Comprehensive monetary policy frameworks classification goes global

Prof David Cobham of Heriot-Watt University has built a database of evolution of monetary olicy frameworks of 179 countries over 1974-2017: https://monetaryframeworks.org/.

Cobham explains the database and methodolgy in theis voxeu post:

Monetary policy frameworks have evolved significantly around the world over the past four decades. This column introduces an updated, freely available, database of monetary policy frameworks, which now covers 179 countries/currency areas over the period 1974-2017. The classification covers both domestic and external monetary policy targets and both de jure and de facto targets. It makes possible for the first time a clear and detailed examination of the worldwide and regional trends in monetary policy frameworks since the Bretton Woods era, and provides a resource that can be used in a wide variety of research settings.

Historical monetary and financial statistics for policymakers: towards a unified framework

Claudio Borio, Øyvind Eitrheim, Marc Flandreau, Clemens Jobst, Jan F Qvigstad and Ryland Thomas in this BIS paper stress on the importance of Historical monetary and financial statistics:

In recent years, many central banks have engaged in data projects aimed at the collection and documentation of historical monetary and financial statistics (HMFS) for their respective countries. Long runs of data for key macroeconomic time series are increasingly being used in policy-oriented research. Information from these historical databases is used to draw parallels between current developments and historical events to shed light on today’s policy issues in the areas of monetary and financial stability.

The aim of the Bank for International Settlements (BIS) HMFS project is to establish a network between interested central banks that have already invested in local national HMFS databases, using the BIS as a hub. This BIS paper is an attempt to take stock of what counts as “good practice” in collating HMFS and how it should be implemented in different contexts.

Commodity Price Shocks and Non-Performing Assets in the Indian Banking Sector

Abhishek Kumar, Rakesh Mohan & Divya Srinivasan of Centre for Social and Economic Progress (CSEP) in this working paper show correlation between bank npas and global commodity prices.

Non-performing assets in the Indian banking sector increased significantly in the 2010s, accompanied by a slowdown in credit and GDP growth rates. In this paper, we show that nonperforming assets in the banking sector and profit ratios in commodity-sensitive non-financial
sectors are highly correlated with global commodity prices.

To estimate the effect of movement in commodity prices on non-performing assets, we create nominal price and inflation exposure indices for banks using novel data on banks’ sectoral exposure and commodity prices. These measures capture banks’ exposure to commodity prices through their borrowers’ profitability and cash flow and act as income shocks for banks. Results from a range of models suggest that a 1% decline in nominal exposure increases non-performing assets by 0.20-1.35% and these models explain ~30% of the increase in non-performing assets.

Since public sector banks in general had higher exposure to commodity-sensitive sectors, they experienced a relatively higher decline in nominal exposure and a more significant rise in non-performing assets after the price crash of the 2010s. The increase in non-performing assets is followed by a decrease in credit growth. These results help us in understanding the origins of India’s twin balance sheet crises of the 2010s.

Should RBI establish a forex swap line with Federal Reserve?

Should RBI establish a forex swap line with Federal Reserve? I explain in this moneycontrol article.

Why Pakistan needs a new charter of economics

muneeb sikandar in this article says before deciding reforming pakistan economy, we need a charter on pakistan’s economics.

Pakistan needs a charter of economics before a charter of the economy. Recently, there has been much debate on the need for all political parties to come together and formulate a charter of the economy for Pakistan. Proponents have argued that such a consensus is pivotal for the country to navigate its current crisis in order to bring forth a period of stability necessary to help Pakistan. But how would one go about formulating a charter of the economy? Perhaps a good first step could be to ensure all political parties have a common definition of economics.

Pakistan ought to follow the Chinese model of economic development. but which model of chinese development? He points to 4 definitions of economics.

Definition 1: Economics enables us to look at the grand political and economic changes in history and explain them using economic factors. In other words, it is a branch of historical materialism. Decisions driven by economic factors shape societies and make them change. In this case, we must discuss the classics and historical case studies of their application in countries.

