Archive for the ‘Academic research & research papers’ Category

How Europe is taking another page from US financial history..

June 25, 2020

Interesting piece from Jacob Funk Kirkegaard of PIIE.

He points how Europe is taking a leaf from US financial history in 1913. US government until relied on revenues from customs and other sources. In 1913 US started income tax which became a significant source of state financing. Europe is at similar juncture now and gradually looking to raise revenues from other sources:

Enter the US history books and the enactment of the 16th Amendment to the US Constitution in 1913, which enabled progressive personal income taxation to be levied at the federal government level for the first time.[2] The tax, which had previously been enacted and declared unconstitutional in the 1890s, enabled the federal government to finance its participation in world wars and the New Deal, establishing the modern federal government era in the United States. Prior to 1913 (apart from a brief period during and after the Civil War), the most important sources of US federal government revenues were not income or consumption taxes, but high tariffs on imports; “sin taxes” on spirits, tobacco, and wine; and a modest tax on corporations in the early 20th century.

The European Commission has proposed a new set of own resources similar to the revenue sources the US federal government had prior to 1913. It suggests raising an additional €10 billion from expanding the carbon emissions trading system (i.e. a 21st century climate “sin tax”), €5 billion to €14 billion from a new EU carbon border adjustment mechanism (i.e. a 21st century trade tariff), €10 billion from a new EU level corporate tax on multinational corporations operating across the EU internal market, and €1.3 billion in new revenue from a digital tax on large firms operating in Europe. These levies would, combined with the €20 billion already collected in traditional tariffs, increase European-wide resources to just over €50 billion,[3] or 0.4 percent of EU27 gross national income. Figure 1 compares the breakdown of these new EU traditional own resources with the financing of the pre-1913 US federal budget.

Proposed EU revenue sources resemble US federal government revenue streams prior to 1913

Tariffs and carbon border adjustment would thus comprise 60 percent of the EU’s new proposed traditional own resources, in line with how trade tariffs were the largest source of income for the US federal government pre-1913. About 20 percent of the EU’s new revenues would be “carbon sin taxes,” taking the total foreign import + sin tax revenues to 80 percent of the new traditional own resources total, not far off from the historical US pre-1913 level of roughly 90 percent of total federal government revenues from these two sources.[4] The rest of the EU’s new proposed traditional own resources would be variations of corporate taxes, also in line with this category being the third largest revenue source for the US federal budget in the early 20th century until the passage of the 16th Amendment.

Europe is thus following the example of the early US federal government prior to the 16th Amendment in raising its direct revenue from limited tax sources. Until that changes, member states will remain fiscally dominant in Europe, and the EU will not take over any additional redistributive tasks.


Thinking about Security issues while designing a Central Bank Digital Currency

June 25, 2020

Cyrus Minwalla of Bank of Canada writes on the need to look at several security issues while designing a CBDC.

This paper explores the security aspects involved in constructing and deploying a central bank digital currency (CBDC). Security is an essential quality of a CBDC system. In addition to securing the underlying storage and transfer of value, security involves aspects of privacy and resilience. Threats must be mitigated to protect the integrity of funds and the confidentiality of users. A secure CBDC system will retain public trust in the central bank.

See the references in the paper. So many on technology.

Podcast: The evolving role of Swift in global payment systems

June 25, 2020

Technology is becoming more and more integral to finance and payments. One cannot understand financial systems without understanding technology. Sample this from a OMFIF podcast on Swift payment system:

Swift plays a vital role moving money around, acting as a lifeline for trade and economic activity. Michael Moon, Swift’s managing director of payments and trade, joins Bhavin Patel, senior economist and head of fintech research at OMFIF, to discuss how Swift’s role in global payment systems is changing as payments become increasingly digitised and amid greater innovation in the financial infrastructure. Further topics include the introduction of Swift gpi and the ISO 20022 standards, and correspondent banking during a time of derisking.

