Archive for the ‘Academic research & research papers’ Category

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:


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:


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:


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.

Robots and jobs: Evidence from the US

April 14, 2017

Daron Acemoglu and Pascual Restrepo research on emerging hot topic:


Why Germany has rental housing and US own housing? Institutional perspective..

April 12, 2017

A very interesting paper by Sebastian Kohl (HT: Economic Sociology blog).

There is always interest in this question: Why Germany has rental housing and US own housing? Kohl says this is due to differences in evolution of housing finance institutions in the 2 countries in 19th century:


What Explains Call Money Rate Spread in India?

April 11, 2017

RBI researchers – Sunil Kumar, Anand Prakash and Krishna M Kushawaha – look at the factors that explain call spread (spread = call rate – policy rate):

The study focuses on various drivers of overnight inter-bank rate spread under the new liquidity management framework during July 2013 to December 2016. Applying OLS with Newey-West estimator and various GARCH models to daily data, the study finds that liquidity conditions, viz., deficit, distribution and uncertainty impact the call money rate spread adversely. A moderation in the impact of liquidity uncertainty has, however, been noticed after the introduction of fine-tuning liquidity management operations in September 2014. Other factors, viz., the quarter-end phenomenon and structural changes in the liquidity management framework have also been found impacting the call money rate spread

The findings pretty much fit with understanding of call market players as well..

Israel’s immigration story..

April 7, 2017

Assaf Razin says:

What has bank capital ever done for us?

April 7, 2017

Òscar Jordà, Björn Richter, Moritz Schularick and Alan Taylor research the issue:

From being world leader in economic surveys, India is now facing a serious data problem…

April 5, 2017

I was just reading this piece by Abhijit Banerjee on decline of higher quality education in India. Though it is on general education, much of is related to economics education in India.

Whereas in the 1950s and 60s good teaching jobs were scarce, and many talented people had to settle for ill-paying part-time jobs in obscure private colleges, finding competent teachers is a major problem these days, and very few places even aspire to attract world-class talent. Even prestigious institutions like the Delhi School of Economics have many unfilled slots.
It is tempting to blame the explosion of institutions. There are of course many more colleges, universities and institutes, which is why places like Presidency University (the erstwhile Presidency College) are now struggling. In 1959 they used to have the pick of the talent; now they have to compete for them against upstarts that are often able to pay much more (more about that later) and offer better working conditions.
But if you think about it, this cannot explain why the entire system is short of talent. After all, the fact that we have so many more institutions also means that we are producing vastly more graduates and each such person is a potential academic, a possible Nobel Prize winner in the making. The same factors that increased the demand for higher education should, in principle, also increase the supply of outstanding researcher-teachers? Why haven’t they?

In another article (HT: Niranjan), Prof Banerjee along with three more economists deplores the decline in statistics systems in India:


What happened to Pakistan based Banks (West and East) during the Partition in 1947?

April 5, 2017

This question has fascinated me for a while.

During India’s partition, there were mainly two parallel forces at work. One was that of partition of India into two countries. Second was integration of British Indian Union with Princely States. These political fores partition impacted economic and financial developments as well. This blog is more interested in financial history/developments as there is hardly any emphasis on the same.

In terms of integration with princely states, the issue was of State Associate Banks. This blog looked at fascinating history of these State Banks which were 54 in number! How government and RBI integrated these banks which had varied structure is quite something.Out of 54 banks, just five remained. These banks were lately in news for their merger with SBI. With them goes the fascinating history as well. In case of Hyderabad, the integration also involved a monetary union of sorts as the State had its own currency (will blog about the exchange ratio soon).

Let us now look at the partition side of the story. Here, the case was of division of banks’ assets and liabilities.

There were two types of banks here:


Role of immigrants in US innovation history

March 27, 2017

I would be surprised if there was no role. How immigrants are attacked despite they bringing benefits to the local economies.

Profs. Ufuk Akcigit, John Grigsby and Tom Nicholas have a piece:

1965: The Year the Fed and US President Lyndon Johnson clashed..

March 23, 2017

Nice piece by Helen Fessenden of Richmond Fed.

