Prof. Guido Alfani of Bocconi university says:
Archive for the ‘Academic research & research papers’ Category
Came across this really interesting speech by Cecilia Skingsley of Riksbank. It is a pity that the media and experts discuss every word of speeches made by Fed and ECB chiefs much of which is repetitive. In the process, we miss such speeches which give you a panoramic view of the burning issues by smaller central banks. And this is from the oldest central bank in the world.
Anyways Ms. Skingsley gives you a very nice historic and institutional account of central banks and their currency function. As cash usage in Sweden is one of the lowest in the world, they are talking much more about digital payments and digital currencies.
Given all this, the big question is should the central bank issue its own currency? If yes, how do we think through the changes? She says we need to think about e-krona as a complement to krona.
Donato Masciandaro of Bocconi University has a piece showing how behavioral biases impacts decision of central bank officials:
…what happens if we assume that psychological drivers can influence the decisions of the central bankers? In a recent paper, my co-author Carlo Favaretto and I simulated a monetary policy setting with three different kinds of central bankers (Favaretto and Masciandaro 2016).
The members of an MPC (i.e. central bankers) can be split into three groups – doves, pigeons, and hawks – depending on their monetary conservativeness. In the monetary policy literature, a specific jargon has been coined: a “dove” is a policymaker who likes to implement active monetary policies, including inflationary ones, while a “hawk” is a policymaker who dislikes them (Chappell et al. 1993, Jung 2013, Jung and Kiss 2012, Jung and Latsos 2014, Eijjfinger et al. 2013a, 2013b, Neuenkirch and Neumeier 2013, Wilson 2014, Eijffinger et al. 2015); “pigeons” fall in the middle. Throughout time, the dovish/hawkish attitude has become one of the main focuses of the analysis of monetary policy board decisions.
The model introduces sequentially the assumptions that each central banker is a high-ranking bureaucrat – i.e. a career-concerned agent – with his/her conservativeness, that a monetary policy committee formulates monetary policy decisions by voting with a simple majority rule, and finally that loss aversion characterises the behaviour of the central bankers – i.e. for every monetary policy choice, losses loom larger than gains, and both are evaluated with respect to the status quo.
The framework shows that, given the three types of central bankers, the introduction of loss aversion in individual behaviour influences the monetary policy stance under three different, but convergent, points of view. First of all, a moderation effect can emerge, i.e. the number of pigeons increases. At the same time, a hysteresis effect can also become relevant: both doves and hawks soften their stances. Finally, a smoothing effect tends to stabilise the number of pigeons. The three effects consistently trigger greater interest rate inertia, which is independent of both the existence of frictions and the absence or presence of certain features of central bank governance.
Loss aversion can explain delays and lags in changing the monetary policy stance, including the fear of lift-off after a recession. Needless to say, the behavioural motivation doesn’t rule out the other motivations already stressed in the literature.
It is surprising to see it take so long for such literature to emerge…
A big hi to all the visitors. Blog is on a break for a few days. Happy holidays to all.
An interesting piece by Richard Barwell who is a Senior Economist at BNP Paribas
He says though there is a lot of discussion on dissent in central bank monetary policy meetings, it does not mean much. It is just talk with very little action:
If the acid test of dissent within a policy committee is how people vote – rather than how they talk – then to paraphrase Lord King, all the MPC ever does is consensus. The hawks and doves are birds of a feather: they agree, all the time. In this column, we have focused on the MPC during the Great Moderation, but the point applies more broadly. For example, it is interesting that there is far more dissent within the FOMC over the near-term path of interest rates (e.g. ‘the 2017 dot’) than over the current level of interest rates.
Likewise, if one looks at the pattern of votes during some of the most high profile episodes of dissent within central banks that have fascinated the media and markets alike – such as ‘Svensson versus the Riksbank’ in 2010/11 or ‘Blanchflower versus the Bank of England’ in 2008 – we see the same mismatch: material differences in views but marginal differences in votes. Whether this state of affairs is optimal is debatable. A case can be made that the quality of the internal policy debate and the external communication strategy would benefit from policymakers providing a frank assessment of the appropriate monetary stance alongside their assessment of the economy. What cannot be disputed is that either policymakers essentially agree all the time or they do not vote their view.