ISO 20022 means:

It describes a common platform for the development of messages using:

  • a modelling methodology to capture in a syntax-independent way financial business areas, business transactions and associated message flows
  • a central dictionary of business items used in financial communications
  • a set of XML and ASN.1 design rules to convert the message models into XML or ASN.1 schemas, whenever the use of the ISO 20022 XML or ASN.1-based syntax is preferred

Swift GPI details here..

Central Bank of Belgium analyses Modern Monetary Theory (MMT)

June 24, 2020

M. Kasongo Kashama of Central Bank of Belgium (called as National Bank of Belgium) in this paper reviews MMT:

Modern monetary theory (MMT) is a so-called heterodox economic school of thought which argues that elected governments should raise funds by issuing money to the maximum extent to implement the policies they deem necessary. Over the last few years, it has been supported by political representatives, for whom MMT has provided a rationale for their calls for Green New Deals and other large public spending programmes. Most recently, it has also found an echo in calls for bold post-COVID-19 recovery plans. But it also came under increased scrutiny and fire from the mainstream economic world.

This article seeks to understand modern monetary theory (MMT) using six frequently asked questions.

What exactly is MMT all about? The MMT doctrine suggests shifting to a regime where the government finances its spending programmes by issuing base money, to achieve full employment. Should inflationary risks emerge, it is expected to raise taxes. The job of the central bank (if any) boils down to accommodating the needs of the government.

How do MMT’s theoretical foundations compare with the consensus approach? The MMT doctrine relies on an unconventional approach for its assignment of macroeconomic policies to the macroeconomic stabilisation targets: the government (through fiscal policy) must tackle the joint full employment price stability objective, while the central bank (through monetary policy) deals with debt sustainability. Under the consensus approach, it is the other way around: monetary dominance prevails. In theory and assuming both these policy‑makers deliver on their mandates by appropriately deploying their respective instruments, both approaches should put the macroeconomy on track to equilibrium.

Is MMT workable in practice? There is some indication that the MMT doctrine may face practical limitations. Elected governments are typically associated with commitment problems, because they have incentives to push the economy beyond its productive capacity/full employment. And as the government commitment to the joint objective of full employment and price stability can be perceived not to be credible, it is more likely that people’s inflation expectations are not well anchored.

Why has MMT been so popular in recent years? The low inflation context of the last few years might suggest that the inflationary risks induced by expansionary fiscal policies are limited. And the low interest rate environment points to contained servicing costs for the sovereign debt. But MMT’s appeal might rely too much on the persistence of such low inflation and low interest rates.

How does MMT compare with the Eurosystem’s asset purchase programmes (APP and PEPP)?

Asset purchase programmes and MMT both aim at stabilising the economy. But their approaches differ. While the asset purchase programmes seek to lower longer-term rates to ensure easy funding conditions for the whole economy until the economy takes off again, MMT concentrates solely on providing the government with ample and cheap financing on a permanent basis.

Is a temporary switch to MMT principles realistic in the euro area in the COVID-19 crisis context? The recent increased need for further fiscal support in the midst of the COVID-19 crisis justifies an in-depth reflection about the appropriate monetary-fiscal policy mix to support a fast and sound economic recovery. Doing so does not mean that monetary dominance should be abandoned, and MMT recipes taken on board. Avoiding being perceived as opening the MMT Pandora’s box is key: that will minimise the risk of having to make a painful choice between high inflation and severe fiscal consolidation in the (distant) future.

Interesting to see a central bank researcher trying to figure MMT.

Conversation with Prof M. Govinda Rao: COVID-19 Crisis and Response by the Indian Government

June 23, 2020

The conversation with Prof M. Govinda Rao is on June 26, 2020 at 5:00 pm. One can register here.

The unprecedented COVID-19 crisis has severely impacted the economy leading to losses in both lives and livelihoods. In order to counter the downturn, the Indian Government came up with a fiscal stimulus worth Rs 20 lakh crore (10% of GDP) to support agriculture, industry, MSME, labourers,etc.

However, the stimulus has raised more questions than answers. Some economists say that the actual scale of the stimulus is much smaller in magnitude and questioned its effectiveness to revive the Indian economy. Others have raised concerns over sources of financing the stimulus and add the burden lies with the already ailing banking system. The crisis has also raised questions over the relationships between Central and State Governments.

