has done a detailed study on Mann Deshi Bank and Mann Deshi Foundation

Mann Deshi Bank’s mission is to foster entrepreneurship and financial literacy as means of advancing women in rural areas, and particularly in drought-prone areas of rural Maharashtra. It has chosen to serve the illiterate and semiliterate rural women facing resource and educational constraints: more than 90,000 rural women, mostly from vulnerable communities, involved in microenterprise are its clients.

Mann Deshi Bank’s products are highly customised to suit the specific needs of its clients. Loans are provided only to women and are delivered to their doorstep. The Bank uses technology extensively to give its clients convenient access to services at minimal cost to the clients and to enhance the reach of the Bank. Its processes are highly client-centric and ensure that its products and services are provided in a manner that leads to their sustainable adoption and use.

The Bank follows an integrated lending process that includes careful selection of clients, developing clients’ financial literacy, provision of insurance, insistence on social collateral and doorstep collection of instalments. A major pillar of Mann Deshi Bank’s business model is the provision of non-financial services – for example, reaching out to women and girls in remote villages with financial literacy programmes, training in income-generating activities, training in managing business and finance, providing a market for finished goods, promoting synergy via collective bargaining, etc. Its various initiatives – for example, its business school, community radio, chamber of commerce and community development programmes – have led to an integrated approach to banking. It looks after its clients, and its holistic approach to sustaining their bankability is carried out by networking, resource sharing and handholding in addition to advocating for their rights and living conditions.

Quite similar to how banks from South Canara region operated and functioned few decades back.

Dining and Wining During the Pandemic? A Quasi-Experiment on Tax Cuts and Consumer Spending in Lithuania

Serhan Cevik of IMF in this paper analyses whether cuts in value added tax rate on restaurants during pandemic helped the food services industry:

Could temporary tax cuts stimulate consumer spending? Sector-specific measures to the COVID-19 pandemic provides a quasi-experimental variation in consumption patterns to infer a causal effect of tax policy changes.

Using a novel dataset of daily debit and credit card transactions, this paper investigates the effectiveness of Lithuania’s decision to cut the standard value-added tax (VAT) rate from 21 percent to 9 percent on restaurants and catering services during the pandemic in a difference-in-differences regression framework.

I obtain robust evidence that the VAT reduction has had no statistically significant impact on consumer spending on restaurants and catering services, while other policy interventions such as mobility restrictions and vaccination have more pronounced effects.

These results have important policy implications in terms of the expected stimulative effect of sector-specific VAT reductions and the effective design of fiscal policy interventions to counter the impact of pandemics during which mobility is highly constrained.

Community networks and trade: Evidence from India (West Bengal)

Johannes Boken , Lucie Gadenne, Tushar Nandi and Marta Santamaria in this voxeu research piece trace importabce of caste networks in businesses in West Bengal:

Production networks matter for firm growth. However, little is known about what shapes firms’ production networks in developing countries. This column explores the role of community networks in West Bengal in firm-to-firm trade between 2010 and 2016. Firms systematically trade more within their caste than they would if trading relationships were randomly chosen, both for firms in large and smaller castes. Being in the same caste doubles the probability that two firms trade and, when they do, increases trade volumes by almost 20%.

Lessons from Mount Everest – acting now to curb nature-related financial risks

How do we work on climate change driven financial risks?

Klaas Knot, Governor of Netherlands Central Bank draws analogy with Mount Everest:

One way to help us approach this problem may be to compare our quest to climbing a mountain. A mountain no-one has ever climbed before. When Tenzing Norgay and Edmund Hillary first reached the summit of Mount Everest in 1953, they were not alone. They were part of an expedition team of about 15 climbers, and a large number of porters.

First they created a number of advance camps, gradually reaching higher up the mountain. And then they sent a series of two climbers for an assault of the summit, one pair after another.

Despite all their preparation, each pair of climbers faced the same problem: they did not know exactly what they would find on their path. Each pair encountered new obstacles, like technical problems with the oxygen sets. But the expedition team learned from those obstacles, and the climbing pairs also made discoveries that helped the next pair do a better job. Finally, on May 29th, on returning from the summit, Hillary’s first words to his colleague George Lowe were “Well, George, we knocked the bastard off”.

I think what this analogy teaches us is that, in order to make meaningful progress as NGFS members, three things are essential: starting now, working together, and keeping our eyes on the summit.

There is just major difference though. Whether we climbed Mount Everest or not would not have mattered. But if we do not get going on climate change front, we are doomed.

Padma Desai: A pioneer in more ways than one

Arvind Panagariya pays tribute to Padma Desai:

Padma Desai, a pioneering economist and expert on the Russian economy as it made the transition from communism, passed away in April 2023. This column outlines her many contributions over several decades to our understanding of barriers to economic development in pre-reform India, the former Soviet Union and further afield, as well as her insights on financial crises around the world. Not content with writing simply for her peers, she engaged deeply with policy debates, not least in a volume of personal interviews with nearly all the top politicians and technocrats involved in reforms after the Soviet Union’s collapse.

G20: Multilateral development banks need governance reforms in addition to capital adequacy

My new piece in moneycontrol on the proposed capital adequacy reforms in Multilateral Development Banks (MDBs) in the G20.

I argue that the capital adequacy alone is not enough and we also need governance reforms in MDBs. The emerging markets should have a bigger say in running these banks.

FinTech and Banks: Strategic Partnerships That Circumvent State Usury Laws

Fascinating paper on how banks and fintechs partner to circumvent ususry laws in US states:

Previous research has found evidence suggesting that financial technology (FinTech) lenders seek out opportunities in markets that have been underserved by mainstream banks. The research focuses primarily on the effect of bank market structure, limited income, and economic hardship in attracting FinTech companies to underserved markets.

This paper expands the scope of FinTech research by investigating the role of interest rate regulation of consumer credit and institutional risk segmentation in FinTech lenders’ efforts to solicit new customers in the personal loan market. We find that strategic partnerships between FinTech companies and specialist banks target marginal-risk, near-prime, and low-prime consumers for credit card and other debt consolidation loans.

These FinTech-bank partnerships especially target marginal consumers in states with low interest rate ceilings. Mainstream banks largely avoid higher-risk consumers, and low rate ceilings inhibit consumer finance company lending, which historically has been the major source of personal loans for higher risk consumers and may compete with banks at the margin. In partnering with the specialist banks, the FinTech lenders are able to take advantage of federal preemptions from state rate ceilings to lend profitably to higher-risk consumers in states with low rate ceilings to compete in these markets.