Drivers and Management of RBI’s Liquidity operations in 2018-19

In the earlier versions of India’s monetary policy, RBI used to release this useful Macroeconomic and Monetary Developments Report (MMDR).  This was discontinued after April-2014 policy, as RBI started releasing Monetary Policy Report. In the MMDR, the chapter on Monetary and Liquidity Conditions used to be very useful as it would tell us about ongoing changes in RBI’s liquidity management. This would tell us the drivers of market liquidity and how RBI managed the situation. Alongwith MMDR, this very useful input was also done away with.

In the recent RBI Bulletin (Feb-19), there is a nice research note bringing back both: memories and insights. The note is written by Indranil Bhattacharyya, Samir Ranjan Behera and Bhimappa Talwar of the Monetary and Liquidity Analysis Division, Monetary Policy Department, Reserve Bank of India.

They first summarise the broad history of RBI’s LAF framework since 1999 and changes which have happened overtime. Then they discuss the drivers and management of liquidity in Indian money markets in 2018-19.

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Charting a course for the Financial Stability Board

Randal Quarles, Vice Chairman for Supervision at Federal Reserve gives a useful speech:

Let me begin with the principle of engagement, and let me lay the groundwork for this discussion by reviewing the way the FSB was established and its mandate, to see how we can continue to fulfill that mandate going forward. As we all know, the FSB was born out of the crucible of the 2007-09 Global Financial Crisis–a crisis that demonstrated in the starkest possible way the importance of global financial stability to the well-being of families and businesses around the world. In the months following the peak of the crisis, the world was struggling with financial market turmoil, and the resultant macroeconomic effects were felt by people everywhere around the world. It was clear that the response to this crisis needed to be global, and the G7 and G10, without any emerging market representation, were not the right bodies to organize a global response.

As such, the Heads of State and Government of the G20 called for the Financial Stability Forum (FSF), a relatively small and unmuscular group, to expand its membership and to strengthen its institutional framework. The result was the Financial Stability Board, which was designed as a mechanism for national authorities, global standards-setting bodies, and international authorities to identify and address vulnerabilities in the global financial system and to develop stronger regulatory and supervisory policies to create a more resilient global financial system. This new group is more representative of the interconnected global economy and financial system and can more effectively mobilize to promote global financial stability than anything that existed before. Whereas the FSF included only 11 jurisdictions (all of which were advanced economies), the FSB includes 24 jurisdictions and 73 representatives, which include all the members of the G20 and of which 10 are emerging market economies.

In fostering global financial stability, the actions of the FSB have the potential to affect the global economy and financial system in important ways. Success in promoting global financial stability should benefit everybody, through more sustainable and stronger economic growth. At the same time, financial stability policy will also affect institutions and markets beyond the FSB’s membership. Recognizing the wide-reaching effects of its work, the FSB must seek input from a broad range of stakeholders, each of whom brings a different perspective to the issues under consideration. While we are directly accountable to the G20, we are, through the G20, accountable to all of the people affected by our actions. In my view, that means we must engage in genuine, substantial dialogue with all of these stakeholders, to a greater and more effective degree than we have in the past.

He is also the chair of FSB now.

Narratives about Technology-Induced Job Degradations: Then and Now

Prof Robert Shiller is making this whole idea of building narratives in economics as an important thing.

In his new paper, he writes on how people have reacted to technology impacting their work over the years:

Concerns that technological progress degrades job opportunities have been expressed over much of the last two centuries by both professional economists and the general public. These concerns  can be seen in narratives both in scholarly publications and in the news media. Part of the expressed concern about jobs has been about the potential for increased economic inequality. But another part of the concern has been about a perceived decline in job quality in terms of its effects on monotony vs creativity of work, individual sense of identity, power to act independently, and meaning of life.

Public policy should take account of both of these concerns, inequality and job quality.

Superb bit.

Why narratives?

From Commodity to Fiat and Now to Crypto: What Does History Tell Us?