One has always believed much of this MPC design, communications etc is a bell and whistle thing which is mostly noise..
Demonetisation in US on 14 July 1969: How relevant is it for comparing with India’s demonetisation in 2016?December 16, 2016
Anil Bokil, member of the Pune-based ArthaKranti Pratishthan is seen as the person behind India’s demonetisation drive in 2016. Despite the fact that this exercise is hardly anything new and has been done twice in the past (with little success), we take it to be some new thing designed by someone else.
Mr Bokil in this latest interview in ToI points to demonetisation in US on 14 July 1969:
The authors say cash usage has declined in Aus but still remains important:
Australian consumers have increasingly been using electronic payment methods in preference to cash for their transactions. The overall demand for cash in Australia, however, remains strong. There is ongoing demand for cash for non-transaction purposes, particularly as a store of wealth. While the role of cash in society is evolving, it is likely to remain an important feature of the payments system and economy for the foreseeable future. Moreover, the current mix of banknote denominations continues to meet community demand for a secure means of payment and store of wealth. Given the ongoing importance of cash, the Reserve Bank will maintain the public’s confidence in Australia’s banknotes by continuing to ensure that banknotes are of high quality and secure from counterfeiting.
Is it a reminder to the Government as well?
They also shows how cash usage is the highest amidst old age compared to younger lot which is on expected lines.
The authors look at cash usage trends in other countries and sees there is a gradual decline towards less cash economy. Germany and Austria continue to transact nearly 80% of transactions in cash. Sweden is the lowest at 15%!
Nice realistic assessment on cash usage in Australia.
As demonetisation fever rises across the world, a look at respective Central Banks’ laws on demonetisation…December 14, 2016
After inspiring Venezuela, Indian could inspire Australia too. Though, Australian one already under the pipeline, it is unlikely to shock as it did in India. Whatever anyone chooses to do now, the shock and awe title clearly belongs to India as of now.
As the recent demonetisation in India was driven using the Indian Central Bank Act, it is interesting to what other central bank acts have to say on demonetisation/withdrawal.
So this blog tried to read through several central bank acts. Some initial findings:
- Only Mauritius and Philipines mention the word demonetise/demonetisation in their acts. Within these two, only Mauritius clearly has a section named as Demonetisation of currency notes and coins
- Most countries call this withdrawal, if at all.
- The powers to withdraw or demonetise are murky to say the least just like they were in India. The withdrawal or exchange is mainly provided in case of damaged notes.
- Most say withdrawal to be done by Board or Ministry, in Poland the President of the Bank can do it.
- The information is to be published in Gazette of following countries : Pakistan, South Africa, New Zealand, Mauritius and Oman. This is due to the British colonial legal system which continues to be followed.
- Some countries like New Zealand have clear punishment laws for anyone doing currency production other than their central bank.
- Some countries also have clear laws on period under which ceased notes shall be accepted like Oman, Denmark, Norway etc. Most of the time this period is one year.
These are just some initial bits of information. Much more needs to be expanded and learnt.
Here is a list of central banks and the specific sections picked from their acts which deals with the subject. It is randomly done and not in any order. I will try and expand on this as and when. Request the readers to add as well..
Nice paper by Philip Cross of CD Howe Institute.
GDP is key to macroeconomics, yet different ways of defining and measuring GDP have particular purposes. This paper examines how total GDP can be conceptualized, dissected and studied and how these improve our analysis and understanding of the sources of economic growth. While each approach is useful, macroeconomic analysis is shifting from a short-term, recession-driven focus on managing aggregate demand to a long-term, supply-side perspective on the determinants of economic growth. This shift is likely to accelerate in the current environment of concerns about a “new normal” of slow growth, with the debate framed by supply determinants such as an aging labour force and whether technological innovations have been mostly exhausted. How one views GDP has important implications for policymaking.
If today’s chronic slow growth is due to deficiency of demand, stimulative fiscal policies might be the proper response, depending on a country’s fiscal capacity to take on more debt. However, if the shortfall in growth is due to a lack of productivity growth, different policies might be appropriate that increase the efficiency of resource use or the rate of innovation. The point is that a more detailed understanding of each measure of GDP leads to better comprehension of why it behaves in a particular way in response to different economic circumstances. This knowledge will allow policymakers to make more informed decisions.
