Archive for the ‘Academic research & research papers’ Category

Impacts of an online English learning programme among Japanese high school students

May 23, 2017

Interesting paper by Yuki Higuchi, Miyuki Sasaki, Makiko Nakamuro.

They evaluate whether Japanese students can learn English using online programmes. They show students do make progress but also procrastinate learning:

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Empire and the Economist: Analysis of 19th century economic writings in Maharashtra

May 22, 2017

This is a brilliant paper by a brilliant economist – Prof Neeraj Hatkar of Mumbai University.  I just stumbled on the paper written in 2003 .

It reviews history of economic thought of scholars from Maharashtra region in the 19th century.

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Bundesbank joins Bank of England in saying banks are not financial intermediaries but creators of money…

May 19, 2017

We usually understand banks as financial intermediaries which first collect deposits from surplus units and then pass them as loans  towards deficit units.

In 2014, Bank of England turned this wisdom upside down with their research. They said banks first give loans and then put deposits as liabilities to balance the balance sheet. This had massive implications on the way we thought about banking, monetary transmission and so on. The most important being we need to pay more attention on quality of loans than just mobilising deposits. More on this here.

Now it seems other central banks are catching up to this view.

Bundesbank in its monthly report reviews this literature:

The accommodative non-standard monetary policy measures taken by the Eurosystem in response to the financial and sovereign debt crisis caused the reserves of (commercial) banks in the euro area to increase sharply. In spite of this, the annual growth rate of the monetary aggregate M3 has remained at a moderate level over the past two years, reigniting interest in the connection between the creation of reserves and growth in the broader monetary aggregate.

It suffices to look at the creation of (book) money as a set of straightforward accounting entries to grasp that money and credit are created as the result of complex interactions between banks, non-banks and the central bank. And a bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal. Instead, various economic and regulatory factors constrain the process of money creation. From the perspective of banks, the creation of money is limited by the need for individual banks to lend profitably and also by micro and macroprudential regulations.

Non-banks’ demand for credit and portfolio behaviour likewise act to curtail the creation of money. The central bank influences the money and credit creation process in normal times through its interest rate policy, which affects the financing and portfolio decisions of banks and non-banks through various transmission channels. Non-standard monetary policy measures, too, have effects on the creation of money and credit. One such unconventional measure, the Eurosystem’s asset purchase programme, differs from interest rate policy in that it directly boosts the supply of reserves. Moreover, purchase programmes structured in this manner have an immediate expansionary impact (originating directly from the asset purchase) on the stock of money held by non-banks, though this effect is dampened in the euro area by the fact that the Eurosystem does not only purchase the assets from domestic non-banks.

There are also indirect effects resulting from the transmission of the purchase programme and its impact on lending and portfolio allocation. Critics point to the banking system’s capacity to create money as one of the main culprits behind destabilising financial cycles and financial crises, hence the long-standing debate about proposals to fully back deposits with central bank money, a move intended to restrict the extent to which the banking sector can create credit. It is not evident, however, that these constraints do indeed make for a financial system that is more stable overall than might in any case be achieved through targeted regulatory action. At the same time, that kind of transition to a new system would risk impairing important functions which the banking system performs for the economy and are crucial for keeping real economic growth on a steady path.

Lots of other details in the publication..

When silver ended as a unit of account…

May 18, 2017

Superb note by Ricardo Fernholz, Kris Mitchener, Marc Weidenmier. It is based on a bigger paper here.

They show how silver declined and ended as a unit of account. Moreover, it had sharp mpact on agricultural commodities:

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What we can learn from tweets which predict movement of euro-dollar currency pair?

May 17, 2017

Interesting paper. As traders share their predictions across asset classes on social media, it leads to research opportunities.

Vahid Gholampour and Eric van Wincoop analyse tweets that predict Euro-Dollar rates. They find that Tweets get the direction right but not the magnitude:

We focus on opinions posted on Twitter, because Twitter is widely used to express opinions about asset prices. Several anecdotal stories suggest that this information can be important. For example, on 13 August 2013, Carl Icahn, an activist investor, tweeted about his large position in Apple. As a result, Apple shares increased in value by more than 4% in a few seconds. We investigate what can be learned from Twitter by considering two and a half years of tweets that expressed opinions about the euro-dollar exchange rate.