Nice paper as always from Prof Barry Eichengreen:

Over time, there has been a tendency for political jurisdictions and residents to converge on a single currency. Monopoly over seigniorage is a source of political power and a valuable lifeline when sovereignty is threatened. Moreover a uniform currency, insofar as it is free of counterparty and liquidity risk, facilitates economic activity. But will digital currencies now reverse this trend toward uniformity, given the apparent ease with which they can be created? The information sensitivity of those units, evident in the fact that they trade at varying prices, suggests that they do not yet provide the core functions of money. So-called stable coins are intended to bridge this gap, but whether they can be successfully scaled up and maintain their stability is doubtful. The one unit that can clearly meet these challenges is central bank digital currency. But there would be both costs and benefits of moving in this direction.

 

Is the Indian Ocean economy a new global growth pole?

Interesting paper by Ganeshan Wignaraja, Adam Collins and Pabasara Kannangara of Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI) in Colombo.

This paper examines whether the Indian Ocean economy–comprising 28 states across three continents–can become a growth pole for the global economy. It considers initial conditions, recent trade-led growth, portrays the near and medium context and various policy challenges. It finds that the strategically located Indian Ocean economy has become a pivotal global shipping hub. Its trade and Gross Domestic Product (GDP) have grown faster than the global
economy in recent years. Projections suggest that the Indian Ocean economy will likely account for over 20% of global GDP by 2025 and its GDP per capita is expected to almost double to USD 6150. However, realising this outlook will depend on tackling several pressing policy challenges including improving port quality and logistics, lowering barriers to trade and investment, narrowing development gaps and strengthening the regional economic governance.
Tackling these challenges requires a combination of coherent national and regional policy measures.

How the tides keep changing. It used to be Indian Ocean for a long time before Atlantic Ocean took over. Now back to Indian Ocean.

Revisiting Taylor Rule in this era of low inflation and low unemployment…

A two-part series by  Kevin L. Kliesen of St Louis Fed.

The first part presents the original Taylor Rule which shows that Fed Funds rate should be much higher than it is today:

Canadian legalisation of cannabis reduces both cash usage and the ‘black’ economy

Charles Goodhart and Jonathan Ashworth in this interesting research:

Canada is the first major developed nation to have legalised recreational cannabis use. This column argues that movements in cash in circulation around the time of legalisation seem to provide early evidence that Prime Minister Trudeau’s policy has already been successful in crimping the black economy. If around one-quarter of the cannabis market remains illegal, as recently estimated by Statistics Canada, over time legalisation could reduce the size of the total underground economy by around 4% or 5%.

Hmm..

The Founding of the Federal Reserve, the Great Depression and the Evolution of the U.S. Interbank Network

Interesting paper by Matthew Jaremski and David C. Wheelock:

Financial network structure is an important determinant of systemic risk. This paper examines how the establishment of the Federal Reserve and Great Depression affected U.S. interbank network structure. Seeking liquidity sources, banks generally preferred to connect to Federal Reserve member banks in cities with Fed offices or clearinghouses. Overall network concentration declined initially as banks connected to Federal Reserve cities other than New York, but increased in the Depression. Banks that survived the Depression generally had higher percentages of connections to Federal Reserve cities and to correspondent banks that also survived.

More specifically, Federal Reserve was key to Depression in many ways:

The Federal Reserve was intended to reduce the banking system’s reliance on the interbank network, and especially the concentration of the system’s reserves in New York City. Although the share of interbank deposits held by major New York City banks did fall after the Fed was established, previous studies have not examined how the interbank network changed with the introduction of the Fed. Using newly digitized data on the interbank relationships of every U.S. depository institutions in 1900, 1910, 1919, 1929 and 1940, we quantify changes in network concentration and other aspects of network structure over four decades.

