Archive for the ‘Academic research & research papers’ Category

How banks lobby and capture regulations..

August 21, 2019

Superb paper by Deniz O Igan and Thomas Lambert:

In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes.

The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis.

While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.

I think in other sectors regulatory capture is not as straight forward. In financial sector it is blatant. You see central bankers and securities regulators join financial firms pretty freely.


Devotion and development: Religiosity, education, and economic progress in 19th-century France

August 19, 2019

Network Analysis of NEFT Transactions in India

August 16, 2019

Shashi Kant and Sarat Chandra Dhal of RBI in Aug-2019 Bulletin article do network analysis of NEFT transactions in India:

Since the global crisis in 2008, network models have emerged as a tool for analysis of interbank financial exposures. The recent literature has accordingly emphasised the role of network analysis of interbank payment transactions in complementing the existing framework for financial stability analysis (Caccioli et al., 2018). Where central banks are the operators of payment and settlement infrastructure, as in India, a comparative advantage is that it is relatively easier to acquire clean, structured and accurate data that are crucial for network analysis.

Surprisingly, therefore, there has been little research on the interconnectedness of participating entities in the payment system in India. The motivation for
this study is to bridge this gap as a first attempt in the Indian context. We use the National Electronic Fund Transfer (NEFT) system as a case study. Operated by the Reserve Bank of India (RBI), it is India’s largest payment system by volume and a game changer in the retail payments sphere.

We examine the network topology of the NEFT system and analyse financial interconnectedness using network metrics of centrality. Using bilateral transaction information for each participating institution aggregated for March and April months of 2019, we build a network graph depicting the linkages. We use these data to explore the connections between various groups of banks in order to identify patterns. We also seek prominent players in the payment network in order of their systemic importance using a non-parametric methodology (Jaramillio et al., 2014). 

In summary, our findings show that out of the public sector, private sector and foreign banks that constitute around 83 per cent and 87 per cent of the
total transactions by value on NEFT in the month of March and April respectively, the flow from private sector to public sector banks is very large, with public
sector banks being net receivers in the system. We also present evidence of strong connections between public and public sector, and between private sector
banks, nascent role of co-operative banks and newly established payment banks in NEFT. 

Lots of amazing pictures of networks..

A tale of two countries: Cash demand in Canada and Sweden

August 9, 2019

Superb paper by Walter Engert and Ben S. C. Fung (Bank of Canada) and Björn Segendorf (Riksbank). They try and understand why cash demand is different in the two countries.

First, Sweden and Canada economies are quite similar:


When Central European countries gave loans in Swiss Francs and it backfired..

August 7, 2019

Before the 2008 crisis, certain Central Europeans took loans in Swiss Francs given the stability etc. As Swiss entered the crisis and did their own thing, the CHF appreciated given its safe haven status. This led to problems for these countries as the borrowers had to pay more due to CHF appreciation. Some respite was there when Swiss National Bank decided to target their currency to prevent this appreciation. But once they removed the target, the problems again continues. This led to some of these economies to restructure their loans in either Euro or local currency.

For instance, the Slovenian government has decided to restructure in Euro and asked their central bank to face losses if any. They sent a letter to ECB for its view as per the law. ECB replied raising concerns over this move saying it is the role of the government and not Slovenia central bank.

Andreas Fischer and Pınar Yeşin in this SNB working paper look at evidence from other countries:

This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in
Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period.

Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased currency mismatches in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.


How private prisons affect sentencing?

August 6, 2019

Christian Dippel and Michael Poyker in this voxeu piece:

Was Mr Say the ultimate nemesis of Lord Keynes?

August 6, 2019

Profs. Alain Béraud and Guy Numa in this piece says we usually think that Keynes and Say were at opposite ends of each other. However, they are far more proximate than it is imagined:

In economics we love this comparison of this vs that. But if we analyse closely, there are more similarities than differences.  

The structure of global trade finance: Evolution from market based to bank based

August 5, 2019

Olivier Accominotti and Stefano Ugolini in this piece look at evolution of global trade finance.

Trade finance is the oldest domain of international finance. From the very beginnings of the history of international commerce, merchants and firms have been in need of working capital in order to finance their commercial transactions and have looked for methods to reduce the risks involved in long-distance trade. However, relatively little is known about how trade finance evolved over the very long run. In a recent study, we review the main developments in international trade finance from the Middle Ages to today and compare its structure and governance across time (Accominotti and Ugolini 2019). Our goal is to understand whether alternative structures existed in the past that might provide regulators with insights on how to design more resilient trade finance.

