20 years of Euro: a glass half-full or half-empty?

My new piece in moneycontrol.

 

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Examining the trade-off between price and financial stability in India

Ila Patnaik, Shalini Mittal and Radhika Pandey of NIPFP in this recent paper find trade off between price and fin stability:

In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis,
there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical
approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and
financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial
stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging
economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with
monetary policy instrument.

Hmm..

Turkey’s central bank pays early interim dividend…

Turkey’s central bank pays an early dividend worth 33.7 billion Lira (HT: Centralbanking.com).

Apparently, the dividends are paid annually in April as per the law. But the law was amended to allow an interim dividend..

 

 

Central Bank of Brazil looks through its 54 year histiry

Nice bit from the Central Bank. It is all in Portuguese so do press the translate option.

The Central Bank of Brazil is more than 50 years old. The conduct of oral interviews with personalities who contributed to its construction is part of the memory of this institution, which is so closely linked to the economic trajectory of the country.

The interviews allowed not only a tour of history, but also to experience the crises, conflicts, choices made and the opinions of those who gave a period of their lives for the construction of Brazil. At the same time, they constitute complementary material to traditional historical sources.

The set of statements clearly demonstrates the process of building the Central Bank as a state institution, persistent in fulfilling its mission. The concern with the construction of an organization with technical profile pervades all the interviewees. At the same time that they were building the structure, they sought to adopt the necessary economic policy measures to achieve their mission.

Our expectation with the publication of these interviews is to contribute with a better understanding about the evolution of the Institution and its performance and stimulate the search for knowledge about the economic history of the country and about how the Central Bank pursues its objectives of guaranteeing the stability of the power of purchase of the currency and the soundness and efficiency of the financial system.

One just gets profiles of the interviewed personalities in English. The interviews remain in Portuguese and one hopes the central bank translates them to share it with the wider audience.

 

 

India’s Corporate Bond Market: Issues in Market Microstructure

Nice piece by Shromona Ganguly of  RBI in the January Monthly Bulletin.

Development of corporate bond market in India remains crucial for meeting the financing requirement of industry and infrastructure sector. Despite various initiatives undertaken in the past, there is little change in the overall market microstructure of the corporate bond market in India. At this backdrop, this article explores the available statistics on corporate bond market in India during recent times (2010-18) to analyse the various demand and supply side factors, which impede the growth of corporate bond market in India. It is found that the gradual increase in proportion of market-based sources in total debt financing by non-financial companies is confined only to the larger-sized firms. Though finance and infrastructure companies dominate the corporate bond market, mutual funds are playing an important role in diversifying the issuance base of the market. Empirical analysis suggests significantly higher risk-premia associated with lower-rated bonds in the private placement market.

Remembering CD Deshmukh on his 123rd Birth Anniversary…

Nice tribute from Remya Nair:

In 1943, the Reserve Bank of India got its first Indian governor in Chintaman Dwarkanath Deshmukh, a civil servant luminary who went on to do a great many things for the country in the early years after Independence.

Deshmukh’s appointment to the independent regulatory body came at a time when India was ruled by the British, and predictably in the face of opposition from various sections of the government who wanted the tradition of a European helming the central bank to continue.

But he battled all these odds to become the third governor of RBI.

What worked in his favour was his long association with the bank. Deshmukh was appointed as a government director on the bank’s board and subsequently held the posts of secretary and deputy governor before being elevated to become a governor.

His association with the central bank did not cease after he demitted the Governor’s office in 1949. Deshmukh was later appointed as the union finance minister marking a 17-year long association with the central bank.

On his 123rd birth anniversary, ThePrint takes a look at the life of the civil servant who served the country in various capacities.

We need more and more biographies of people like Mr Deshmukh…

Agricultural Loan Waiver: A Case Study of Tamil Nadu’s Scheme

Deepa S. Raj and Edwin Prabu of RBI have this interesting and timely paper:

This paper examines the impact and implications of Tamil Nadu’s agricultural loan waiver scheme of 2016, based on data collected through a field survey of seven districts of the state as well as farm loan transactions data obtained from select primary agricultural co-operative credit societies. The state government’s loan waiver scheme was applicable only to agricultural loans availed by small and marginal farmers, while other farmers with land holdings of above 5 acres were not eligible for the waiver benefit.