Definition 2: According to Alfred Marshall’s definition, economics deals with our ordinary life and its objective is to improve that ordinary life, to make our incomes higher, allow us to have more free time, and make poverty disappear so that we can enjoy other activities that we like while having a satisfactory standard of living. Then, we should consider discussing classics and historical case studies of their application in countries but perhaps not as carefully as under the first definition.

Definition 3: Economics helps us in allocating scarce resources among alternative ends. Then we need to discuss only selected classic texts and historical case studies of their application in countries.

Definition 4: Economics is just what businesses and finances do now. Then perhaps we should not bother with classic texts and historical case studies of their application in countries.

Goes on to explain each of the definitions and how they apply to China and Pakistan.

Religion, the Scottish Enlightenment, and the Rise of Liberalism

Erik W. Matson and Jordan J. Ballor in this article

Does the liberal project presuppose, as some have claimed, an unrealistic and individualistic anthropology (Deneen 2018; Macpherson
1962)? Does modern economics share such presuppositions (see discussions in Bowles 1998; 2016)? Do our sensibilities about the individual and the ethics of pluralism derive from religious beliefs (Siedentop 2014)? Can those sensibilities be maintained if their motivating beliefs are no longer widely held? Were there, as Hayek also argued, different varieties of liberalism on offer from the eighteenth century and beyond? What might a liberal system of political economy look like when based on “speculative and rationalistic” perspectives as opposed to “empirical and unsystematic” approaches (Hayek 2011, 108; see also Freire 2021)?

It is with such questions in mind that we organized the present symposium, “Religion, the Scottish Enlightenment, and the Rise of Liberalism.” Building on recent literature (e.g. Oslington 2011; 2018; Ballor and van der Kooi 2022), we aimed to facilitate discussions on the
development of political economy and early liberal discourse in eighteenth-century Scotland by  considering the religious and cultural framework from which they emerged.

Axel Leijonhufvud: A life among the Econ, 1933 to 2022

Prof Roger Farmer pays tribute to Prof Axel Leijonhufvud

Axel Leijonhufvud, who passed away in May 2022, was one of the most creative macroeconomists of his generation. This column, written by a long-time friend and colleague, outlines the development of his thought, including his work on Keynes and Keynesian economics; his enthusiasm for agent-based modelling; his insistence that good macroeconomists need to understand the past before they can understand the present or the future; his view that modern macroeconomics is a degenerative research programme that took a wrong turn in the 1950s; and his many contributions to policy discussions on VoxEU during the Global Financial Crisis and the ensuing Great Recession.

100 years of Central Bank of Lithuania

Central bank anniversaries are very useful to reflect on the past and think about the future.

Central Bank of Lithuania has completed 100 years in 2022.

The year 2022 marks the centenary of the establishment of the Bank of Lithuania, the central bank of the Republic of Lithuania. The Bank of Lithuania strengthens the stability of the country’s financial sector, actively acts as a centre of excellence in financial and economic issues, promotes competition in the payment services market and searches for new forms of supervision of financial institutions. As part of the Eurosystem, we cooperate with the European Central Bank and other euro area central banks to make decisions on the euro area monetary policy and its implementation.

Re-established on 1 March 1990, the Bank of Lithuania continues the traditions of the country’s central bank that operated during the interwar period. Plans to establish a bank of issue in Lithuania and to introduce national money began to be made immediately after the restoration of statehood in 1918, however due to the difficult financial situation of the State, the Bank of Lithuania commenced its activities only in 1922. The laws on the currency unit and on the Bank of Lithuania were passed on 9 and 11 August 1922 respectively, the Bank was officially established on 27 September 1922 and commenced its activities on 2 October. The founder of the Bank was the Government. The primary objective of the Bank of Lithuania was to regulate currency circulation, facilitate cash withdrawals, develop a sound and sustainable monetary system as well as foster the development of agriculture, industry and trade. The Bank was granted the right to issue banknotes for the period of 20 years, it could also carry out state treasury and saving bank operations, distribute and redeem the State’s loan sheets, provide commercial credit, etc. Vladas Jurgutis (1885-1966) became the first Governor of the Bank of Lithuania. The representative building of the Bank of Lithuania at the intersection of K. Donelaičio and Maironio streets in Kaunas was built 6 years after the Bank’s establishment, specifically to meet the needs of the central bank.

