Archive for the ‘Academic research & research papers’ Category

What drives demand for banknotes? Swiss edition

July 11, 2019

Interesting paper by Katrin Assenmacher, Franz Seitz and Jorn Tenhofen:

Knowing the part of currency in circulation that is used for transactions is important information for a central bank. For several countries, the share of banknotes that is hoarded or circulates abroad is sizeable, which may be particularly relevant for largedenomination banknotes. We analyse the demand for Swiss banknotes over a period starting in 1950 to 2017 and use different methods to derive the evolution of the amount that is hoarded.

Our findings indicate a sizeable amount of hoarding, in particular for large denominations. The hoarding shares increased around the break-up of the Bretton Woods system, were comparatively low in the mid-1990s and have increased significantly since the turn of the millennium and the recent financial and economic crises.

Well, the results are just opposite of what central bankers and government will tell you. They say people hoard money for all kinds of illegal transactions, black money and so on. They never tell you that most of the time common people hoard money for all the policy problems created by the government and central banks.


Cost-benefit Analysis of Leaning against the Wind

July 11, 2019

Should central banks increase policy rates to mitigate financial instability?

Trent Saunders and Peter Tulip of RBA look at the evidence from Australia:

Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial instability is called ‘leaning against the wind’. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia.

The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.


Safeguarding the euro in times of crisis: The inside story of the European Stability Mechanism (ESM)

July 10, 2019

In the backdrop of European sovereign debt crisis, the leaders first established European Financial Stability Facility in 2010 followed by European Stability Mechanism in 2012.

ESM has released a book (free pdf available) reflecting on the experiences of establishing the facility and so on:

Global financial leaders and ESM insiders provide a rich stock of perspectives and anecdotes that bring to life the urgency of the euro area crisis as well as the innovative solutions found to resolve it. As Europe strives to further strengthen its financial architecture, this books provides important lessons for future crisis management.
Should be a good read…

Global Dimensions of U.S. Monetary Policy

July 9, 2019

Maurice Obstfeld of Univ of California Berkeley in this research paper says there are 3 channels:

This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that U.S. monetary policy faces. It considers three main channels.

The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations.

The second channel is the determination of asset returns (including the natural real safe rate of interest, r*) and financial conditions, given integration with global financial markets.

The third channel, which is particular to the United States, is the potential spillback onto the U.S. economy from the disproportionate impact of U.S. monetary policy on the outside world.

In themselves, global factors need not undermine a central bank’s ability to control the price level over the long term — after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.


20th anniversary of Euro: Twenty papers to better understand the single currency

July 9, 2019

Nauro Campos and Fabrizio Coricelli do us a huge favor by listing the 20 papers one should be reading to understand Euro.

Does Financial Cycle Exist in India?

July 4, 2019

A new RBI working paper by Harendra Behera and Saurabh Sharma:


RIP: Lee Iacocca

July 3, 2019

I have always liked reading autobiographies and biographies of all kinds.

One of the first ones I remember reading was Autobio of Lee Iacocca where he explains his journey into car making. He started with Ford (1946-78) and later joined as head of Chrysler, saving it from bankruptcy(1978-92). Iacocca was a really popular CEO of his time famous for his spat with Henry Ford II.

The man passed away. Rest in Peace.

Implicit trade patterns in global cuisines: Who are the exporters and importers in cuisine market?

July 1, 2019

Fascinating paper by Joel Waldfogel of Carlson School of Management:

Perceptions of Anglo-American dominance in movie and music trade motivate restrictions on cultural trade. Yet, the market for another cultural good, food at restaurants, is roughly ten times larger than the markets for music and film. Using TripAdvisor data on restaurant cuisines, along with Euromonitor data on overall and fast food expenditure, this paper calculates implicit trade patterns in global cuisines for 52 destination countries. We obtain three major results.

First, the pattern of cuisine trade resembles the “gravity” patterns in physically traded products.

Second, after accounting gravity factors, the most popular cuisines are Italian, Japanese, Chinese, Indian, and American.

Third, excluding fast food, the largest net exporters of their cuisines are the Italians and the Japanese, while the largest net importers are the US – with a 2017 deficit of over $130 billion – followed by Brazil, China, and the UK.

With fast food included, the US deficit shrinks to $55 billion but remains the largest net importer along with China and, to a lesser extent, the UK and Brazil. Cuisine trade patterns appear to run starkly counter to the audiovisual patterns that have motivated concern about Anglo-American cultural dominance.


The rise of part-time work: A German-French comparison

June 28, 2019

New research by Petra Marotzke of Bundesbank:

I study possible determinants of part-time employment among women in France and Germany using microdata of the Labour Force Survey. Voluntary part-time work is substantially more widespread among women in Germany than it is in France. Estimation results show that while the presence of children and marital status are related to the choice to work part time in both countries, their impact is substantially greater in Germany. Controlling for several factors, the probability of working part time in Germany exceeds that in France among married women and among women with children, while there is hardly any difference among single women and women without children living in the same household. Further results suggest that, besides financial incentives, social norms and cultural legacy play a role in choosing to work part time.