Empirical findings using Regression Discontinuity Design (RDD) suggest that in the immediate post-waiver period near the cut-off acreage of 5 acres, the probability of obtaining credit was higher for non-beneficiary farmers than for beneficiary farmers. However, the differentiation in post-waiver access to credit to the beneficiary farmer and the non-beneficiary farmer comes down as the supply of funds for agricultural loans normalises.

The paper also has a summary of the previous debt waiver schemes and their impact….

Remembering 2018: Year of economics’ anniversaries and milestones

The blog has been on a long break. Hoping to get back on track.. Here is the first post for 2019.

The year 2018 was quite historic given several anniversaries and milestones completed during the year. We just saw how the leaders of developed world had congregated at Paris recently, paying homage on the 100^th anniversary of end of World-War-I. World War-I in turn shaped the worldwide polity and economy over the years whose anniversaries will come in future.

Having said that, the year 2018 was quite a remarkable year for anniversaries and birthdays in the field of economics, finance and business as well.  In this article I list these key milestones.

I start with central banks where we saw several such birthdays. The world’s first central bank –Riksbank of Sweden- celebrated its 350^th year amidst celebrations in Stockholm. Riksbank hardly started as a central bank and was more like a bank to serve the monarchy. The central banking as a concept developed with evolution of Bank of England in the 19^th century. Sweden was also the first country to start banknotes in Europe. This is ironical 2018 also marks 10^th year of bitcoin, an idea which threatened the mere idea of a central bank and physical currencies.

Next we saw Denmark Central Bank celebrate 200 years. The other Scandinavian central bank of Norway was established 2 years ago in 1916. All these three central banks started mainly to counter the over-issuance of banknotes by private banks.

The next set of central banks in the list are those in Ireland, China, Pakistan and Malta which celebrated 75^th, 70^th, 70^th and 50^th birthdays. In particular, the history of State Bank of Pakistan is interesting as it was established on 1 July 1948, under highly trying circumstances after the Partition.

Some countries celebrated anniversaries of certain currencies which is different from anniversaries of central banks. For instance, in 1868 made Pestada as the official currency and let Escudo disappear, marking 150 years since the event. We also Czech authorities commemorate 100 years of their currency Koruna (after dissolution of Austro-Hungarian empire after World War-I) and Armenians celebrate 25 years of their currency Dram (after breaking with the USSR).

For connoisseurs of Indian numismatic history, 2018 also marks 100 years of Osmania Sicca Rupee, the currency issued by Princely State of Hyderabad (Kashmir also issued its own currency but circulated briefly). Hyderabad always wanted to issue their own currency but were denied by British. They finally got an opportunity in 1918, as British India struggled with supplies of silver during World War I. Infact, both notes of Rupee 1 and Rupee 2.5 were issued for the same reason in 2017. Post-Partition, Osmania Rupee went through interesting times as the Hyderabad State first wanted to be a part of Pakistan and later was made part of Indian Union.

Talking about British empire, the year also marked the 350^th year of start of British empire in India. The East India company was leased a bunch of islands (Bombay) by the British Crown in Mar-1668 and they landed on the islands in Sep-1668. Benita Fernando looked at the spate of events here: (https://www.livemint.com/Leisure/KkeKxDetn5daogULO3TMVJ/The-East-India-Company-the-founders-of-Bombay.html)

Few Indian companies also completed their milestones starting from India’s oldest business group that of Tatas celebrating its 150 years. Their own website says: “In 1868, aged 29 and wiser for the experience garnered by nine years of working with his father, Jamsetji started a trading company with a capital of Rs 21,000.” This is followed by Hindu newspaper marking 140 years followed by three businesses marking their centenaries: Britiannia, Saraswat Bank and Mysore Sandal Soap.  Hindu newspapers is also celebrating 25 years of its business paper – Hindu Business Line.