We show that while the banks most central to the network remained those located in New York City and other major centers, the regional Federal Reserve cities took on a more important role in the network after the Fed was established and again during the Great Depression. Ironically, by pushing the
network toward the regional Fed cities, the System’s founders may have inadvertently made the banking system more vulnerable to regional liquidity shocks and to the responsiveness of local Federal Reserve Bank officials to those events.17

Interbank connections were a conduit for bank distress during the Great Depression. Banks with correspondents that failed or otherwise closed were themselves more likely to close during the Depression. Banks apparently responded to the Depression by linking even more to correspondents in cities with Federal Reserve offices, especially to banks in New York City, which saw a relative increase in correspondent links between 1929 and 1940. Thus, while the establishment of the Federal Reserve altered the structure of the interbank network, the Fed’s presence neither eliminated the network nor prevent it from transmitting shocks across the banking system. Moreover, the amplification of distress through the network in turn contributed to events that further altered the network’s structure while at the same time having even more profound long-term impacts on the regulation of the U.S. banking system.

Hmm..

 

Towards India’s new fiscal federalism

Vijay Kelkar gave Prof. Sukhamoy Chakravarty Memorial Lecture at the 55th Annual Conference of The Indian Econometric Society (TIES). TIES was organised by Mumbai School of Economics and NISM. The program looks quite interesting and hopefully they also put up papers overtime.

Good to see NIPFP put up Mr Kelkar’s talk as a working paper where he talks about India’s new fiscal federalism. He argues to bring back Planning Commission’s role to address state imbalances (horizontal) in development in today’s Niti Aayog. He also argues for a single GST rate of 12% with 2% of the resources marked for the third tier of oue governance: elected local bodies.

Summary:

In conclusion, I have discussed the issue of the need to revisit the fiscal federal architecture in contemporary India. Briefly tracing the origin of arrangement in
contemporary history, I have attempted to point out the changing political- economic parametric environment calling for commensurate change in the way our fiscal federal setup ought to be conceptualised, here and now. In doing this, I have identified some of the important issues that arise as we move forward. I have also suggested innovative reform proposals towards creating Four Pillars- based architecture for India’s new Fiscal Federalism. While the final resolution of these matters will be attained through a dialectic that will play out in the domain of realpolitik, it is important that such a process be helped along by evidence based analysis and debate. It is my strongest possible hope that this lecture will contribute to such a debate on the issues which are so vital to our country. I should say that  in these debates, this society and its members should play a fulsome role.

Useful stuff…

Establishing viable capital markets

A new report by BIS:

Capital markets provide an important channel of financing for the real economy, they help allocate risk, and they support economic growth and financial stability. Moreover, capital markets have played an important part in financing the recovery from the Great Financial Crisis (GFC), a reminder of their “spare tyre” role in the financial system. This report examines recent trends in capital market development and identifies the factors that foster the development of robust capital markets.

The report finds that large differences persist in the size of capital markets across advanced and emerging economies. Emerging-economy markets have been catching up with their more advanced peers, but the gap has not yet been closed.

The analysis highlights the importance of macroeconomic stability, market autonomy, strong legal frameworks and effective regulatory regimes in supporting market development. Better disclosure standards, investor diversity, internationalisation, and deep hedging and funding markets, as well as efficient and robust market infrastructures, also play a key role.

The report’s recommendations across six broad areas outline practical ways to support the development of robust and efficient markets.

Should be an interesting read….

Measuring Utility: From the Marginal Revolution to Behavioral Economics

Ivan Moscati of University of Insubria in this paper (which is actually a prologue from his book by the same title):

Does inflation targeting make the poor poorer?

Recently Prof Abhijit Banerjee said that RBI’s inflation targeting has made the agrarian crisis worse.

Prof Mario Seccareccia of  University of Ottawa in this video takes us through the history and political economy of  inflation targeting. His main argument is that IT has taken out economics of distribution out of discussion. He also says that when central banks set inflation targets, they effectively redistribute income from wage earners to bondholders.