…..

We find that the direction of exchange rate changes is predicted by tweets in a way that is statistically significant. This suggests that there was information content in the tweets. But we also find that Twitter sentiment does not predict the magnitude of future exchange rate changes in a statistically significant way. Such predictability would be needed to develop trading strategies from this data. This absence of predictability based on a data-only approach is not surprising, because exchange rates are notoriously hard to predict. Twitter sentiment is only directional, and the data sample covers only two and a half years.

Also, Sharpe ratio for Tweet based trades is high indicating one could make money:

The large Sharpe ratios that we find suggest that there are significant gains from trading strategies based on Twitter sentiment. We can compare the Sharpe ratio from the TSI trading strategy to that of the popular currency carry-trade strategy based on interest differentials. Burnside et al. (2010) reported an average annualized Sharpe ratio of 0.44 for 20 currencies against the dollar based on a carry-trade strategy. A Sharpe ratio in the range [1.59, 1.78] is clearly very high by any reasonable standard. The methodology developed here could easily be applied to other currencies or portfolios of currencies, as well as other financial markets such as the stock market.

Hmm..

If not Britain, where? The case for a French Industrial Revolution

May 11, 2017

Interesting analysis by Anton Howes, an Innovation historian (what a profession!). HT again to MR blog.

He says France could have also ushered the industrial revolution as basics were present. But speed would have been slower:

But this isn’t to say that France (as well as the other countries I’ve mentioned) would have experienced an acceleration of innovation that was quite as fast as that in Britain. There were a number of factors that may have slowed France’s acceleration (but crucially not stopped it):

  1. France’s educated, learned types — the savants — had slightly different interests. Although the French Académie des Sciences (1666) was founded only a few years later than England’s Royal Society (1660), French scientists were said to be rather more concerned with abstract theorising than with applying their knowledge.
  2. France may not have had quite as prominent a commitment to spreading innovations further, to evangelising innovation. Britain’s major society for promoting improvements in general, the Society for the Encouragement of Arts, Manufactures and Commerce (founded in 1754, now the Royal Society of Arts), was founded about half a century earlier than its French counterpart, the Société d’Encouragement pour l’Industrie Nationale (1801). [Then again, the French organised public exhibitions of their innovations about half a century before the British — their l’Exposition des Produits de l’Industrie Française began in Paris in 1798; Britain’s Great Exhibition at Crystal Palace was in 1851].
  3. French religious intolerance didn’t help. The revocation of the Edict of Nantes, in 1685, put an end to religious tolerance. People like the early steam engine innovator Denis Papin, a Huguenot (French Protestant), were forced to leave (in his particular case, rendered unable to return). I found many first or second generation immigrant Huguenots among my sample of innovators in Britain.
  4. France suffered some major political instability: the 1789 French Revolution, the Revolutionary and Napoleonic Wars, the 1830 July Revolution, the 1848 February Revolution. All harmed innovation. The inventor Marc Isambard Brunel (also father of the famous civil engineer Isambard Kingdom Brunel), fled the French Revolution for the United States, before eventually settling in Britain. The great chemist Antoine Lavoisier was rather less fortunate — in 1794 he lost his head to guillotine. [Note, again, that this only slowed innovation rather than stopping it. The Massachusetts-born Benjamin Thompson, Count Rumford, who had fought for the British in the American Revolution, had no misgivings about settling in Paris in 1804 (and marrying Lavoisier’s widow)]

So without the British acceleration of innovation, the Industrial Revolution would likely have happened elsewhere within a few decades. France and the Low Countries and Switzerland and the United States were by the eighteenth century well on their way towards sustained modern economic growth. The growth would probably have been slower, it may have been delayed. The path that technology took may have been a little more winding. But the improving mentality was already spreading rapidly throughout Europe, as was the commitment to spreading it further. The steam locomotive had already bolted.

Ageless debates..

Is Roger Federer more loss averse than Serena Williams?

May 11, 2017

Looks like.