The 1991 reforms led to wide-scale reforms including those in financial sector with advent of National Stock Exchange and allowing Private Sector in Mutual Funds as the marquee of these reforms. Both competed their 25 years in 2018 with NSE hosting Prof Robert Merton in the R.H. Patil memorial lecture. The media discussed the events with the fund managers who were around during that momentous time. More importantly, the torchbearer of these reforms Securities Exchange Board of India also completed its 30 years. It started in 1988 as a non-statutory body and gained steam after 1991 reforms and Harshad Mehta Scam.

Talking about reforms, one has mention China competing its 40 years of liberalization and reforms. After the Mao-era, Chinese authorities began to gradually to open up their economy to external markets and becoming a force in world economy.

We now look at some of the names and ideas that shaped world and Indian economy. We start with who else but Karl Marx who continues to divide the world thinkers despite being born 200 years ago. A history of Indian political economy can never be complete without discussing the role of PC Mahalonobis as he completed 125 years in 2018. There are two seminal research papers which made a phenomenal contribution to economic research marking 50 years. The first is the highly celebrated work by Milton Friedman where he questioned the trade-off between inflation and unemployment as espoused by Philips Curve. The second not so celebrated is Douglass North’s paper where he estimated shipping productivity from 1600-1855. The other paper which deserves mention is Paul Krugman’s paper written in 1998, which analysed the Japanese crisis of 1990s and famously asking their central bank to “credibly promise to be irresponsible”.

It is good to end with Krugman’s paper, as the developed world faced near similar shock as Japanese economy leading to referring that very paper. We have just completed 10 years since Lehman crisis making it the shortest phase of history (along with bitcoin) mentioned in this article. The policymakers and academicians worldwide, have written and reflected on the lessons from the 2008 crisis. There is a wide belief that lessons have been learnt and we are unlikely to see repeat of the events. We will have to wait and see history enfold to see how much of this optimism is indeed true.

Till then, bidding adieu to a historic 2018 and welcoming 2019!

40th anniversary of China’s economic reform and the 70th anniversary of its central bank: Some perspectives

Yi Gang, Governor of the People’s Bank of China, gives a speech on the twin anniversaries:

This year marks the 40th anniversary of the reform and opening-up and the 70th anniversary of the founding of the People’s Bank of China (PBC). As components of China’s tremendous achievements in the progress of the reform and opening-up, historic changes in the financial sector have taken place in the past four decades, and a modern financial market system has been broadly established which, adapting to the socialist market economy with Chinese
characteristics, is vital and internationally competitive.

And over the past 70 years, under the leadership of the Communist Party of China (CPC), the PBC has made extensive exploration and innovation, overcome formidable obstacles, pioneered in the promotion of financial development, reform and opening-up at different times, kept creating new prospects for the financial sector, and made significant contributions to China’s economic and social development.

In China it is clear. Central Bank functions under the aegis of the Government and there is no quarrel over central bank independence. The markets do not even care whether the central bank is any independent or not.

Gang lists several changes which have gone in the 40 years in financial sector. Useful speech as we know little of the developments in China..

2008-18: A decade where mainstream academic world and mainstream policy world went own ways..

JW Mason gives a nice overview of macroeconomic research in the decade:

He says the macro research may not have changed in academic world but in policy world there are sure changes.

Has economics changed since the crisis? As usual, the answer is: It depends. If we look at the macroeconomic theory of PhD programs and top journals, the answer is clearly, no. Macroeconomic theory remains the same self-contained, abstract art form that it has been for the past twenty-five years. But despite its hegemony over the peak institutions of academic economics, this mainstream is not the only mainstream. The economics of the mainstream policy world (central bankers, Treasury staffers, Financial Times editorialists), only intermittently attentive to the journals in the best times, has gone its own way; the pieties of a decade ago have much less of a hold today. And within the elite academic world, there’s plenty of empirical work that responds to the developments of the past ten years, even if it doesn’t — yet — add up to any alternative vision.