Few challenges to the Federal Reserve’s independence have ever matched the drama of Dec. 5, 1965. Fed Chairman William McChesney Martin Jr. had just convinced the Board of Governors to raise the discount rate amid signs that the economy was starting to overheat. Fiscal stimulus — increased spending on the Vietnam War, expanded domestic programs for President Lyndon Johnson’s “Great Society,” and a tax cut enacted in 1964 — had raised inflationary warning signals for Martin and, increasingly, a majority of the Federal Open Market Committee (FOMC). But Johnson was adamant that higher rates would slow down the economy and compromise his domestic agenda. Enraged, he called Martin and other top economic officials to his Texas ranch, where he was recovering from gallbladder surgery.

“You’ve got me in a position where you can run a rapier into me and you’ve done it,” charged Johnson, as recounted by Robert Bremner in Chairman of the Fed. “You took advantage of me and I just want you to know that’s a despicable thing to do.”

Johnson was accustomed to getting his way — whether through bluntness or sweet-talking, as the occasion might require. But not this time.

“I’ve never implied that I’m right and you’re wrong,” Martin said. “But I do have a very strong conviction that the Federal Reserve Act placed the responsibility for interest rates with the Federal Reserve Board. This is one of those few occasions where the Federal Reserve Board decision has to be final.”

Johnson finally relented, and Martin’s refusal to back down is often considered one his strongest moments as Fed chairman. His relationship with the president was sometimes strained in the following years. But the 1965 showdown was seen as a tough lesson to Johnson that the Fed would flex its muscles when needed to push back against the inflationary pressures caused, in part, by his administration’s own policies.

What is less often remembered in the popular mind is that the rate hike of 1965 did not, in fact, turn a corner on inflation. In the years that followed, fiscal stimulus was ample, war spending kept rising, and the deficit grew. But FOMC members were often divided, and their policy decisions reflected this ambivalence. Furthermore, while Martin saw monetary and fiscal policymakers as obligated to work together to promote price stability and growth, he discovered that dealing with this particular White House and Congress was often a one-way street. And even though the Fed was substantially upgrading its analytic capacity in the 1960s — hiring more Ph.D. economists, building up its research departments, and adopting forecasting — it didn’t always translate into consistent monetary policymaking.

Nice bit of history..

Books on Indian Financial History and World Economic History

March 22, 2017

Prof JR Varma of IIMA lists Indian Financial History books. It has contributions from Prof Chinmay Tumbhe of IIMA and yours truly as well. Those interested can mention other books/papers which should be read.

Niranjan alerts to this interesting list of World economic history books.

So much to read…

An analysis of the branch network of SBI Associate banks: How local are they?

March 22, 2017

SBI has announced it shall close 47% of the branches of associate banks:

State Bank of India (SBI), which will see five associate banks merge into it on April 1, has decided to shut down almost half the offices of these banks, including the head offices of three of them. This process will start from April 24.

“Out of the five head offices of the associate banks, we will retain only two. Three head offices of the associate banks will be unbound along with 27 zonal offices, 81 regional offices and 11 network offices of the associate banks,” SBI Managing Director Dinesh Kumar Khara told IANS in an interview.

“We will keep their structure in place till April 24 and, post that, we will start dismantling the associate banks’ controlling offices, which includes head offices, regional offices, zonal offices and network offices,” Khara said.

The shut-down move is to avoid overlapping offices in the same area and “we intend to remove any kind of duplicacy in the controlling structure”, Khara said.

There are currently 550 SBI offices while its associate banks have 259. The target for the number of controlling offices after the merger is 687 — a reduction of 122 offices.

This blog has been trying to work on the branch network of these SBI Associate Banks just to understand geographical coverage and so on.

First some concepts. There are two things: Offices and Branches. In offices, banks also do admin work. Most offices (barring Head office. reginal office etc) also serve as branches. There is more here.

The article above talks about Offices and not branches. This is how the numbers look.


Five remaining Associate State Banks to merge with SBI: A comparative history (data driven)..