There cannot be a better person than Prof Govinda Rao to answer these questions given his wide experience in India’s policymaking and research. He has written on these topics extensively. The Conversation series invites all students of economics and those interested in economics to join us in what promises to be a fascinating discussion.

Why European Citizens’ trust the euro but not as much the ECB?

June 23, 2020

Stephanie Bergbauer, Nils Hernborg, Jean-François Jamet, Eric Persson and Hanni Schölermann in ECB’s Eco Bulletin analyse citizens trust in ECB and Euro. European trust Euro but not the ECB:


How will introduction of central bank digital currency impact the seignorage of central bank?

June 23, 2020

Peter Gustafsson and Björn Lagerwall of Riksbank analyse this question from Sweden’s perspective:

Seigniorage has historically been an important source of profits for the Riksbank. In recent years, the use of cash in Sweden has declined rapidly,and a future possibly cashless society could have important consequences for the Riksbank’s financial independence. This article contains a discussion and some numerical examples of how the introduction of an e-krona could affect the Riksbank’s ability to generate profits. Several factors affect the results: whether the e-krona would be regarded as a substitute for cash or bank deposits, how high the demand for the e-krona would be, and the level of the interest rate. As a final part of this article, we address the question of how high the demand for an e-krona would have to be to cover the Riksbank’s current expenses.

Nicely explained using the balance-sheet approach..

Adam Smith and the Virtue of Punctuality.

June 23, 2020

Maria Pia Paganelli of Trinity University in this interesting paper:

Commercial society changed many things, including what is considered virtuous and what is considered valuable. The increase in productivity observed in commercial society changed the ways we use our time and thus the value of time. Time is now money. So punctuality becomes a virtue. Adam Smith explicitly recognizes the virtue of punctuality as a commercial virtue.

Have heard a few economists write how they saw some the society valued punctuality as the economy progressed and grew…


How Kurzarbeit, Germany’s Short-Time Work Benefit, is helping its economy?

June 22, 2020

Kurzarbeit, Germany’s short-time work scheme, was instrumental in keeping employment stable during the global financial crisis. But this crisis is likely to be even more profound, and affect more sectors of the economy.

Shekhar Aiyar, the IMF’s Mission Chief for Germany, discusses whether the program is likely to be effective this time around:

What are the main features of Kurzarbeit?


Economic Effects of the Spanish Flu in Australia

June 19, 2020

James Bishop of RBA in this new Bulletin article:

The Spanish flu reached Australia in 1919 and remains the country’s most severe pandemic in terms of health outcomes. At the peak of the pandemic, sickness due to influenza temporarily incapacitated 2 per cent of the labour force. However, despite the social distancing measures used by governments to contain the virus, few job losses in this period were due to a lack of available work. The labour market also recovered quickly, but it is not clear how relevant this experience is for the modern economy.


How India’s Banks Navigated The Last Global Pandemic in 1918?

June 19, 2020

My new piece in BQ.

I review how Indian banking system fared during the 1918 pandemic. Infact 1918 was quite a crisis year with multiple crises. Yet banks did well. Why? Answer: World War I. Read the piece for more details….

Sweden’s constitution decides its exceptional Covid-19 policy

June 19, 2020

Prof Lars Jonung of Lund University in this piece:

India’s first climate change assessment report

June 18, 2020

Ministry of Earth Sciences released its “first-ever climate change assessment report for India”: Assessment of Climate Change over the Indian Region.