A fascinating paper by a group of researchers (HT: MR blog). Though the results are just based on one tournament.

 

Compassionate capitalism in the Middle Ages: Profit and philanthropy in medieval Cambridge

May 9, 2017

Catherine Casson, Mark Casson, John Lee and Katie Phillips have a post:

 Interesting..

Central Bank Legal Frameworks in the Aftermath of the Global Financial Crisis

May 2, 2017

Perhaps one of the more important papers on central banking.

There is a lot of research on how and whether central bank objective functions have changed or the independence. But there is hardly any research on the most important thing that drives central banks at the first place: Their legislation, saw in India’s demonetisation how central bank law is so crucial to understanding monetary affairs.

It is written by Ashraf Khan of IMF and looks at how central bank legislations have changed post the financial crisis.

Drawing on the 2016 update of the IMF’s Central Bank Legislation Database, this paper examines differences in central bank legal frameworks before and after the Global Financial Crisis. Examples from select countries show that many central bank laws have undergone changes in objectives, decision-making, accountability, and data collection. A wider cross-country survey illustrates the common occurrence of price stability in central bank objectives, and varying practices in defining financial stability, “independence” versus “autonomy,” and who within a central bank determines monetary policy. The highlighted facts illustrate the uses of the database and could be a starting point for further analyses.

Even small changes in the central bank legislation should be keenly watched. There is usually a larger political economy game at play behind these small changes and the intent is much larger than initially thought. Moreover, the impact may be seen many years later as we see in case of Section 7 (1) in RBI Act.

Thus, instead of just focusing on usual literature on inflation/employment or central bank independence, we should look at the legislation and the changes.

Now central banks are weary of private digital money: How history is being repeated the other way round..

April 28, 2017

Before central banks became monopolies of currency issuance, private banks started issuing their own notes. These notes were backed by gold/silver. However, some banks could overissue currency leading to mismatch between currency and metal base.

It so happened that a Swede bank – Stockholms Banco- over issued its banknotes. This led to a kind of run on the bank leading to all kinds of crisis. The bank was shut leading to jailing of its founder  Johan Palmstruch. But the seeds had been sown and the King established another bank called Bank of the Estates of the Realm in 1668. This bank eventually became Riksbank, known as the first central bank of the world. (Much more here)

So basically, early central banks were formed for two purposes. Prevent this overissuance of private bank money (as in Riksbank) or financing wars (as in Bank of England and Banque de France). They were not really central banks right at the beginning. The Central bank we know today came via evolution over multiple years as Governments realised the power of money and concentrated most powers under a central bank financed by them.  Though early central banks were private banks which were eventually nationalised.

Fast forwarding to today. With digital money, it is becoming possible for private players to once again enter the money space. And not surprisingly central bankers are worried as a monopoly would be.

Norway’s central bank  Deputy Governor Jon Nicolaisen gives a speech cautioning against these private money. He gives an example:

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RIP: Vinod Khannaji

April 27, 2017

Indeed a sad news as Vinod Khanna passed away.

I have grown seeing his movies many of those with Amitabh Bachchan. His personality and effortless acting attracted one to see those movies repeatedly. I must have seen his Parvarish umpteen times and still continue to do so.

He was one of those rare actors who was as good as a villain too for those who have seen Mera Gaon Mera Desh.

Those were times when leading actors burned their egos and agreed to work in multi-starrers. The idea always was to entertain public.  Within these multi-starrers one looked to compete with fellow actors and leave an impression.

Now a days we just see egos and seldom any acting..

 

The 2017 Clark Medal shows precarious state of economic history..

April 27, 2017

I wish I had written this post. Dave Donaldson recently won the Clark medal for his work on economic history of Indian railways.

A Fine Theorem blog points how difficult the journey has been. It highlights how difficult it is to publish economic history work in mainstream journals, given his railways paper has been forthcoming for 8 years!

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The operation and demise of the Bretton Woods system: 1958 to 1971

April 26, 2017

Michael Bordo explains the BW system:

 He says key reason for breakdown was inflation in US:

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Are states led by queens less prone to conflict than states led by king?

April 26, 2017

Fascinating paper by Oeindrila Dube and S.P. Harish (HT: MR blog).