Today, the mission of the Bank of Lithuania is to bring benefit to society. To accomplish this mission, we have brought together highly qualified staff and the necessary financial and technological resources. We have a clear vision of what our organisation should be like in the near future. The work of our staff, anchored by the institution’s core values, not only brings benefit to society, but also contributes to enhancing the trust of the people of Lithuania in the national central bank and the domestic financial system as a whole. The Bank of Lithuania currently employs more than 600 members of staff and is headed by Gediminas Šimkus as of April 2021.

 

Historical importance of OPEC for oil price fluctuations

Andrea Pescatori and Yousef F. Nazer in this IMF paper studies impact of OPEC decisions on oil prices from 1989-2019-

This paper studies the historical importance of OPEC for oil price fluctuations. An event-study approach is used to identify the effects of OPEC announcements on oil price fluctuations. Results show that price volatility is higher than typical around OPEC meetings. Also, members’ compliance, a proxy for credibility, has strongly fluctuated over time. An ordered multinomial logit framework identifies the main factors that explain OPEC’s decisions to cut, maintain, or boost members’ oil production and is able to successfully predict OPEC meeting outcomes 66 percent of the time, between 1989 and 2019. Cyclical oil price fluctuations (as opposed to persistent shifts in levels) drive OPEC’s decisions, suggesting that OPEC’s objective is to stabilize the oil price rather than countering fundamental shifts in demand and supply. Low OPEC’s market share reduces the probability of a production cut. Finally, the transparency of OPEC’s statements has modestly improved between 2002 and 2019.

UK crisis: Drawing parallels with the pound’s collapse 30 years ago when George Soros made a killing

How history comes back in different hues and colours.

I had blogged about how uk faced a major currency crisis 30 years ago just a fornight back. It is surreal how the economy faced another simlar looking crisis a fortnight later.

My article in moneycontrol drawing parallels between the two crises.

And yes as I wrote the article, i realised even daya are similar. The 1992 crisis happened on a Wednesday when the government tried to protect pound but failed to do so. it was called as black wednesday. Even yesterday it was a wednesday when the central bank tried to protect the currency and interest rates.  From black wednesday to a grey wednesday!

Need for Transparency in RBI’s Prompt Corrective Action Framework

The RBI recently took out the Central Bank of India from the Prompt Corrective Action Framework:

The performance of the Central Bank of India, currently under the Prompt Corrective Action Framework (PCAF) of RBI, was reviewed by the Board for Financial Supervision. It was noted that as per the assessed figures of the bank for the year ended March 31, 2022, the bank is not in the breach of the PCA parameters. The bank has provided a written commitment that it would comply with the norms of Minimum Regulatory Capital, Net NPA and Leverage ratio on an ongoing basis and has apprised the RBI of the structural and systemic improvements that it has put in place which would help the bank in continuing to meet these commitments.

Taking all the above into consideration, it has been decided that Central Bank of India is taken out of the PCA restrictions subject to certain conditions and continuous monitoring.

I had written earlier that RBI should be more transparent in reporting on pca framework. I had argued the regulaor should have kid of a dashboard which lists the banks in pcaf and the various metrics on which select banks are in and out of the list. Some critical information may not be shared but there is a need for more clarity on which banks are in and out of pca and the basis for the in and out of the list.

 

CBDCs: The Past, the Present and the Future

Payal Ghose and Abhishek Date of Clearing corporation of india summarise developments on CBDCs.

Digital currencies are the latest stage in the continual process of evolution in money since the transition from barter of goods. Finance Minister Nirmala Sitharaman while presenting the Union Budget 2022- 23, announced the introduction of Digital Rupee to be issued by the Reserve Bank of India (RBI) starting 2022-23 using blockchain and other technologies for cheaper and efficient currency management. On this backdrop, this article explores the evolution of Central Bank Digital Currencies (CBDCs) and their role in thefinancial landscape of thefuture.