This open access book discusses the impact of human-induced global climate change on the Indian subcontinent and regional monsoon, the adjoining Indian Ocean and the Himalayas. It also examines the regional climate change projections based on the climate models used by the IPCC Fifth Assessment Report (AR5) and national climate change modeling studies using the IITM Earth System Model (ESM) and CORDEX South Asia datasets.
The IPCC assessment reports, published every 6–7 years, provide important reference material for major policy decisions on climate change, adaptation, and mitigation. While the IPCC assessment reports largely provide a global perspective on climate change, they offer limited information on the regional aspects of climate change.
Regional climate change effects over the Indian subcontinent, especially relating to the Indian monsoon, are unique to the region, and in particular, the climate in this region is shaped by the Himalayas, Western Ghats, the Tibetan Plateau, the Indian Ocean, Arabian Sea, and Bay of Bengal. Climatic variations in this region are influenced by (a) regional-scale interactions between the atmosphere, ocean, land surface, cryosphere and biosphere on different time scales, (b) remote effects from natural phenomena such as the El Nino / Southern Oscillation, North Atlantic Oscillation, Indian Ocean Dipole, and Madden Julian Oscillation, and (c) human-induced climate change.
This book presents policy-relevant information based on robust scientific analysis and assessments of the observed and projected future climate change over the Indian region.
Shailendra Yashwant Senior adviser, Climate Action Network South Asia (CANSA) reviews the report in Moneycontrol:
new report by the Government of India reveals that local climate change is influenced not only by the increase in greenhouse gases but also by the increase in air pollution and the local changes in the land-use pattern. The report goes on to warn that the rapid changes in India’s climate will place increasing stress on the country’s natural ecosystems, agricultural output, and fresh water resources, while also causing escalating damage to infrastructure and economy.
India needs to wake up seriously to the challenges of climate change. This has to be addressed and fought on war footing.

Podast: How India’s COVID‑19 Jobs Crisis Will Impact Women in the Workforce?

June 18, 2020

Prof Jeemol Unni of Ahmedabad University discusses the topic in this podcast.

Mauritius central bank providing funds to the government and using forex reserves to support ailing firms

June 18, 2020

India’s Forex reserves crossed a landmark figure of USD 500 billion on 5 June 2020. There is always talk of RBI/India using its forex reserves for development purposes. RBI has not allowed it saying forex reserves are due to FII flows which are short-term in nature and can easily move out.

Mauritius central bank is going ahead using USD 2 billion of reserves to support economy and firms.

Mr Harvesh Seegolam, Governor of the Bank of Mauritius in his speech explains that the CB is using its reserves to establish Mauritius Investment Corporation Ltd (MIC) which will support ailing firms:


Inflation statistics difficult to interpret during the current crisis

June 18, 2020

Riskbank Deputy Governor Henry Ohlsson in this speech talks on difficulting of computing and interpreting inflation data:

Under normal circumstances, monetary policy can be based on the analysis of along line of economic quantities. As monetary policy is conducted with an inflation target, the statistics on inflation outcomes become particularly important.

During the economic crisis an obvious problem with inflation statistics has been that there are no prices for the goods and services that cannot be consumed at present. This of course creates problems when calculating the consumer price index (CPI). Statistic Sweden (SCB) have clearly described their methods.

For products that have no prices, they use the price development on similar products that do have prices. For products that do not have “similar” products, such as various types of foreign air travel, the annual percentage change in total CPI is used. Replacing missing prices in this way is usually referred to as imputation. The total weight in the CPI for the products where prices are imputed in this way is not particularly large; it amounts to just under 3 per cent of the total weight of the CPI, see Figure 2.

What does this imply?

What do the many imputations abroad entail for the quality of the statistics? The conclusion in a current working report written by two world-leading researchers in this field is that the principles recommended by international organisations lead to underestimation of the rate of inflation and overestimation of the real increase in consumption.5 However, this is probably no major problem for Sweden, as the
percentage of prices imputed is relatively low. The problems could be much greater for other countries, and therefore for international comparisons.

Another problem with the inflation statistics at present is that the actual consumption pattern that has arisen during the crisis does not tally with the weights for different goods and services in the consumer price index. Or, put differently, Swedes have bought more toilet paper and fewer trips abroad than the weights in the consumer price index imply.

At present, we do not know whether the changes in consumption patterns are temporary or permanent. If they are temporary, the actual consumption pattern will gradually move towards the consumption pattern represented by the weights in the consumer price index.