The answer seems to be yes. Moreover, married queens were more likely to attack than unmarried ones:

Are states led by women less prone to conflict than states led by men? We answer this question by examining the effect of female rule on war among European polities over the 15th-20th centuries. We utilize gender of the first born and presence of a female sibling among previous monarchs as instruments for queenly rule. We find that polities led by queens were more likely to engage in war than polities led by kings. Moreover, the tendency of queens to engage as aggressors varied by marital status. Among unmarried monarchs, queens were more likely to be attacked than kings. Among married monarchs, queens were more likely to participate as attackers than kings, and, more likely to fight alongside allies.

These results are consistent with an account in which marriages strengthened queenly reigns because married queens were more likely to secure alliances and enlist their spouses to help them rule. Married kings, in contrast, were less inclined to utilize a similar division of labor. These asymmetries, which reflected prevailing gender norms, ultimately enabled queens to pursue more aggressive war policies.

I would think otherwise. Unmarried queens should be attacking more given insecurity over their kingdom.

Whatever, fascinating stuff. What all research people are doing.

Would be interesting to do similar analysis for kings and queens in India as well..

Why does Indian central bank need things like Prompt Corrective Action despite having inspection powers under Banking Regulation Act?

April 21, 2017

Despite many years of rising NPA and bank problems, we just keep moving from one regulation to other. The latest regulation is Prompt Corrective Action which  apparently is not really new. It was started in 2002 and has been modified recently in 2017. As expected, media is buzz with whether this PCA 2.0 will correct banking problems.

What is not understood or questioned how these things have gone so wrong?

RBI is perhaps one of those few central banks which has extensive powers to regulate and monitor our banks. The central bank got these powers under Banking Regulation Act (1949). Section 35 of the Act gives wide inspection powers to the central bank. RBI in its first history volume celebrates passage of this Act which gave central bank powers to put our banks in order. Apart from capital and reserves requirements, the History notes:

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For a nation born out of tax resistance, why Americans tend to grumble but not revolt against taxes?

April 20, 2017

I had posted earlier how cleverly governments have convinced people that any incomes taxed is white and rest black. However, history of nations shows how revolt against some or the other taxes was one of the crucial ingredients to development of the very nation.

So two more things here. First is to read stuff by Charles Adams who is a tax historian and has written a lot about the subject. Second is this post by Jeff Deist who writes about American tax day:

Today is Tax Day in America. When April 15th happens to fall on a weekend, the IRS generously permits us to extend the filing ritual until the following Monday. But since Monday was a holiday in the District of Columbia known (without irony) as Emancipation Day, we all enjoyed an extra bonus day to comply. And for the most part, comply we do: the voluntary compliance rate, defined by the IRS as taxes timely paid as a percentage of taxes owed in aggregate, is nearly 82%. Compare this with Italy, for example, where tax evasion is a national pastime. For a nation born out of tax resistance, we Americans tend to grumble but not revolt.

We also tend to view taxes only in terms of personal pain: the financial costs of paying, the compliance costs of dealing with the paperwork, and the psychic costs of worrying about it all. It is precisely this pain, experienced only by individuals, that upends the left-wing rationale for imposing taxes on business entities, estates, and all manner of transactions. Only people pay taxes. When someone talks about raising taxes on “greedy corporations,” they’re really calling for higher consumer prices for those corporations’ goods and services.

But the larger impact of taxation is found in the countless and profound ways it changes human activity. Charles Adams, the great tax historian, devoted his career to examining the enormous sociological and cultural impacts resulting from how states raise revenue. Adams called taxes a “prime mover of history,” from ancient Egypt through the Middle Ages, from Enlightenment Europe to Colonial America and all the way up to our present world of offshore tax havens. Taxes, Adams maintained, are far from the price we pay for civilization. Instead they are mean, petty, and arbitrary, causing existential struggles for the poorest people in societies across history. Taxes not only fund wars and enrich unworthy rulers, but also create crippling distortions in every economy the world has ever known.