Historical anti-fascism and right-wing voting in Italy

Marco Lecci, Laura Panza, Eik Swee and Giulio Zanella in this voxeu post:

 In recent elections, voters in countries around the world have expressed support for right-wing political parties. Each of these countries has its own history of right-wing politics generally, and fascism specifically. This column examines the past and present of right-wing parties in Italy, and finds that the historical resistance to fascism dampened support for right-wing political parties decades later. Modern right-wing platforms have reduced appeal for voters with connections to an anti-fascist tradition that was violently repressed, owing to the intergenerational transmission of cultural attitudes that translate into political preferences.

What the RBI can do to contain the rupee’s depreciation

Actually rbi should not do much and allow rupee to depreciate.

My explainer in moneycontrol.

Rebel Governance and Development: The Persistent Effects of Guerrillas in El Salvador

Antonella Bandiera, Lelys I. Dinarte Diaz, Juan Miguel Jimenez, Sandra V. Rozo & Maria Micaela Sviatschi in this nber paper study impact of rebel governance on economic development:

How does territorial control by non-state actors affect long-term development? We investigate the economic, social, and political consequences of temporary territorial control by guerrillas during the Salvadoran Civil War. During this period, these guerrillas displaced state authorities and promoted the creation of self-governing institutions that were highly representative of local community values and showed open distrust of the state and elites.

Using a spatial regression discontinuity design, we show that areas exposed to guerrilla control have experienced worse economic outcomes over the last 20 years relative to areas adjacent to these locations that were controlled by the formal state.

Our results suggest that informal participatory institutions in guerrilla-controlled areas led to the persistence of land fragmentation and disengagement with the government. We argue that when non-state actors develop governance institutions as an alternative to the state, it can lead to negative effects on development through persistent norms of distrust towards out-groups, even after they relinquish control.

Macroeconomics of the 2020s: What we’ve learned, and what’s to come

Paul Beaudry, Deputy Governor of Bank of Canada in this speech reflects on lessons from macroeconomics of the 2020s.

When COVID-19 first hit, the Bank of Canada—and many other central banks—took a series of actions. Some were new and innovative in response to the situation before us. Others stemmed from the playbooks we used during other crises. This is a key approach to policy-making: we draw from past experiences to figure out what actions will best support the economy, keep inflation on target and protect the well-being of households and businesses.

Looking back now, I believe we got a lot of things right when trying to manage the economic fallout from the pandemic. But in other areas, we could have done better.

So today, with the benefit of hindsight, I want to talk about some early lessons we can draw from this episode. I’ll discuss what worked, and where we could improve our response to future downturns.1

I’ll focus specifically on three issues.

The first is how international spillovers have been shaping the macroeconomic landscape. Here I’m thinking about how countries responded to and are recovering from the pandemic, and how policy-makers’ actions in individual countries affected global outcomes. And I’ll emphasize how cross-country interactions played out differently during the pandemic than they did in other recessions, such as the one that followed the 2008–09 global financial crisis (GFC).

Second, I’d like to compare the strong rebound that we’ve seen in the labour market with the jobless recoveries that advanced economies sometimes experienced in the past. Here I’ll stress how these differences partly reflect the way policy shaped the evolution of public and private sector balance sheets.

Finally, I’ll look ahead to an issue on so many minds these days: inflation. Just this morning new numbers were released. In August, inflation stood at 7%. While we’re headed in the right direction, that’s still too high. Consumers and businesses are rightfully wondering when we’ll stop feeling the pinch of high prices. And so I’ll talk about the role that expectations play in driving inflation, how central banks try to influence those expectations and what this means for the Bank of Canada as we guide inflation back to our 2% target.

He says the response to the pandemic shock was driven by the 2008 crisis. both the shocks were different:

A distinctive feature of the GFC was that many sectors and countries were left facing levels of demand well below available supply, and for extended periods of time. This excess capacity meant that price pressures associated with stimulus measures were modest. The inflation dimension was therefore a relatively small part of the overall story during this period.

The COVID-19 crisis was clearly very different. Even when countries were experiencing excess supply overall, key sectors were operating at or near capacity limits, including many sectors that rely on internationally traded goods. Bottlenecks occurred in these sectors because of demand surges driven by a combination of stimulus policies, shutdowns and re-openings as well as by consumers shifting away from services.