They say that earlier trade finance was mainly through bills of exchange and was more market driven. Now it is mainly driven by Letters of Credit via banking system:

The 2008 crisis has revealed how banking and liquidity problems can have far-reaching consequences on global trade. This column reconstructs the evolution of global trade finance from the Middle Ages until today. Just like in medieval times, today’s global trade is predominantly financed through banks so that banking problems automatically transmit to international trade. In contrast, from the 16th to the 20th century, trade finance was mostly market-based. The decline of market-based trade finance was triggered by major geopolitical shocks.

However, much of this market was centralised in London. Now this bank-based system is widely spread:

The long-run evolution in the structure of international trade finance has implications for its governance. In the 19th century, the global trade finance market was highly centralised and regulation was exercised by the leading political and economic power of the time – the UK. London’s monopoly over the trade finance market was criticised by potential competitors as it granted UK financial institutions a significant rent. By contrast, the more decentralised structure that prevails nowadays makes international control over the trade finance market less feasible. While this market structure clearly has advantages, it also makes exporting and importing firms more dependent on local credit conditions and pushes back the governance of the trade finance market into a sort of anarchy.


Do closer political ties with a global superpower improve sovereign borrowing conditions?

August 1, 2019

Everything humans create is basically gamed.

Gene Ambrocio and Iftekhar Hasan of Bank of Finland in this paper look at how friends can be bought at world stage for an exchange: (more…)

Night-time Luminosity: Does it Brighten Understanding of Economic Activity in India?

July 31, 2019

RBI released its Occasional Paper Series Vol. 40.  It has this paper by Anupam Prakash, Avdhesh Kumar Shukla, Chaitali Bhowmick and Robert Carl Michael Beyer on using night-time luminosity as an economic variable:

In view of the growing popularity of night-time luminosity as a measure of economic activity, this study explores the scope for using such data as a supplement
for gross domestic product (GDP) in the Indian context. We found that night-light data exhibit reasonably robust correlataion with GDP and other important
macroeconomic indicators like industrial production and credit growth at the national level.

Quarter-on-quarter growth of night lights tracks growth of GDP reasonably well. Even after controlling for seasonal factors, the relationship of night lights with value-added in agriculture and private consumption expenditure turns out to be statistically significant.

In addition, night lights are strongly correlated with gross state domestic product (GSDP). The elasticity of night lights with respect to GSDP (i.e., the so-called inverse Henderson elasticity) is found to be statistically significant, though relatively smaller in magnitude than similar estimates available at the global level.


Notwithstanding the presence of a statistically significant relationship between night lights and GDP, there are certain limitations of using nightlight data for economic measurement. First, given that it is just a rough approximation of economic activity, it should be considered at best as an
additional indicator and not a substitute.

Second, although night lights correlate strongly with GDP, the correlation weakens substantially when growth rates are considered, which suggests that one needs to be careful while using night-light data for analysing short-term events. The existing literature finds similar result for other countries as well (World Bank, 2017).

Third, night lights as a proxy for economic activity do not distinguish between value added in different sectors.



Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy

July 31, 2019

Superb new paper by Michael Bordo and Edward Prescott. They document how Regional Feds have contributed to ideas in US mon policy:

The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented.

Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s.

Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.

I actually think you see far better research in regional Feds than Washington Fed…

Are some dictators more attractive to foreign investors?

July 29, 2019

Abel François, Sophie Panel and Laurent Weill in this Bank of Finland working paper:

Since political uncertainty is greater in dictatorships than in democracies, we test the hypothesis that foreign investors scrutinize public information on dictators to assess this risk. In particular, we assume they use five suitable dictators’ characteristics: age, political experience, education level, education in economics, and prior experience in business. We perform fixed effects estimations on an unbalanced panel of 100 dictatorial countries from 1973 to 2008 to explain foreign direct investment (FDI) inflows.

We find that educated dictators are more attractive to foreign investors. We obtain strong evidence that greater educational attainment of the leader is associated with higher FDI. We also find evidence that the leader having received education in economics and prior experience in business is associated with greater FDI. By contrast, the leader’s age, and political experience have no relationship with FDI. Our results are robust to several tests and checks, including a comparison with democracies.



Why did central banks continue to maintain gold reserves after Bretton Woods?

July 29, 2019

Interesting paper by Eric Monnet (Banque de France) and Damien Puy (IMF):

Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard.

The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected.

Even after radical institutional change, history still shapes the decisions of policymakers.

Lots of monetary history in the paper..

Beware of digital promise

July 29, 2019

My piece over the weekend in Business Standard.