If the changes in consumption patterns are permanent, it will be the weights inthe consumer price index that move towards the actual consumption pattern. In Sweden, the weights are revised once a year on the basis of the consumption pattern a year or so earlier.

What times…

India’s Forex Reserves cross USD 500 billion: Long history since 1861

June 17, 2020

On June 5, 2020 India crossed the barrier of USD 500 billion in forex reserves. In Rupee terms it is approx 37.9 lakh crore. This is quite an achievement. Ira Dugal has a fine piece in BQ tracking the journey from 1991 onwards when it was USD 5 billion.

There is a long history behind these numbers before 1991 as well.


Will Sweden have higher growth as it had an easier lockdown?

June 17, 2020

Yıldız Akkaya, Carl-Johan Belfrage, Vesna Corbo och Paola Di Casola of Riksbank in this research note:

Swedish GDP closely follows that of our most important trading partners. In the crisis triggered by the coronavirus pandemic there are nevertheless a number of factors indicating that the Swedish economy could be less negatively affected in the short term than other countries:

    • The Swedish economy has not been closed down to the same extent as many others.
    • The sectors that have been hardest hit by social distancing comprise a relatively small percentage of GDP in Sweden.
    • The low national debt in Sweden provides relatively good opportunities to use fiscal policy stimulus to support companies and households that have been hit hard.

But there are also indications that the reverse could apply.

    • The Swedish economy is dependent on trade with other countries functioning, at the same time as the ongoing crisis exposes international trade to severe strain.
    • Swedish households have a high level of debt, which entails risks for both households and the financial sector.

In this Economic Commentary the authors discuss some of the reasons why the relationship between Sweden’s and other countries’ GDP development may differ from what we have observed historically. Their conclusion is that the economic consequences of the pandemic could be slightly smaller in Sweden than in many other countries. However, they say that it is too early to say anything about how different economies will develop in the longer run. We are still at an early stage of the economic crisis, and much is still unclear with regard to the spread of the virus. It is therefore extremely difficult to know what the conditions will be for developments in the coming years.


From revered to reviled: a historian’s view of Lebanon’s banking sector

June 16, 2020

Lebanon’s banking system is literally on fire. The economic and currency crisis has led to protesters setting the central bank and bank branches on fire.

Prof Hicham Safieddine at King’s College London wrote a book on history of Lebanon monetary/banking system.

In 1943, Lebanon gained its formal political independence from France; only after two more decades did the country finally establish a national central bank. Inaugurated on April 1, 1964, the Banque du Liban (BDL) was billed by Lebanese authorities as the nation’s primary symbol of economic sovereignty and as the last step towards full independence. In the local press, it was described as a means of projecting state power and enhancing national pride. Yet the history of its founding—stretching from its Ottoman origins in mid-nineteenth century up until the mid-twentieth—tells a different, more complex story.

Banking on the State reveals how the financial foundations of Lebanon were shaped by the history of the standardization of economic practices and financial regimes within the decolonizing world. The system of central banking that emerged was the product of a complex interaction of war, economic policies, international financial regimes, post-colonial state-building, global currents of technocratic knowledge, and private business interests. It served rather than challenged the interests of an oligarchy of local bankers. As Hicham Safieddine shows, the set of arrangements that governed the central bank thus was dictated by dynamics of political power and financial profit more than market forces, national interest or economic sovereignty.

Here is an interview of Prof Saffiedine:

Why was there little to no criticism of the Banque du Liban and banking sector in the Lebanese media until after outbreak of the crisis?

After the end of the civil war (1975-1990), the BDL emerged as the most stable state institution. Its longtime governor Riad Salameh helped stabilise the Lebanese exchange rate and eventually pegged the Lebanese pound to the dollar while portraying it as the hallmark of stability. Many Lebanese, weary of the war years of instability, readily bought into this portrayal.

Salameh further impressed himself on the national imagination when he managed to stave off any capital flight from Lebanon during the 2008-2009 financial crisis. His apparent diligence stood in sharp contrast to the bickering and corrupt sectarian leaders. All this while, however, Salameh oversaw the financing of the largest government debt in the country’s history. Much of this debt was held by local private banks in return for exorbitant interest rates that generated astronomical profits.