Mint newspaper is hiring..

June 27, 2019

Mint’s data journalism team is hiring. Last date is 10 July 2019. Spread the word.

Inflation Dynamics in the Age of Robots: Evidence and Some Theory

June 25, 2019

Interesting BOJ working paper by Takuji Fueki and Kohei Maehashi.

Over the past decade, one of the central questions in macroeconomics has been the missing link observed between inflation and fluctuations in economic activity. We approach this issue with a particular focus on advances in robots, or what are essentially autonomous machines. The contributions of the
paper are twofold.

First, using a country level balanced panel dataset, we provide significant evidence to show that advances in robots are one factor behind the missing link. Second, we ask a standard New Keynesian model to rationalize this fact. The distinguishing feature is the introduction of capital which is substituted for human labor, and can therefore be interpreted as the use of robots.

Due to this feature and developments in robot, firms can adjust their production by using robots, whose efficiency is getting higher, instead of employing human labor. Hence, the responsiveness of marginal costs to changes in economic activity becomes weakened, and thus, our model supports the empirical fact that advances in robots are one factor behind the missing link.


Bridging the textbook gaps on how the central banks implement monetary policy

June 20, 2019

Kellie Bellrose of RBA explains the difference between how textbooks explains central banks implementing monetary policy vs how central banks actually implements it.

Though the article is for Reserve Bank of Australia but applies to most central banks.

The RBA’s implementation of monetary policy is an area of confusion for professional economists, commentators and educators alike, particularly in reference to how closely the actual process aligns with the standard textbook explanations. T

he two main gaps in typical textbook explanations relate to:

    1. The omission of the policy interest rate corridor. The corridor is key to how the RBA implements monetary policy, particularly a change in monetary policy, as it encourages banks to trade ES balances at the target cash rate.
    2. The use of open market operations. Textbooks often link OMOs with achieving a change in the cash rate when, in practice, the RBA uses OMOs to manage the supply of cash to keep the cash rate at its target.

In summary, the market automatically trades at the new cash rate target following a change to monetary policy. This is achieved by the policy interest rate corridor, which resets around the new cash rate target, and banks have no incentive to trade outside of this corridor. Given the automatic adjustment to the cash rate target, there is no need for additional OMOs. OMOs are instead used by the RBA to manage the supply of cash (liquidity) in the market on a daily basis as part of its liquidity management practices.

This information can be viewed at a glance in the accompanying table ‘The Reality of Monetary Policy Implementation’.

Nice bit.


The future of cash in New Zealand

June 20, 2019

Reserve Bak of NZ issued a report on future of cash in the country:

The future of cash1 in New Zealand is uncertain. The Reserve Bank of New Zealand (Reserve Bank) is in the middle of a multi-year programme to establish The Future of Cash — Te Moni Anamata. This programme has identified that, despite an increasing trend in the overall cash in circulation (CIC), New Zealand is becoming a society that uses little cash.

New Zealanders are using cash less and less for transactions. As the transactional demand for cash falls, the per transaction cost of providing cash infrastructure increases. Commercial operators have natural incentives to reduce their costs and reduction in cash demand and use could lead them to reduce their provision of cash infrastructure, or to stop accepting and issuing cash. Such decisions — driven by commercial considerations — would in turn further increase the per-transaction costs of providing cash and lead to further reductions in the cash network.

The benefits of having cash become greater and greater as more and more people use it. This so-called ‘network effect’ of cash, also declines as fewer people use it. For example, if fewer consumers, businesses, and banks dealt with cash, the ability for people to use cash for transactions in stores and between individuals would decline. If this occurred, some of the unique roles of cash could be lost. The legal tender status of cash does not oblige anyone to accept cash as a means of payment except for debt.

A contraction in the cash network without regard to the wider benefits of cash in society might significantly disadvantage people who rely on the unique role that cash plays in their lives. This would be considered a market failure2 to the extent that commercial operators did not fully incorporate the wider network benefits of cash. As a result, government action could be warranted following the completion of this review.

The Reserve Bank is the sole issuer of cash in New Zealand and is required to issue currency that meets the needs of the public.3 There is no agency responsible for over-seeing the usability of cash by the public or stability of the cash system in New Zealand. Therefore, the Reserve Bank is taking a leadership position to assess the future of cash.

This issues paper outlines our4 preliminary analysis of the role of cash in society and the trends in cash use and supply. It sets out the key issues to consider – both positive and negative – if less cash were being used in New Zealand accepted that:

    1. People who are financially or digitally excluded could be severely negatively affected. These include:
      1. People who are not banked or have limitations to accessing the banking system, such as people without identification and proof of address, people with convictions, people with disabilities, illegal immigrants and children.
      2. People who face barriers to digital inclusion, such as people with disabilities, senior citizens, people with low socio-economic status, people that live in rural communities with low internet service, migrants and refugees with English as a second language, Pasifika, and Māori.
    2. Tourists, people in some Pacific islands, and people who use cash for cultural customs might be negatively affected if they cannot use cash substitutes.
    3. All members of society would lose the freedom and autonomy that cash provides and the ability to use cash as a back-up form of payment, and might be more exposed to national and personal cyber threats.
    4. There would be limited or balanced effects for people’s ability to budget, New Zealand’s financial stability, and government revenue.
    5. Cash infrastructure is costly. Moving to a society with less cash could increase efficiency and reduce the overall transaction costs of payments.