Nice bit…

 

Can a tiger change its stripes? Reform of Chinese state-owned enterprises…

Profs. Ann Harrison, Marshall Meyer, Peichun Wang, Linda Zhao, and Minyuan Zhao in this paper:

The majority of state-owned enterprises (SOEs) in China were privatized through ownership reforms over the last two decades. Using a comprehensive dataset of all medium and large enterprises in China between 1998 and 2013, we show that privatized SOEs continue to benefit from government support relative to private enterprises. Compared to private firms that were never state-owned, privatized SOEs are favored by low interest loans and government subsidies. These differences are more salient with the Chinese government’s trillion-dollar stimulus package introduced after the 2008 global financial crisis. Moreover, both SOEs and privatized SOEs significantly under-perform in profitability compared to private firms. Nevertheless there are clear improvements in performance post-privatization. The tiger can change its stripes; however, the government’s behavior seems to be sticky.

Hmm..

The Effect of Superstition on Health: Evidence from the Taiwanese Ghost Month

Martin Halla, Chia-Lun Liu and Jin-Tan Liu in this interesting research paper:

Superstition is a widespread phenomenon. We empirically examine its impact on health-related behavior and health outcomes. We study the case of the Taiwanese Ghost Month.

During this period, which is believed to increase the likelihood of bad outcomes, we observe substantial adaptions in health-related behavior. Our identification exploits idiosyncratic variation in the timing of the Ghost Month across Gregorian calendar years.

Using high-quality administrative data, we document for the period of the Ghost Months reductions in mortality, hospital admissions, and births. While the effect on mortality is a quantum effect, the latter two effects reflect changes in the timing of events. These findings suggest potential benefits of including emotional and cultural factors in public health policy.

Hmm..

Examining the trade-off between price and financial stability in India

Ila Patnaik, Shalini Mittal and Radhika Pandey of NIPFP in this recent paper find trade off between price and fin stability:

In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis,
there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical
approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and
financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial
stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging
economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with
monetary policy instrument.

Hmm..

How and why did we start collecting economics statistics (such as inflation, GDP etc.): Case of US

A really nice paper by Prof Hugh Rockoff of Rutgers Univ.

He discusses an area which is seldom discussed in economic research which is origins of statistics/data which help us understand the trends in an economy. How and why did we start collecting data on things like inflation, employment and output? He discusses the US case:

Although attempts to measure trends in prices, output, and employment can be traced back for centuries, in the main the origins of the U.S. federal statistics are to be found in bitter debates over economic policy, ultimately debates over the distribution of income, at the end of the nineteenth century and during the world wars and Great Depression. Participants in those debates hoped that statistics that were widely accepted as nonpolitical and accurate would prove that their grievances were just and provide support for the policies they advocated.

Economists – including luminaries such as Irving Fisher, Wesley C. Mitchell, and Simon Kuznets – responded by developing the methodology for computing index numbers and estimates of national income. Initially, individuals and private organizations provided these statistics, but by the end of WWII the federal government had taken over the role. Here I briefly describe the cases of prices, GDP, and unemployment.

Most of the time the origins of these stats was due to some or the other crisis. How some people (economists/statisticians) responded to calls from the polity to develop these numbers is quite a story…

Gross National Happiness and Macroeconomic Indicators in the Kingdom of Bhutan

Sriram Balasubramanian (World Bank) and Paul Cashin (IMF) in this interesting paper:

This paper examines the origins and use of the concept of Gross National Happiness (or subjective well-being) in the Kingdom of Bhutan, and the relationship between measured well-being and macroeconomic indicators. While there are only a few national surveys of Gross National Happiness in Bhutan, the concept has been used to guide public policymaking for the country’s various Five-Year Plans. Consistent with the Easterlin Paradox, available evidence indicates that Bhutan’s rapid increase in national income is only weakly associated with increases in measured levels of well-being. It will be important for Bhutan to undertake more frequent Gross National Happiness surveys and evaluations, to better build evidence for comovement of well-being and macroeconomic concepts such as real national income.