For a socialist, it’s probably a mistake to see economists primarily as either carriers of valuable technical expertise or systematic expositors of capitalist ideology. They are participants in public debates just like anyone else. The profession as the whole is more often found trailing after political developments than advancing them.

……

Many critics were disappointed the crisis of a 2008 did not lead to an intellectual revolution on the scale of the 1930s. It’s true that it didn’t. But the image of stasis you’d get from looking at the top journals and textbooks isn’t the whole picture — the most interesting conversations are happening somewhere else. For a generation, leftists in economics have struggled to change the profession, some by launching attacks (often well aimed, but ignored) from the outside, others by trying to make radical ideas parsable in the orthodox language. One lesson of the past decade is that both groups got it backward.

Keynes famously wrote that “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” It’s a good line. But in recent years the relationship seems to have been more the other way round. If we want to change the economics profession, we need to start changing the world. Economics will follow.

Hmm..

This line-  the image of stasis you’d get from looking at the top journals and textbooks isn’t the whole picture, the most interesting conversations are happening somewhere else – is quite true. You get far more ideas reading newspapers and blogs (most of which ironically are written by top academicians) than reading journals and textbooks..

Bank Underground Blog’s Christmas Quiz

Nice quiz  on the blog.

I fared too poorly to tell my score 😦

 

“A Noteworthy Woman”: Viola Desmond who featured on Canada’s $10 note..

An interesting way of honoring noteworthy women is by featuring them on currency notes!

Carolyn Wilkins of Bank of Canada in this speech does this really well:

Thank you all for being here for the opening of A Noteworthy Woman, our temporary exhibition about the imagery on Canada’s new $10 bank note. The process to choose the first Canadian woman to be featured on a regular bank note was exciting, and it inspired many. We received more than 26,000 submissions.

This exhibition retraces our journey with Canadians to collect ideas. It tells the story of the 12 amazing women who, in the end, were considered for the honour, and of Viola Desmond and her lasting legacy as a human rights icon in Canada.

The artifacts in the exhibit are evocative reminders of Viola Desmond’s life and the time in which she lived. The focus has, of course, been on that day in a movie theatre in Nova Scotia in 1946. A successful business woman was denied a seat downstairs, was arrested and jailed, then ultimately convicted and fined for doing what was right in a system that was wrong.

Yet, that day in the theatre was not the first time Viola Desmond had experienced systemic racism. She had always dreamed of opening her own beauty salon, but the 1930s was not a time when a woman-and especially a black woman-could easily succeed. Nova Scotia beauty schools would not accept her, so Viola trained in Montréal and the United States. She then returned to Halifax to open her own studio in 1937, during the depths of the Great Depression. Viola Desmond had been an inspiration for years before she bought that fateful movie ticket.

Our exhibition includes mementos from Viola Desmond’s business and seats from the movie theatre where her public battle began.

More poignant still is Viola Desmond’s free pardon, granted in 2010 by the government of Nova Scotia, which recognized that she was innocent of the conviction that had remained on her record for 63 years. She never got to see justice served. It is a pleasure and honour to have Wanda Robson here today to share this moment dedicated to her sister.

The exhibition also highlights other design features of the vertical $10 note, which centre on the theme of human rights and social justice. You will find an image of an eagle feather, an excerpt from the Charter of Rights and Freedomsand an image of the Canadian Museum for Human Rights, where Wanda Robson spent the first new $10 note 10 days ago.

We could not leave out of the exhibition the important stories of the 11 inspirational women who were also considered for the bank note. These remarkable women overcame barriers, created significant change and left Canada better because of their contributions.

Soon, many Canadians will carry a Viola Desmond note in their wallets. But the lessons of her life must continue to be told. That’s why I’m glad that, through this exhibition, people will be able to learn more about her history, and Canada’s history. It is by interpreting our past that we inform our future.

Hmm…

Central Bank of Seychelles celebrates 40th anniversary

The Central Bank of Seychelles was established on 1st Dec 1978 as Seychelles Monetary Authority:

Central Banking in the Seychelles started as far back as 1936, with the establishment of the Seychelles Currency Board, similar to other British colonies of the time. The Seychelles Notes Ordinance and the Coinage Ordinance of 1936 bestowed the responsibility for the issue and redemption of Seychelles currency on the Colonial Secretary and later, with the Financial Secretary, acting as Currency Commissioner.