Creation of Washington, D.C.: How war debts, states’ rights, and a dinner table bargain created the capital

July 26, 2019

Superb piece by Jessie Romero:

By the summer of 1783, soldiers in the Continental Army were fed up. The British army had surrendered at Yorktown, Va., two years earlier, effectively ending the Revolutionary War, but soldiers remained on duty while treaty negotiations dragged on in Paris. They hadn’t been paid in full for their service in years, and when the Continental Congress passed legislation furloughing them, they suspected they never would be. On June 21, around 400 angry members of the Pennsylvania militia surrounded the building in Philadelphia where the Congress met, scaring off so many delegates that legislators failed to achieve a quorum. Alexander Hamilton and other congressional leaders urged Pennsylvania’s government to send in friendlier troops for protection, but the state refused. The next day, the Congress announced it was abandoning Philadelphia in favor of Princeton, N.J.

Over the next few years, legislators would meet in Annapolis, Md., Trenton, N.J., and New York City. In 1788, the Constitution gave Congress the power to establish a permanent home for the federal government, but there was considerable disagreement among the states’ delegates about where that home should be. Eventually, the debate would become entangled with arguments about the nation’s finances, reflecting deep philosophical divides between the country’s founders. The compromise that was eventually reached in 1790, which created a new district on the banks of the Potomac River, had long-lasting political and economic repercussions for the region and for the country.

How Washington, Jefferson and Hamilton navigated through the political economy of those times..

Everything is f***d: Name of a new course at the University of Oregon

July 24, 2019

The syllabus is here (HT: John Cochrane Blog)

The incoming payment revolution and the future of central banking: Lessons from the history of the Banque de France

July 22, 2019

Usually we read lessons of history on central banking  from England or US.

This lesson is from France by Maylis Avaro and Vincent Bignon. It shows how Banque de France opened its liquidity window to non-banks and yet did quite well:

The payment landscape is changing. Rapidly. More payment operators are non-banks who propose e-solutions to make payments both online and in real life. Some are big players, such as the ‘Big Four’ tech companies, and others are much smaller start-ups (Committee on Payments and Market Infrastructures 2015). These changes are creating a more decentralised payment landscape, qualified by some as a revolution in payments (Coeuré 2019, Mersch 2019). 

Technologies have changed, but the pattern looks strikingly familiar to the students of European monetary history. To them, there is no natural law tying the payment instruments with their operation by the banking system. From the Middle Ages to WWI, the most common payment instrument outside coins and banknotes was operated by both banks and non-banks (Van der Wee 1977). Similarly, banks and non-banks alike will operate e-payments. This makes history an interesting source of inspiration to search for institutional solutions in order to fix the impact of the payment revolution on financial instability caused by a lack of access to emergency liquidity assistance.

In recent work (Avaro and Bignon 2019), we explore the implications of this more decentralised and less banked payment landscape for the design of central banks’ interventions when fighting financial crises. We take the example of the Banque de France because Bignon and Flandreau (2018) show that it was especially successful in taming financial and banking panics. We add that this was achieved in a situation of significantly unbanked payments in which non-banks represented half of the borrowers at the Banque de France discount window.


Demographic changes and their macroeconomic ramifications in India

July 16, 2019

Nice short paper in RBI’s Monthly Bulletin of July-2019. It is written by Atri Mukherjee, Priyanka Bajaj and Sarthak Gulati:

This study examines the influence of demographic changes on macroeconomic outcomes in India using generalized method of moments. The estimation results show that population growth and age dependency ratio have inverse relation with the growth in real GDP and
per capita income, and positive relation with inflation. Increase in working age population, on the other hand, contributes to higher economic growth. An aging population is deflationary in nature though improves the current account balance. While the declining age dependency ratio offers a demographic dividend for India, the realisation of the same would require an environment empowering the labour force with right skills and enabling their gainful employment in productive uses.



Corporate Governance in Banks in India: Designing a new benchmark index

July 16, 2019

Rekha Mishra and Anwesha Das of RBI in this new EPW paper:

While several committees have examined and suggested ways to improve corporate governance in banks in India, this study makes an attempt to prepare a benchmark index for the board composition aspect of corporate governance. A comparison between the indices for public sector banks with private sector banks reveals that differences in governance structures cannot be explained fully in terms of ownership only. This is a welcome feature, as with some efforts on the part of the majority shareholder, corporate governance in all the banks can be brought on par with the best-performing bank, by ensuring greater compliance with corporate governance benchmarks.

Inflation Co-Movement in Emerging and Developing Asia: The Monsoon Effect

July 12, 2019

Patrick Blagrave of IMF in this paper looks at the monsoon effect on inflation in developing Asia:

Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement.

By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation.

In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.


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