The author reviews each of the different ways of looking at GDP and how they evolved in response to the needs of analysts. He summarizes the strengths and weaknesses of each and what can be learned by contrasting and combining them in analysis. In order the six are:
• GDP by industry;
• GDP by expenditure;
• GDP by income;
• The quantity equation;
• GDP by input/output; and
• GDP by factor input.
For economists, the different optics for viewing economic activity lead to a more profound understanding of the process of economic growth. Good analysis and policy prescription often depend on finding the right optic to understand a particular problem.
It is always good to get back to basics:
As we confuse terms like Black money,Black income, Black wealth and so on, time to read some experts.
Prof Arun Kumar of JNU has a paper looking at size of black economy in 1996-2012:
This article attempts to make an advance in the estimation of the size of the black economy in India by bringing in the institutional aspects of black income generation and taking the macroeconomic variables they affect into consideration. It is not a one-point study, as earlier studies based on the fiscal approach have been. Unlike studies based on the monetarist approach, the fiscal approach recognises that black incomes are generated through many different ways in different sectors of the economy. Hence, the size of the black economy in India is projected on the basis of data on the share of the services sector and trade in GDP and the crime rate representing the extent of illegality.
Finally, after 1995–96, estimates based on the fi scal approach are not available, and this article therefore estimates the size beyond that year. The analysis points to two major difficulties in estimating the size of the black economy. First, the lack of official studies that can provide additional data points. Second, the lack of proper econometric techniques to incorporate the missing or mis-specified variables required to carry out the estimation. All the offi cial data series are in error due to the existence of the black economy, and all the studies using such official data suffer from this.
Given the many limitations concerning data mentioned, the relative size of the black economy in 2012 turns out to be 62.02% of the GDP. The average rate of growth of the black economy in the five-year period up to 2012 was about 20%. Clearly, since projections have been made from 1996 onwards, the further out in time one goes, the larger is the likely error in the estimate. New methods of estimation of the size of the black economy are needed, and this article has made one such attempt.
The paper is an extension of earlier interviews of Prof Arun Kumar (one and two) who pointed who this demonetisation exercise will hardly achieve much. It will just be increased trouble for the poor and marginal..
This is the title of a new EPW paper by J Dennis Rajakumar S L Shetty of EPW Research Foundation, Mumbai.
Sudden demonetisation of ₹500 and ₹1,0000 notes, an elimination of existing money stock that enables economic transactions, is bound to have an economic impact, apart from penalising those who hold this money as store of their tax-evaded illegal wealth. Considering various possible scenarios, a loss of gross domestic product will be inevitable.
Whether demonetisation this time will achieve its stated purpose can be understood only when more statistics become available. The extent of demonetised high denomination currency that finally fails to be exchanged for new notes or be deposited in banks will be an important indicator.
There are some interesting trends and analysis here.
Digging India’s Demonetisation History Part -2: Case of Pakistan demonetising Indian Rupee notes post Partition….November 24, 2016
The history of demonetisation continues to be fascinating. After posting about two episodes of Demonetisation in India in 1946 and 1978, one came across another one reading RBI history during Partition.
There are various economic history issues in Indo-Pak partition. The currency usage was one such issue. Before Partition, the Indian Rupee was used across the sub-continent. Post-partition, how did Pakistan move onto a new currency? How was Indian currency removed or in other words demonetised from Pakistan monetary system?What was the process?
In RBI’s first history volume (1935-51), there is some interesting discussion on these issues. (Let me warn upfront. This one is both a long and confusing post):
Brandon Dupont and Thomas Weiss have an interesting paper telling you about history of many things:
We have therefore also made use of advertisements in a number of newspapers and magazines to construct a consistent long-term series on first cabin passenger fares from 1826 to 1914. This has proved to be an efficient method of collecting enough evidence on fares to be representative of the industry as a whole. The newspapers – a number of which are readily available online – reported ship movements, departure schedules, and contained shipping line advertisements of fares, often on a daily or nearly daily basis across the period. Compiling fares from standardised newspaper advertisements is more feasible than excavating heterogeneous data from the archives of multiple firms, and it also represents the price signals which passengers were likely to have considered when deciding to travel, even though it does not always measure how much was actually paid.
One limitation to the advertised fares is that they stopped appearing after 1896 for reasons that seem to be associated with the contemporaneous advancement of market-sharing and rate-setting by North Atlantic passenger shipping cartels or conferences. We were, however, able to extend the series up to 1914 using minimum fares established by the cartels. Although these cartel fares were not advertised in newspapers, they were public information, and were reported in news stories and in some shipping line brochures. These fares are those that would have been advertised, if the shipping lines had continued to include fare information in the ads they did run.
The evidence shows that fares declined over a period and then rose:
Since passenger volumes varied across shipping companies, we also constructed a weighted fares series using estimates of passenger volumes from a variety of sources including the New York Commissioner of Emigration, the New York Times and other newspapers, and, in later years, records of the Transatlantic Passenger Conferences. Both the weighted and unweighted fares are illustrated in Figure 1.
By 1870, the major UK lines were all providing at least weekly departures from New York, and the quality of travel was improving as well, with electric lighting and the first forms of refrigeration soon becoming standard. But as illustrated in Figure 1, first class travellers paid fares that were about 40% lower in 1890 than in 1870 even while there were considerable improvements in frequency of service, safety, and on-board amenities. The declining fares before 1890 contrasts noticeably with what took place in first class travel on the New York–UK corridor for the two and half decades after1890, during which first cabin fares increased while first cabin passenger traffic stagnated. This might reflect increased efforts to substantially improve travel amenities as suggested by Johnson and Huebner (1920), and made evident with Cunard’s launching of the Lusitania and Mauritania in 1907. Or it might have been more a matter of passenger lines using stronger cartel price support to collect some offsetting revenue – through fare increases – for the mild cost inflation incurred since the 1890s and for enhancements provided to passengers. What is consistent for both the decades before and the decades after the 1890s is the negative correlation of first cabin fares and passenger volumes, which was stronger than might be expected given that most pre-WWI first class transatlantic passengers were wealthy tourists not especially sensitive to the prices of tickets for the oceanic transit.
Many things are here. How people traveled, time taken, various passenger classes in ships and so on..
One major objective of Demonetisation 2016 is stopping counterfeiting notes. The question is do we have data etc which shows rising counterfeits? That too in high denom notes?
I dug up the data since 2001-02. The table shows the % ages of counterfeit notes across denoms:
|%age distribution counterfeit notes|
|Rs 2 and 5||Rs.10||Rs.20||Rs.50||Rs.100||Rs.500||Rs.1000||Total|
We see differences across denominations:
- In Rs 1000, we see rise in number of counterfeit notes every year. Its share in total number of counterfeit notes rises from 0.1% in 2002-03 to 22.6% in 2015-16
- In Rs 500 it was at 43% in 2001-02 which declined to 7.9% in 2004-05 on account of some security measures (will try cover these measures in later post). And since then it rose to 58% in 2011-12 and has declined to 41% in 2015-16.
- Interestingly, in early oughties share of Rs 100 in counterfeit number was the highest. It went up till almost 90% in 2004-05 and then declined to 22% in 2012-13. It has risen in last few years to touch 35%. This is high number and govt could have demonetised it as well based on numbers and not values.
Let us look at values table now:
|%age distribution counterfeit notes in value|
|Rs 2 and 5||Rs.10||Rs.20||Rs.50||Rs.100||Rs.500||Rs.1000||Total|
As expected, both Rs 500 and RS 1000 capture much of the counterfeit value.
A more interesting table is to see the share of these counterfeit notes in total currency:
|Rs 2 and 5||Rs.10||Rs.20||Rs.50||Rs.100||Rs.500||Rs.1000||Total|
The numbers show that share of total counterfeit notes as total currency in just about 0.02%. Within this, share of Rs 1000 notes is at 0.0022%.
These are really tiny tiny percentages and one wonders whether such a large scale demon exercise needed to be taken to remove these counterfeit notes. Even if the number of notes would have surged in last 6-8 months since the data, still it shall be highly insignificant.
One could have followed the simpler strategy used earlier. Earlier, the govt, stopped printing old notes and got the newer ones aggressively in the system. It asked the banks to keep bringing the older notes to RBI to cancel them. Or, it could have been a strategy as done two years ago where one gave a longer time for note exchange. Under this, the older notes would only work till this date which was a long period. Not like today, where notes were demonetised overnight and older notes could be used only in some select places which also stopped accepting them.
Thus, based purely on past trends and even current numbers, the case of counterfeit notes does not really explain the need for such a large-scale demon exercise.
Warning upfront: This is a long long post..
One is trying to break his head over both ongoing effects of demonetization (demon) and the historic bit as well. There are so many articles on the history bit that one is just confused. So here is more to the confusion.
Let me start with some trivia. It is interesting to see the similarities in the dates of previous two demons. Both were in Jan with just four days away from each other – 12 Jan 1946 and 16 Jan 1978. One could call it the Jan demon! Even the days are just seperated by the Sunday. In the third one, the date is 8 Nov 2016 which was a Tuesday. So you have 8, 12, 16 series. Next one whenever could be on 4th or 20th of perhaps December!
First Denom — 12 Jan 1946 (Source: RBI History 1935-51, pg 706)
As most economics and finance professors are at sea with financial history and institutions, scholars from other disciplines are helping us learn.
Sarah Quinn who is a Prof of Sociology at University of Washington has an interesting piece on evolution of American farm credit system. Not surprisingly, much was borrowed from Europe where these developments had started much earlier:
Hoping to learn from other countries’ experiences in organizing finance for agriculture, more than 150 Americans were sent abroad in the summer of 1913 to investigate the minutiae of farm-credit systems in and around Europe.
They were sent as far north as Norway and as far south as Egypt, with Ireland and Russia marking the western and eastern boundaries of the study. They learned of microcredit-like experiments to support small-plot tenant farming in Italy. In France they were told how farm credit embodied democratic ideals. In the Netherlands and Spain, commission members found counterparts who, like the Americans were doing, had looked to other European nations for ways to improve the management of farm credit. Perhaps the most anticipated stop of this trip would be in Germany, whose system of long-term farm credit distribution had achieved world renown.
The key ideas brought home from Europe by commission members more than a century ago still shape today’s U.S. credit policy. The organizing principle of these ideas was the proposition that providing farm credit could be a low-cost and politically palatable form of economic policy through which government could help people help themselves. This paved the way for the Federal Farm Loan Act of 1916, which redesigned the U.S. system from the ground up by creating a new network of government-supported farm credit cooperatives.
This idea of federal credit for agriculture was used for other purposes as well:
The Act was arguably a watershed in the use of credit as a federal policy tool whose impact was felt far beyond the agricultural sector. Before 1916, the national government used credit allocation more sparingly, as a temporary means to support expensive internal developments such as railways. After the Act, there was a continual expansion of programs that bought, sold, issued, guaranteed, or otherwise promoted the flow of credit to specific sectors or groups. In the United States today, one third of privately issued debt is backed by the government, not only through the Fed but also through the $3.4 trillion in loans guaranteed or held through a vast network of federal credit programs (if you include implicit guarantees of financial debt, the amounts are much, much higher). As Marianna Mazzucato and L. Randall Wray have noted, these forms of credit support are a central part of how the federal government participates in the U.S. economy. This proliferation of government credit allocation seems remarkable in light of longstanding political attitudes on government involvement in the economy.
The German system trusted its bureaucrats to deliver. But there was no such system in US. Moreover, it was felt that any such fedeal program if not carefully worded would be met with deep suspicion. This led to another 12 regional Feds to disburse farm credit.
To overcome these objections, proponents of a European-inspired farm credit policy spun it as government helping people help themselves, providing credit support could through farmers’ cooperatives.
The divisive nineteenth century credit politics gave way to a vision of credit as an inoffensive means of economic development, of low cost to the state. Proponents argued that “wise legislation” to lower credit risk could unlock the value of the nation’s land, then estimated by one commentator at $40 billion. It was a huge potential payoff. Later scholars of credit programs would frequently note the same thing about the federal credit programs: compared to direct forms of welfare or other expenditures, credit support is cheap, since it can be implemented by government guarantees, tax expenditures, risk management techniques, and disbursements paid back over time, sometimes with interest.
This logic was built into the structure of the Federal Farm Loan Act of 1916. The centerpiece of the Act was a proposed local version of the German system. The Treasury was authorized to fund 12 reserve banks in order to funnel credit to a network of new farmers’ lending cooperatives. The Department of Agriculture encouraged the formation of these lending cooperatives through a massive education effort. In a nod to American independence, the German system of risk sharing — in which members of the Landschaften were liable up to the full value of their property — was watered down. If the bank itself ran into trouble, American farmers would be liable for only 10% of their loan amount, rather than for the full value of their property. Since, over time, farmers could pay into the system and repay the state, the long-term costs of the program were expected to be low. Tax-exempt bonds would encourage a flow of funds into the reserve banks at the cost of some state revenue, but this was far less expensive than, say, directly subsidizing farmers.
For all that the 12-bank structure mimicked the Federal Reserve Act, the creation of lending cooperatives meant that the FFLA was a far more complicated, experimental, and entrepreneurial design.
Till date, Americans carefully present or word these programs:
In the “Analytical Perspectives” section of the President’s budget, the chapter detailing the $3.4 trillion in loans held or guaranteed by the federal government reveals the diverse political uses of credit. Federal credit has military functions, including Defense Department loans for the purchase, stockpiling, and manufacturing of military materiel, and the Atomic Energy Commission’s use of guarantees to encourage nuclear science. Credit is also a tool of foreign policy: the United States exports food to other nations through USAID. Loans can serve as disaster relief, as both FEMA and the SBA include credit support to assist with natural disasters, and the federal government also provides loans directly to states for this purpose. Credit is also extensively used as part of energy and environmental policy, with geothermal and renewable energy, biorefineries, and synthetic fuels having all benefited from credit support. Tracing its use in housing, David Freund notes that the appeal of credit programs is that they seem like small market corrections rather than consequential state policies. And they have been used to support every major sector of the American economy.
The Analytical Perspectives of the budget wraps the complexities of these programs in the dry academic language of market corrections. “Credit and insurance markets sometimes fail to function smoothly due to market imperfections … ” The implication is that this massive mobilization of debt and risk absorption by the federal government is best thought of as a technical adjustment to market imperfections, rather than, say, the American version of a developmental state.
That language, I believe, is the moderate way of thinking about credit articulated during the progressive era, and now tailored for the neoliberal age. Like a nervous wizard, it asks us not to pay attention to the man behind the curtain, and for the most part, Americans comply. And why wouldn’t they? After all, the idea that credit support does not ask us to think hard about the social and political conditions of possibility for market success has been part of the appeal of credit support all along.
Most countries have had a government funding program to help agriculture. One can always argue whether it is efficient or inefficient. But when you are told that Indian govt has no business to be in agri credit and should do as they did in west, one should just laugh off the idea. Agriculture has been politicized worldwide and has enjoyed either direct or indirect/hidden support from govt.
It is just that we are not aware of their histories. As Ha Joon Chang says, the developed world is kicking the ladder for the developing world.
Indian central bank warned against fake currencies being circulated by some players:
A notice issued by the Reserve Bank of India on Thursday highlighted the pitfalls of fake currency notes in circulation and warned the public of “unscrupulous elements putting into circulation fake currency notes of higher denominations.”
In recent weeks, there have been a number of instances of fraud in which third party agencies, hired by banks for cash management services were found to have introduced fake notes in ATMs so that they could make off with genuine currency notes picked up at bank branches.
In India, more than Rs 15,000 crore in cash is in circulation every day in the banking ATM network in India; of which Rs 5,000 crore is handled purely by third party agencies.
Multiple cases of fraud have been reported in metros like Hyderabad, Delhi and Chennai with average third party fraud running to Rs 80 lakh to Rs 4 crore per fraudulent incident. The most glaring case was when a cash recycler RCI in Hyderabad stole more than Rs 10 crore in June to pay the salaries of its employees.