We should have withdrawn the stimulus faster this time aorund:

Normally when demand goes up following a recession, supply responds strongly. But during the pandemic, supply couldn’t keep up because of public health protocols and shutdowns. This caused delays in consumers getting their hands on goods like bicycles and furniture. So prices rose more sharply than usual.

Compared with the GFC, this resulted in a stronger response on the inflation dimension and a weaker response on the activity dimension. So one country’s decision to maintain stimulus disproportionately impacted others through the effects of that stimulus on the prices of globally traded goods.

For instance, as US stimulus spread through the economy and led to a greater demand for new vehicles, Taiwan—a key manufacturer of microchips needed to make modern vehicles—was struggling to adapt its production processes and facing long backlogs of orders. Instead of stimulus-induced demand leading to more output, this bottleneck meant global automobile production stalled and prices increased—not only in the United States, but also in Canada and around the world.

The net result was that, during the recovery phase of the pandemic, it’s likely a somewhat faster global withdrawal process could have made all countries better off.

To summarize, lessons from the GFC informed key parts of the policy response to the pandemic. However, in hindsight, policy-makers everywhere should have been more alert to the possibility that the nature of global spillovers can change over time. A better understanding of these dynamics and how policy actions can ripple around the world should enable more effective global responses to future shocks.

Lets see which lessons will apply in next crisis.

I also like the way dg has mentioned macroeconomics of 2020s. we need to teach and reflect on macroeconomics based on time periods macroeconomics of 1930s, macroeconomics of 1970s. macroeconomics of 2008-19, macroeconomics of 2020s and macroeconomics of 2022.

Ethics of currency – a possible guide for central bankers?

Mr François Villeroy de Galhau, Governor of the Bank of France, gave the Michel Camdessus Central Banking Lecture organised by IMF.

It is my great pleasure to be in Washington with you today, and to deliver this speech in honour of Michel Camdessus. I would like to take this opportunity to pay a special tribute to him, and express my personal gratitude. Michel is not only one of my predecessors as a Governor of the Banque de France, but also a friend of mine and – yes – a master. My speech was prepared with his precious help, so today you can almost enjoy a “Camdessus Lecture by Michel Camdessus himself”.

The somewhat unusual theme I proposed for today, the “ethics of currency”, has guided him throughout his career. In the murky waters that we central bankers are navigating, it should more than ever serve as a golden thread. I will briefly discuss the reasons why I dare to talk about the ethics of currency (I), then elaborate in practice on the golden triangle of trust today (II) and finally raise the question as to whether the international dimension of trust can still inspire us (III).

What is ethics of currency? what is ethics?

Before going any further, we must find a common definition of “ethics”. Is it possible to take this word as a synonym for “morality”? For centuries, this question has been the “bridge of donkeys” (pons asinorum) for philosophers’ apprentices. Supporters of the synonym theory highlight a common etymology between the two words – morality is the Latin translation of Greek ethos. Despite their initially identical meanings, the two words nevertheless have followed different paths over time: “morality” can be described as a “hard concept”, similar to the fundamental rules engraved on Moses’ stone tablets or in the code of Hammurabi. In contrast, “ethics” refer to a softer and less binding concept, a kind of existential version of morality with a more personal dimension.

I will use the word ethics in that way in this speech. The question of interest rates is a noteworthy example of the way a moral prohibition can evolve into a more flexible and ethical approach. From a moral overall ban, ethically “fair” interest rates have been progressively distinguished from usury rate, with the latter still being forbidden.

“Homo economicus” invented currency very early in human history, and it is striking that almost as soon as currency was born, countless abuses were seen as well: manipulation of gold or silver weight in coins, skewing of scales, and so forth. Men therefore quickly summoned ethics to define how to govern its use. However, human kind has also shown a tendency to exempt itself from the rules it had previously established, before setting new rules again in order to respond to the problems caused by deregulation.

….