March 21, 2017

The Government of India had earlier announced to merge the remaining 5 State Banks with SBI. There were 7 associate State Banks and two of them State Bank of Indore and State Bank of Saurashtra were merged with SBI in 2008 and 2010 respectively.

After some deliberations, finally the 5 banks shall merge with SBI on 1 April 2017.

This blog had earlier written and lamented about lack of history of these Associate State banks. These were unique banks which were formed with support from Princely State. Some like Hyderabad were full central banks as it issued its own currency. Most others were quasi central banks and acted as banker to the State and even offered commercial banking services to public. It shall be fascinating to compare all these different banks across their functions.

Only State Bank of Travancore has released its history and even developed a museum.

Always curious to figure financial history, this blog dug up some bit of history from several RBI publications.


Did Thatcher reverse UK decline? Questioning the standard narrative…

March 15, 2017

It is quite fashionable to build narratives around economic growth/development of a country with one/two individuals. Nothing sells as much as this narrative. It has an immediate appeal. What starts as a narrative eventually becomes a fairy tale of sorts and that person a very popular character. What better than India to see this where 1991 was the year when Dr Manmohan Singh just changed Indian economy.

The problem with such grand narratives is the story starts much before and is a series of multiple steps and actors which culminates in that big narrative. So in India’s case researchers have often pointed things started with Rajiv Gandhi post 1985 but it does not really capture the mood.

Similarly in this piece, Profs. Nauro Campos and Fabrizio Coricelli question the Thatcher narrative:

 Though, both EEC membership and Thatcher actions are complementary:

These results provide new evidence that the great British reversal was driven by membership of the European Economic Community, not Mrs Thatcher’s structural reforms. These two explanations may, however, be complementary.

These reforms were implemented in the second term of the Thatcher government. Her June 1983 general election victory was the most decisive since Labour’s victory in 1945. The main reforms that defined her second term covered labour, product, financial market liberalisation, privatisation and openness to foreign investment (Card and Freeman 2004, Oulton 2016).

Our main finding was that the 1969 turning point is more powerful than structural breaks at the launch of Mrs Thatcher’s programme of structural reforms in 1983 or 1986. Our earlier Vox column on this topic discusses the determinants of the UK decision to join the EU (Campos and Coricelli 2015), while here we focus on its implications by providing new statistical evidence on the effects of European integration on UK economic performance, compared to Mrs Thatcher’s reforms. Hence our study combines the empirical identification of structural breaks with an analysis of how and why the benefits from EEC – and later, EU – membership changed over time (Campos et al. 2016, Crafts forthcoming). The UK’s per capita GDP relative to the EU founding members declined steadily from 1945 to around 1970, and became relatively stable after that. If the UK joined the EEC to stop its relative economic decline, it worked. It also laid the ground for future improvements in relative economic performance with the introduction of the single market.

The success of Mrs Thatcher’s reforms required EEC membership. These structural reforms were not implemented in a vacuum. They could not have existed without the powerful support of British entrepreneurs (Grossman and Helpman 2001), who benefited from a larger, deeper and more innovative market (contrast the EEC at the time with EFTA and the Commonwealth). These entrepreneurs also realised that to be competitive they would need access to deeper capital and labour markets supported by a set of common standards, rules and regulations (Baldwin 2016, Mulabdic et al. forthcoming). Without support from such powerful constituencies, Mrs Thatcher’s reforms would not have been implemented as they did, and certainly would not have been as successful.

This explanation draws parallels with the French experience in the immediate post-war period (Adams 1989). Between 1945 and 1957, there was a conflict of interest between powerful groups of French entrepreneurs, some of whom were against, and some in favour of, further European economic integration. The interests of those against were associated mostly with the former French colonies, though they lost influence in the run-up to the Treaty of Rome and found themselves locked into the European integration project even after de Gaulle was elected president in 1958 (Moravcsik 2012). At that point, they could redirect but not reverse the process.

Nice bit..

How mother tongue instruction influences education….

March 7, 2017

A very interesting paper by Prof Tarun Jain of ISB.

The summary is given at Ideas4India. The basic idea is students prefer instructions in their mother tongue . If this does not happen due to policy the learning suffers: