What led colonial states to invest much more in some districts than others?

Prof Joan Ricart-Huguet of Loyola University Maryland in this article tries to answer the colonial question:

What led colonial states to invest much more in some districts than others? This study shows that natural harbors and capes led some places to become centers of pre-colonial trade. These areas, in turn, attracted the lion’s share of colonial public investments not only in infrastructure but also in health and education. Public investments were considerably lower in places further away from the centers of pre-colonial trade.

 

Reducing reserves and central bank balance sheets

Chris Papadopoullos in this OMFIF post discuss ways for central banks to reduce balance sheets if at all:

More than a decade of government bond purchases has put central banks firmly in the fiscal equation. Central banks have always had some impact on fiscal policy, but now it is more direct. To raise interest rates, they must pay interest on reserves. Selling the bonds they have bought may be difficult while government debts are high.

This threatens their independence, but there is a way out. Central banks could swap their bonds for shorter maturing debt and then sell that back to the market. As central bank reserves are like short term government debt securities, it should not have a noticeable economic impact. Easy in theory, tricky in practice.

A fall in demand for reserves by banks is needed though. Under Basel III banking rules, banks are required to hold a certain level of ‘high quality liquid assets’, which include reserves and short-term government bonds. The key to significantly reducing reserve levels is to create a system that allows banks to hold mostly Treasuries for their HQLA requirements in normal times and quickly convert these to bank reserves in a crisis.

To achieve this, two senior Federal Reserve economists, Jane Ihrig and David Andolfatto, have proposed a standing repurchase agreement facility that would allow banks to convert US Treasuries to central bank reserves. This would make it easier for central banks to reduce reserve levels in calm periods without generating upsets.

Labor Migration in Asia: Impacts of the COVID-19 Crisis and the Post-Pandemic Future

New ADB report:

This report by the Asian Development Bank Institute (ADBI), the Organisation for Economic Co-operation and Development (OECD), and the International Labour Organization (ILO) analyzes labor migration trends in Asia and puts them in the context of economic and policy developments and the changes wrought by the coronavirus disease (COVID-19) pandemic. It examines the policy settings in the major origin and destination countries of labor migrants and the medium- and long-term factors that will shape the future of labor migration in Asia. It further provides recommendations for building back better in a post-pandemic world.

The report offers up-to-date comparative statistics on labor migration, including evidence of the impacts of COVID-19 on labor migration flows and remittances. Two statistical annexes offer detailed country fact sheets and coverage of intra-Asia and cross-regional migration flows. The report also includes discussions on the future of labor migration in the aftermath of the pandemic and the role of technology and digitalization on labor mobility and its management.

This analysis partly draws on discussions that took place at the 10th ADBI-OECD-ILO Roundtable on Labor Migration: Future of Labor Migration in Asia: Challenges and Opportunities in the Next Decade, held in Bangkok, Thailand in February 2020, an annual event co-organized by ADBI, the OECD, and the ILO that brings together regional experts and policy makers. In response to the COVID-19 pandemic, the publication focuses on the pandemic’s impacts on labor mobility.

 

Inflation in the aftermath of wars and pandemics: Evidence since 1300s

Kevin Daly and Rositsa D. Chankova in this voxeu article:

The economic consequences of Covid-19 are often compared to a war, prompting fears of rising inflation and high bond yields. However, historically, pandemics and wars have had diverging effects. This column uses data extending to the 1300s to compare inflation and government bond yield behaviour in the aftermath of the world’s 12 largest wars and pandemics. It shows that both inflation and bond yields typically rise in wartime but remain relatively stable during pandemics. Although every such event is unique, history suggests high inflation and bond yields are not a natural consequence of pandemics. 

How well does New Zealand’s financial system serve the Maori community?

Roanna McLeod and Victor Lam in this RBNZ research analyse how well the local community of Maoris is served by financial system. The paper evaluates the role of iwis, largest group amidst Maori society play in providing financial services:

Report on the public consultation on a digital euro

ECB has published the public consultation of Digital Euro:

Although not representative of the European population as a whole, the input received from citizens and professionals signals that privacy, security, usability, low cost and accessibility are among the most popular features that respondents expect from a possible digital euro. Most respondents stress the value of privacy, often acknowledging requirements to avoid illicit activities while protecting the confidentiality
of payments data.

The vast majority of respondents see intermediaries playing a role in the digital euro ecosystem, mainly as a way of enabling the introduction of innovative and efficient services and facilitating integration with existing offerings. Mixed views are expressed on the use of tools to avoid unwanted macroeconomic consequences, which is a technical topic but with a substantial amount of public interest. Generally, respondents expect cross-border and cross-currency payments to be supported in a fast, interoperable and low-cost manner.

Overall, most of the respondents are willing to support a digital euro, especially given the Eurosystem’s commitment ever since its public engagement on the topic began that it would not use a digital euro to either discontinue cash or lower interest rates in the economy.

The responses from the public consultation provide valuable input to the Eurosystem’s ongoing assessments and upcoming decisions on a possible digital euro, even though it is accepted that the sample of respondents is not representative of the European population. At the same time, experiments to assess the strengths and weaknesses of different design options and further analysis of the policy implications of a digital euro are necessary to obtain a comprehensive assessment of the technical input received.

This analysis does not pre-empt decisions, reach conclusions or commit the Eurosystem to provide a digital euro of any kind. Nor does it prevent the Eurosystem  from further investigating and engaging with the general public and relevant stakeholders on the topic of a digital euro.

 

Real interest rates and demographic developments across generations: A panel-data analysis over two centuries

Lucas Fuhrer and Nils Herger in this Swiss National Bank paper:

This paper empirically examines the effect of population growth on long-term real interest rates. Although this effect is well founded in macroeconomic theory, the corresponding empirical results have been rather tenuous and surprisingly unstable. As the demographic interest rate impact is theoretically based on intergenerational relationships, we not only contemplate gross population growth rates but also distinguish between demographic growth resulting from a birth surplus and net migration.

Within a panel covering 12 countries and the years since 1820, our results suggest that there is a positive, statistically significant, and stable effect from the birth surplus on real interest rates. Conversely, the corresponding effect of net migration seems to be much more volatile. Hence, our results suggest that it is mainly population growth occurring through a birth surplus that affects the equilibrium real interest rate.

 

Arbitrage Capital of Global Banks

Alyssa G. Anderson, Wenxin Du & Bernd Schlusche in this NBER paper:

We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment.

Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions—in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage.

In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.

 

Paul Krugman pays tribute to Prof Robert Mundell

Paul Krugman pays tribute to Prof Robert Mundell who passed away recently:

Nobel Laureate Robert Mundell passed away on 4 April 2021. In this column, Paul Krugman describes the evolution of Mundell’s contribution to economic thought and policy, from his early pathbreaking models that remain the foundation of modern international macroeconomics to his later views that were more controversial and less influential in the profession. He also offers an explanation of how the man who brought Keynesian analysis to the open economy and highlighted the difficult tradeoffs in creating a currency area could come to be seen as the father of both supply-side economics and the euro.

Is China setting the future agenda for central bank digital currencies?

My new piece in Moneycontrol:

The Chinese policymakers realise that even if China is on top of the world economic order, it is highly likely that the USD will maintain its dominance. They see a hope in CBDC and thus are trying their bit to set the agenda for CBDC driven International Monetary System.  

Will RBI’s new inflation forecasting model help?

New piece in Moneycontrol (Behind the paywall):

The tighter-than-required monetary policy during 2016-18 is often criticized for derailing Indian growth story; that’s why the new forecasting model assumes importance..

The Man Who Discovered Capitalism: A Documentary on Schumpeter for Use in the Classroom

John T. Dalton and Andrew Logan of Wake Forest University in this paper review the documentary on Schumpeter:

We describe how the 2016 documentary The Man Who Discovered Capitalism can be used in the classroom to provide an entry point to the life and economics of Joseph A. Schumpeter, whose work on innovation, entrepreneurship, and creative destruction remains relevant for students today.

We summarize the key ideas conveyed in the documentary and offer four criticisms: its failure to capture the role of fin-de-siecle Vienna on Schumpeter’s intellectual development, its incomplete understanding of Schumpeter’s theory of innovation, its overstatement of Keynes’s influence relative to Schumpeter, and the overly generous credit it gives to government for spurring innovation.

We show how the documentary can be used in the classroom, complete with sample discussion questions grounded in the criticisms we identify. We argue The Man Who Discovered Capitalism is an effective teaching tool suitable for a variety of courses, including those on economic growth, intermediate macroeconomics, and the history of economic thought, among others.

Superb. We need more such efforts of making documentaries on key economists and then build material to discuss the ideas. One good way to promote and make history of economic thought exciting!!

Measuring human capital: Learning matters more than schooling

Noam Angrist, Simeon Djankov, Pinelopi Goldberg and Harry Patrinos in this voxeu research:

Human capital is a critical component of economic development. But the links between growth and human capital – when measured by years of schooling – are weak. This column introduces a better measurement, using a database that directly measures learning and represents 98% of the global population. The authors find that the link between economic development and human capital is strong when measured in this way. They also show that global progress in learning has been limited over the past two decades, even as enrolment in primary and secondary education has increased.

This should be obvious to humanity. But isn’t perhaps and needs research to show the obvious…

How high-speed rail changes the spatial distribution of economic activity: Evidence from Japan’s Shinkansen

Kazunobu Hayakawa, Hans Koster, Takatoshi Tabuchi and Jacques-François Thisse in this voxeu research:

The economic and social consequences of investments in transport infrastructure generate heated academic and policy debates because they typically involve costly investments that are supposed to yield high payoffs. Particularly telling examples of large transport infrastructure investments are investments in high-speed rail.

This column shows that the Shinkansen has had a substantial effect on Japan’s spatial distribution of employment. The relative position of municipalities within the network and their underlying location fundamentals are essential in understanding why the effects of an extensive infrastructure are positive or negative at the local level.  

Supervising cryptoassets for anti-money laundering

Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo in this BIS article:

Although certain cryptoassets have the potential to make payments and transfers more efficient, some of their features may heighten money laundering/terrorist financing (ML/TF) risks. In particular, the speed of transactions, global reach, potential for anonymous activity and the potential for transactions to take place without financial intermediaries make cryptoassets vulnerable to misuse. In fact, the scale of illicit use of cryptoassets is already significant, highlighting the importance of AML/CFT regulation and supervision, as well as law enforcement, in this area.

The Financial Action Task Force has acted swiftly with a view to preventing the misuse of cryptoassets for ML/TF. However, the effectiveness of international standards depends on effective implementation by national authorities, and the supervision of cryptoasset service providers remains nascent globally. This paper aims to contribute to the international debate by assessing emerging regulatory approaches and supervisory practices and identifying policy priorities to address common challenges faced by financial authorities.

Cryptocurrencies have become cryptoassets and the technology is increasingly being seen for transferring and remitting funds.

Europe’s growth gap: reconciling Keynes and Schumpeter

Governor François Villeroy de Galhau of Banque De France in this speech points to growing growth gaps between Europe and US.

How to bridge the gap? Take advice of Keynes or Schumpeter?

How effective is e-NAM in integrating food commodity prices in India? Evidence from Onion Market

Rudrani Bhattacharya and Sabarni Chowdhury in this NIPFP paper:

RBI’s Financial Inclusion Index

RBI in Apr-21 policy:

Financial Inclusion has been viewed as a key enabler for achieving inclusive and sustainable development worldwide. This has been a thrust area for Government, Reserve Bank and other regulators, with a number of steps having been taken and significant progress made over the years. To measure the extent of financial inclusion in the country, the Reserve Bank will construct and periodically publish a “Financial Inclusion Index” (FI Index). The FI Index would be based on multiple parameters and shall reflect the broadening and deepening of financial inclusion in the country. To begin with, the FI Index will be published annually in July for the financial year ending previous March.

This follows RBI’s announcement of digital payments index in Feb-20 policy which started publishing in Jan-21.

 

RBI rejigs Deputy Governors’ portfolio yet again..

RBI rejigs the Deputy Governors’ (DG) Portfolio yet again. Shri BP Kanungo retired and his portfolio was allocated to the three DGs.

Since July 23, 2019, when Viral Acharya left the RBI, the central bank has reshuffled the DG portfolio four times with three of these reshuffles in 2020 alone.  The reshuffling happens as Government is unable to appoint a replacement for a retiring/resigning DG.

In an earlier piece, I had written about this constant rejigging and even suggested ways to avoid this…

Will bitcoin follow the mania, panic and crash trajectory?

My new piece in Hindustan Times.

Bitcoin’s current surge is difficult to decipher. If the world was preferring bitcoin as a currency, one could still understand this frenzy. But bitcoin’s user base is still insignificant