Another distinction is between the ethics of money and of currency. The ethics of money are customary and widespread, and can be summed up by the words of Alexandre Dumas, a famous French writer: “money is a good servant but a bad master”. The ethics of currency that interest me today are obviously part of this, but are perhaps less common. They have two specific features: (i) the importance of institutions, of the “sovereign” dimension: there is no currency without a public authority that guarantees it and is responsible for it (ii) the importance of trust, which can be defined as being able to count on the character, ability, strength or truth of someone or something.  Today, we central bankers are responsible for trust: we “produce” it, and we stand accountable for it. Such a responsibility entails a strong personal component: our behaviour has to be flawless, and driven by real functional requirements and high ethical standards. But let me today focus on the institutional and collective foundations of trust.

hmm..interesting way to look at currency and money…

Monetary Policy Independence under a Flexible Exchange Rate Regime – The Indian Case

Harpreet Singh Grewal and Pushpa Trivedi in this rbi working paper analyse whether forex interventions have influenced rbis monetary policy:

In an open economy, central banks confront the impossible challenge of simultaneously preserving exchange rate stability, conducting independent monetary policy, and benefitting from an open capital account.

Against this backdrop, the paper assesses whether the foreign exchange market interventions by the RBI to contain the volatility in INR have had any constraining influence on India’s monetary policy independence during 1991 to 2020.

The major findings of the paper are:

1. 1. There is a high degree of sterilisation of the increase in money supply that results from forex market interventions in India.
   2. Forex market interventions during surges in capital flows to contain the INR volatility lead to an increase in M₃, which however is found to be neither inflationary nor elicits a policy rate response by the RBI; this points to RBI’s monetary policy independence not facing much constraints from its exchange rate policy and financial openness.

Economic research at central banks: Are central banks interested in the history of economic thought?

Ivo Maes of National Bank of Belgium in this working paper:

A research department is now a core element of any modern central bank. This was not always the case. The growth of research departments in central banks is closely related to their transformation from issuing banks, with more commercial tasks mainly relating to discount credit, into modern monetary authorities. It is also related to the need for the management of the monetary system, especially after the demise of the Gold Standard.

Moreover, the growth of research departments, not only in central banks, is an expression of the growing importance of a more systematic and scientific approach in modern society. In the European Union, the importance of academic research for central banks was reinforced by the creation of the European Central Bank, which started operating in June 1998.

Two elements are clearly important for any modern central bank research department: contributing to monetary policy-making and sustaining a dialogue with the academic community. Research departments fulfil very much a bridging function between monetary policy-making and the academic world. This is more or less a constant in the history of central banks.

As part of a pluralist approach towards research, historical research can have important benefits.

Firstly, a historical perspective can offer insights into the relative strengths and weaknesses of  economic theories. Theories are techniques of thinking and remain partial. So, it is important to select theories which highlight the relevant features of reality. The great Austrian economist Joseph Schumpeter approvingly referred to Jules Henri Poincaré’s observation, “tailors can cut suits as they please; but of course they try to cut them to fit their customers”.

Secondly, for policy-makers, the policy regime is of crucial importance. Sometimes, one tends to take the policy regime as given, rather
ignoring that a change in regime will affect economic events and policy outcomes. At other moments, on the contrary, there are heated discussions about the policy framework.

In both cases, thorough economic research can help central bankers to build a robust economic policy framework. A broad historical approach, which can offer some distance and a wider variety of experience, has a role to play.

hmm..

I strongly think that all central banks should have dedicated researchers in economic history and history of economic thought.

An International map of gender gaps

Bank of Italy economists Ines Buono and Annalivia Polselli in this paper:

The work revisits the main stylized facts on female labour force participation in the last thirty years, comparing empirical evidence for high-income and middle-low income countries. The comparison is made using data bases from the World Bank Group and the International Labour Organization (ILO), which are updated and comparable over time and between countries.

The analysis finds that: (i) the supply of female labour in recent decades has increased significantly in advanced countries while remaining constant in emerging ones; (ii) the higher employment of women in the growing service sectors has fostered this dynamic, but has also meant that the Covid-19 crisis has mainly affected female employment; and (iii) the adoption of reforms aimed at promoting equal opportunities only contributes to stimulating female participation in advanced countries.