The impact of taxes on ordinary people in modern America, including the lengths to which some will go to avoid them, is well-represented in our national psyche. We’ve all heard anecdotal horror stories, usually involving someone’s finances being destroyed by a sudden IRS seizure. Americans also view the IRS as wanton and political in its enforcement actions, which makes sense. Even experts can’t agree how much a hypothetical family owes in any given year.

The distortive impact of taxes on US and multinational businesses is also extraordinary, albeit not as much discussed. While monetary policy causes malinvestment through artificially low interest rates, high tax rates and burdensome complexity similarly cause firms to radically alter their business decisions. And just as interest rates affect the length of production, tax rates (and rules) dramatically affect decisions about the capital structure of companies.

Trying to find ways to avoid taxes is hardly anything unique to India as our media and politicians suggests. It is present across countries though degrees may differ. Places where State shows more efficiency in delivering public services, people could be less averse towards paying taxes. It would be just opposite for less efficient States. Though, people might just say efficient State is just an oxymoron…

Will Reserve Bank of New Zealand have dual objective like Fed? Inflation and employment?

April 18, 2017

How tides keep turning. Reserve Bank of NZ was the first bank to start inflation targeting formally in 1989. Since then, inflation targeting has become a huge buzzword across central banking circles with more and more central banks taking up targeting inflation.

Now the pioneer of inflation targeting could be made to reconsider and change its single mandate. If the Labour government comes to power in NZ, there are high chances that the RBNZ Act will be changed and employment will be added to the single objective.

The superb blog on NZ economy – Croaking Cassandra blog reports:

I’ve already written a bit about Labour proposals on monetary policy (here and here) and, for now at least, I don’t want to write anything more about the proposed changes to the decision-making process or the plan to require the Monetary Policy Committee to publish its minutes.  If there are all sorts of issues around the details of how, I haven’t seen anyone objecting to the notion of moving from a single decisionmaker model to a a legislated committee, or objecting to proposals to enhance the transparency of the Bank’s monetary policy.    The Bank was once a leader in some aspects of monetary policy transparency, but is now much more of a laggard.

Where there has been more sceptical comment is around Labour’s proposal to add full employment to the statutory monetary policy objective.    At present, section 8 of the Reserve Bank Act reads as follows:

The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.

Responding to this aspect of Labour’s announcement hasn’t been made easier by the lack of any specificity: we don’t know (and they may not either) how Labour plans to phrase this statutory amendment.    There are some possible formulations that could really be quite damaging.  But there are others that would probably make little real difference to monetary policy decisionmaking quarter-to-quarter.  Probably each of us would prefer to know in advance what, specifically, Labour plans.  But this is politics, and I’m guessing that there is a range of interests Labour feels the need to manage.  In that climate, specificity might not serve their pre-election ends.  One could get rather precious on this point, but it is worth remembering that there are plenty of other things that may matter at least as much that we currently know little about.  Under current legislation, who becomes the Governor of the Reserve Bank matters quite a lot to shorter-term economic outcomes, and we have no idea who that will be.   The details of the PTA can matter too, and under the governments of both stripes the process leading up to the signing of new PTAs has been highly secretive (often even after the event).  For the moment, we probably just have to be content with the “direction of travel” Labour has outlined.

In some quarters, Labour’s plans for adding a full employment objective have been described as “cosmetic”, as if to describe them thus is to dismiss them.    That is probably a mistake.  When I went hunting, I found that cosmetics have been around for perhaps 5000 years (rather longer than central banks).   People keep spending scarce resources on them for, apparently, good reasons.     Why?  They can, as it were, accentuate the positive or eliminate the negative –  highlighting features the wearer wants to draw attention to, or covering up the unsightly or unwanted marks of ageing.    They (apparently) accomplish things for the wearer.

🙂

Further, in all NZ elections central bank objective has been a focal point:

What is the relevance of all this to monetary policy?  Well, there has been a long-running discontent with monetary policy in New Zealand, especially (but not exclusively) on the left.  In the 28 years since the Act was passed there has not yet been an election in which some reasonably significant party was not campaigning to change either the Act or the PTA.  We haven’t seen anything like it in other advanced countries.   Personally, I think much of the discontent has been wrongheaded or misplaced –  the real medium-term economic performance problems of New Zealand have little or nothing to do with the Reserve Bank –  and many of the solutions haven’t been much better (in the 1990s, eg, Labour was campaigning to change the target to a range of -1 to 3 per cent and NZ First wanted to target the inflation rates of our trading partners, whatever they were).     But that doesn’t change the fact that there has been discontent –  and more than is really desirable.