The issues arising from a society with less cash have a broad reach. This issues paper invites your feedback on whether we have correctly identified the most important issues and whether there any other significant issues that should be taken into account. It also seeks initial views on the roles of government and Reserve Bank are regarding these main issues.

The Reserve Bank will publish an analysis of the feedback received, as well as further research. A formal policy consultation may follow depending upon what emerges from feedback on this paper and further research and analysis.


History of Australian equity market: 1917-79

June 19, 2019

Thomas Matthews of RBA in this paper:

This paper presents stylised facts about the historical Australian equity market, drawn from a new hand-collected unit record dataset on listed companies from 1917 to 1979. Among other things, I show that: i) dividends for the early 20th century were lower than previously believed; ii) the realised returns on equities has averaged about 4 percentage points above that on government bonds since 1917, somewhat lower than previous estimates; iii) the share of profits paid out as dividends increased substantially after the introduction of franking credits in the 1980s; iv) the current industry composition of the stock exchange is atypical relative to history, despite it being dominated by essentially the same companies for the past century; and v) price-to-earnings ratios are currently almost exactly at their very long-run average, in contrast with the experience of some other countries.

Good stuff!

Financial revolution in Republican China: 1900-1937 (rare case of finance being freed from State)

June 14, 2019

Nice research by Prof Debin Ma of LSE:


Growing use of local currencies in Japanese trade with Asian countries

June 12, 2019

Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu in this research:

Japan exports to neither advanced nor Asian countries in yen, as would be expected. Using questionnaire data, this column shows why Japanese exporters tend to choose destination currencies in their exports to advanced countries and why the US dollar, rather than the yen, is more often used in their exports to Asia. It also presents new evidence that the share of local currency has recently increased markedly, while that of the US dollar has declined, in Japanese exports to Asia. 


Will the weather Gods smile or frown? Evaluating Monsoon forecasts

June 11, 2019

RBI’s June-2019 Bulletin has this article by Priyanka Bajaj, D. Suganthi, Rishabh Kumar and Atri Mukherjee.

The India Meteorological Department (IMD) has predicted normal and well distributed South West Monsoon rainfall for 2019, which is at odds with the
forecasts of private and international agencies. This article drills analytically into past patterns of prediction outcome performances of various agencies through multiple statistical measures to evaluate their forecast accuracy.

The comparative assessment suggests that for generating macroeconomic forecasts, the use of IMD’s second stage long range forecast and the predictions of international agencies in conjunction may be appropriate as the preliminary forecasts of IMD and Skymet released in April appear to be noisy.

Good stuff RBI!

RIP Mr. Girish Karnad

June 10, 2019

Those who grew watching Malgudi days/Turning Point (and several other shows on Doordarshan), cannot forget Mr. Girish Karnad. One is not even listing his several other achievements. A person who wore multiple hats.

Rest in peace Sir.


Indian macro policy’s 2-4-6-8 framework..

June 4, 2019

Niranjan Rajadhyaksha continues to educate us this time via a working paper.

He gives this brilliant insight that Indian economy operates under a 2-4-6-8 framework. These are acceptable targets for current account deficit, retail inflation, consolidated fiscal deficit and growth rates:

Indian macro policy has been operating under an implicit 2-4-6-8 framework, which are the targets for the sustainable current account deficit, the desired level of retail inflation, the consolidated fiscal deficit target embedded in law and the aspirational rate of economic growth. There is a need to take a fresh look at this macro policy playbook for two reasons. First, the individual targets have been decided at different points of time by different parts of the economic policy ecosystem rather than emerging from a common analytical project. Two, there are reasons to doubt its internal coherence given that India has rarely been able to meet all four targets simultaneously over the past decade.

The tricky political economy decision for the new government elected in May 2019 is whether to ease some of the economic stability constraints such as the fiscal deficit, the current account deficit and retail inflation in a bid to maintain economic growth at 8 percent; or continue to prioritise hard-won economic stability while facing the risk of social unrest as lower economic growth fails to provide the adequate number of jobs in formal enterprises; or put in place policy reforms that can help raise potential growth without creating periodic bouts of macroeconomic instability. This working paper argues in favour of the third option with five sets of policy recommendations, so that economic growth accelerates without putting economic stability at risk.


The Macroeconomics of the Greek Depression: Would devaluation have helped

June 3, 2019

Gabriel Chodorow-Reich, Loukas Karabarbounis, Rohan Kekre in this NBER paper analyse the Greek depression:

The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we develop and estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust.

Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression.

Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects.

By contrast, shifting the burden of adjustment from taxes toward spending or from capital taxes toward other taxes would generate significant longer-term production and consumption gains.


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