Over time, this symbiotic relationship between the BDL and the private banking sector, under the auspices of the Association of Banks in Lebanon (ABL), reinforced the untouchable stature of banks. They put their easily earned money to work by investing in public relations campaigns on billboards, TV ads, and even newspaper supplements, to polish their image. As long as the long-term structural instability was hidden – thanks to BDL accounting tactics and inflow of money from abroad – mainstream media parroted the bankers’ narrative and turned a blind eye to underlying instability waiting to explode. When it did, some media outlets threw down the gauntlet while others continued to rally behind the banking oligarch.

Here is another older interview of the author.

Jadaliyya (J):  What made you write this book?

Hicham Safieddine (HS): I was researching the role of Palestinian entrepreneurs in the Lebanese economy when I read in passing that Lebanon’s central bank was founded in 1964. That is a full two decades after the country’s official independence from France. This rarely mentioned fact about Lebanon led me to look into the story of Banque du Liban. I soon gained an appreciation of how pivotal central banks were and remain to national statehood and how little literature there is on the subject in relation to Arab countries. The case of Lebanon was all the more poignant given the conventional history of its laissez-faire economy with its assumption of a weak state. The research evolved into an in-depth study of Lebanon’s financial foundations, stretching from late Ottoman times to the outbreak of the civil war in 1975, with a focus on the post-WWII period. I relied on an array of untapped archival sources (diplomatic cables, newspapers, banking histories, expert studies) in the United States, France, and Lebanon to reconstruct what happened, why it happened, and how it speaks to broader themes of political economy, state formation, and financial sovereignty in the region and beyond.

I reverse the direction of inquiry and examine how market forces and private actors shaped the state.

J:  What particular topics, issues, and literatures does the book address?

HS: Banking on the State intervenes in several literatures in three major ways. Firstly, it sheds light on the creation of financial institutions as part of building states and markets during the age of independence. The emergence of central banking in previously colonized regions remains under-theorized. In the Arab region, recent and valuable studies of colonizing projects cover the realm of education, military, law, civic space, and later the economy. The sphere of finance, which I tackle in this book, has rarely served as a primary object of investigation, and the few studies available do not extend to the post-independence period.

Secondly, the book moves beyond the fetishized use of sectarianism as a primary framework for understanding Lebanon. It equally builds on, and at times challenges, recent studies of Lebanon’s political economy that do not themselves dwell on sectarian tropes but are largely concerned with illustrating the open economy nature of Lebanon by showing how the Lebanese state, in the first decade after independence, shaped the market through polices of deregulation. I reverse the direction of inquiry and examine how market forces and private actors shaped the state. I center the role of bankers and financial experts, rather than sectarian leaders, in the construction of state institutions and by extension, national money markets. I emphasize these business actors’ political rather than purely economic machinations to maintain their hold on the economy amid a shift from French to US financial hegemony.

Thirdly, the book speaks to the global history of modern economic thought. In addition to bankers, I detail the role of a group of Arab economists at the American University of Beirut, like Said Himadeh and Salim Hoss, in the creation and circulation of ideas about reforming central banking. I show how they were influenced by, and transformed, contemporary global visions of economic development.

Should be a terrific read.

How Riskbank (central banks) create money in times of crisis?

June 16, 2020

Hanna Armelius, Carl Andreas Claussen and David Vestin in this Riksbank research:

Central banks around the world have implemented extensive measures to alleviate the effects of the corona pandemic on the economy. Many of the measures involve creating large volumes of new money. But how is money created and who ends up holding it? In this commentary, we explain how money is created and destroyed in the current financial system, what roles the banks and the Riksbank have and how different course of action by the banks and the Riksbank influence the amount of money. At the end of the commentary, we use
examples from the Riksbank’s crisis measures to illustrate how monetary policy influences the economy and the amount of money.

Not very different from how the Riskbank would create money in normal times as well. Just that this crisis demands more action.

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