Some history:

The most important element of the Bhutanese model of development has been the concept of Gross National Happiness (GNH), and the GNH index and tool which has been formulated alongside this philosophy. GNH was in Bhutan in 1972 by the Fourth King of Bhutan, Jigme Singhye Wangchuk, the father of the current king, Jigme Khesar Namgyel Wangchuck (see Government of Bhutan, 2015). He declared that “Gross National Happiness is more important than Gross Domestic Product”. The King had envisioned an economic development model which was based on the tenets of Buddhist philosophy and holistic development, which had its core functions preserving the environment and emphasizing the role of happiness and collective well-being in the lives of people.

This emphasis on happiness was to override the role of monetary incomes which was at the heart of the GDP driven global development model. With assistance from international organizations and bilateral development partners, the government also incorporated major development related
issues into its agenda such as sustainability, climate change and inequality. While GNH has evolved over time, in its quest to stay relevant, the role of GDP in Bhutan has also changed through the years. In the decades of the 1980s and 1990s, GDP was primarily used as a tool for Bhutan’s financial indicators and as a benchmark for access to international grants and loans from multilateral agencies. Even though publicly the primacy of GNH is being advocated by Bhutan, GDP measurements have thus also played a substantive role in the country’s development.

In this context, this paper will look at the relationship between the evolution of GNH and the evolution of GDP and other macroeconomic indicators.

Should read the whole thing..

India’s Corporate Bond Market: Issues in Market Microstructure

Nice piece by Shromona Ganguly of  RBI in the January Monthly Bulletin.

Development of corporate bond market in India remains crucial for meeting the financing requirement of industry and infrastructure sector. Despite various initiatives undertaken in the past, there is little change in the overall market microstructure of the corporate bond market in India. At this backdrop, this article explores the available statistics on corporate bond market in India during recent times (2010-18) to analyse the various demand and supply side factors, which impede the growth of corporate bond market in India. It is found that the gradual increase in proportion of market-based sources in total debt financing by non-financial companies is confined only to the larger-sized firms. Though finance and infrastructure companies dominate the corporate bond market, mutual funds are playing an important role in diversifying the issuance base of the market. Empirical analysis suggests significantly higher risk-premia associated with lower-rated bonds in the private placement market.

Brexit: Blame it on the 2008 banking crisis

Prof Nicholas Crafts of Univ of Warwick:

Brexit in 2019 and the banking crisis in 2007 to 2009 are usually seen as unrelated events. This column argues that they are in fact closely connected. The austerity policies embarked on in response to the fiscal damage resulting from the banking crisis triggered the protest votes of left-behind voters, which at the margin allowed Leave to win the referendum vote. The implication is that the economic costs of the banking crisis are much larger than is usually supposed.

 

A Reflection on the 50th Anniversary of Hardin’s Tragedy of the Commons: What about digital commons?

Interesting paper by Frank Nagle of HBS.

On the 50th anniversary of Garrett Hardin’s “The Tragedy of the Commons,” this article considers the benefits and potential downsides of the digital commons, which emerged well after Hardin wrote his seminal article. Unlike the physical world Hardin wrote about, the digital world is essentially infinitely abundant, which leads to a very different tragedy and many new opportunities.

….

In particular, as the digital commons leads to more firms structured as platforms whose business models result in the gamification or leisurification of work, people are increasingly doing work without getting paid for it (or at least getting massively underpaid). A deeper understanding of this phenomenon may
help to explain puzzles related to wage inequality and the wealth gap, which could inform regulatory policies to help better address these concerns. Relatedly, as value creation, innovation, and production increasingly move outside the boundaries of the firm, the role of firms in society may begin to change. Given that firms have provided the social safety net (healthcare, retirement, etc.) in the United States for the last century, policies will need to address the increasing number of people that are not directly employed by a firm and therefore have no firm provided safety net. Similar questions could arise as to the functions
of government and financial systems in the face of the opportunities the digital commons presents for true democratization of traditional institutions. However, such a society would still need policies to protect individual citizens from being exploited. 

Hmmm..