But what about the trade-off?

I’m quite clear that there is no long-run trade-off adverse trade-off between achieving and maintaining a moderate inflation rate (the sorts of inflation rates we’ve targeted since 1990) and unemployment.  And since something akin to general price stability generally helps the economy function better (clearer signals, fewer tax distortions etc) there is at least the possibility that maintaining stable price might help keep unemployment a little lower than otherwise.  Milton Friedman argued for that possibility.

But I don’t think that is really the issue here.

Because it is not as if there are no other possible connections between monetary policy and unemployment.   Pretty much every analyst and policymaker recognises that there can be short-term trade-offs between inflation and unemployment (or excesss capacity more generally –  but here I’m focusing on unemployment).   Those trade-offs aren’t always stable, even in the short-term, or predictable, but they are there.    Thus, getting inflation down in the 1980s and early 1990s involved a sharp, but temporary, increase in the unemployment rate.  That was all but inescapable.  And when the unemployment rate was extremely low in the years just prior to 2008, that went hand in hand with core inflation rising quite a bit.  Monetary policy decisions will typically have unemployment consequences.    Unelected technocrats are messing, pretty seriously, with the lives of ordinary people.   It is all in a good cause (and I mean that totally seriously with not a hint of irony intended) but the costs, and disruptions, are real –  and typically don’t fall on the policymaker (or his/her advisers).

And it isn’t as if monetary policymakers are typically oblivious to the pain.   There was plenty of gallows humour around the Reserve Bank in the disinflation years, a reflection of that unease.  And yet often the official rhetoric is all about inflation –  as if, in some sense, what look like relatively small fluctuations around a relatively low rate of inflation, matter more than lives disrupted by the scourge of unemployment.

So perhaps that is why cosmetics can matter, and serve useful ends even in areas like monetary policy.

Hmm..age old debates once again come to the surface when we were told they have been addressed. Inflation targeting was seen as the only thing that worked given NZ’s experiences. Now with pioneer considering changes, will it lead to change in thinking in other countries too?

There is little doubt that central banks though may just be targeting inflation but their actions have wide ramifications on the entire economy. This is particularly tricky in case of growth/employment issues which have to be answered by politicians. Thus, central banking is far more politicised than we imagine.

Interesting times. Who knows we could be going back to old central bank debates if we see so called cosmetic changes in RBNZ…

Trading ideas between countries…

April 18, 2017

Ana Maria Santacreu of St Louis Fed posts on the topic. She shows how trading ideas between countries helps in innovation across borders:

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Lessons from 2017 Clark economics prize: Encourage more studies on Indian railways and economic history..

April 17, 2017

Niranjan Rajadhyaksha of Mint has this piece on the 2017 Clark prize given to Donald Daveson of Stanford.

One of Daveson papers is othe controversial topic: Development history of Indian railways. Those for railways say it connected India mainlands to hinterlands enabling development. Those against say railways was another source of colonial exploitation (perhaps the most successful one) where rich resources from hinterlands were brought first to ports and then shipped to London.

Daveson looks at historical data and falls in the first camp:

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India’s Financial Literacy Week: June 5-9, 2017

April 14, 2017

Indian central bank announced organising a financial literacy week  in June 2017:

To emphasize the importance of financial literacy, it has been decided to observe the week June 5-9, 2017 as Financial Literacy Week across the country.

The literacy week will focus on four broad themes, viz. KYC, Exercising Credit Discipline, Grievance Redressal and Going Digital (UPI and *99#). The five messages that will be communicated to the common man based on the above broad themes are available under “Financial Literacy Week” in the downloads section of the financial education webpage of RBI. in the country may display A3 size posters on the five messages in the local language in a prominent place inside the branch premises. These posters will continue to be displayed for at least six months in the branch premises even after the Financial Literacy week is over.