…..

The weaknesses of the Currency Board were uncovered by its inability to adapt and assume control over a rapid expansion of the domestic banking sector in the seventies brought about a by a boom in tourism. With the Board having no mandate to undertake monetary policy, adherence to a fixed exchange rate regime, implied that the domestic money supply would fluctuate according to the flows of external capital. This situation was as expected not favourable to stable and sustainable economic development. As a result, in August 1976, an International Monetary Fund (IMF) Mission at the invitation of the Seychelles government undertook a study of the financial system and recommended structural and operational improvements in the Currency Board system.

Following IMF recommendations the government firmly decided to create a central banking institution to regulate money supply, to supervise the banking system and generally to foster financial conditions conducive to orderly and balanced development. . However, given the rudimentary structure of the financial system and the lack of local expertise, it was decided that, as an interim step, a Monetary Authority be set up, with the establishment of a fully fledged Central Bank planned for a later date. Hence, on November 24, 1978 the Seychelles Monetary Authority Decree was enacted and the Seychelles Monetary Authority (SMA) was founded under this decree on December 1, 1978. All the responsibilities, as well as the assets and liabilities of the Currency Fund established under the Seychelles Currency Act, 1974 were transferred to the Authority.

The SMA functioned very much like a Central Bank. The 1978 Decree empowered it with the necessary tools to enable it to achieve its objectives. These included (but were not limited to) the issue of currency, the management of external reserves, banker and lender of last resort to government and commercial banks and inspection of banks and other financial institutions. The most important difference with its predecessor was that the Authority was given the responsibility for monetary policy, thus enabling it to set monetary instruments such as interest rates and credit controls to achieve certain desired objectives. However, the 1978 Decree provided for a Board of Directors comprising of three members; one of whom was the Permanent Secretary of Finance; another being the Accountant-General; and the third being any person as may be appointed by the President. This was to ensure that the Authority consult closely the government, mainly the Department of Finance, in its capacity as Financial and Economic Advisor.

On the 40th anniversary, the central bank organised an exhibition and its Governor Ms Caroline Abel said:

Understanding Exchange Rates and Why They Are Important

Nice piece by Adam Hamilton of RBA:

Exchange rates are important to Australia’s economy because they affect trade and financial flows between Australia and other countries. They also affect how the Reserve Bank conducts monetary policy. This article outlines how exchange rates are measured, the different types of exchange rate regimes, the factors that influence the exchange rate and how changes in the exchange rate affect the economy.

 

The evolving scope and content of central bank speeches

Pierre Siklos, Samantha St. Amand and Joanna Wajda on the topic:

There is an ongoing debate regarding how far central bankers, as unelected technocrats, should go outside of their remit when communicating in public fora. This column uses a machine-learning algorithm to assess the topics of speeches by officials at the US Federal Reserve and Bank of Canada over the last two decades. It concludes that the topics of central bankers’ speeches have not significantly widened in scope relative to their mandate documents.

….

The analysis reveals no clear deviation in the scope of central bankers’ speeches from their mandate over the past two decades. While the speeches by officials at the BoC have expanded in scope relative to the text of its mandate documents, the outlying topics are clearly related to how central bankers interpret incoming information about the economy. In general, much of the variation in speech content at these central banks can be explained by individual central bankers and key economic events. One exception is discussion of education and inequality by Fed officials, which has increased over the past decade, potentially related to efforts to improve public engagement. 

Whether or not central banks should be discussing these issues in public fora is an important debate for governments, central bank watchers, and the general public. The analysis in our paper informs this debate by identifying which topics of discussion are prominent in central bankers’ speeches and measuring the weight of these topics among all their public addresses. In future work, it may be fruitful to explore whether the topics discussed by central bankers can affect the credibility of and trust in these institutions.

 

The 2008 crisis: transpacific or transatlantic (savings glut or European Banking glut?)

Nice paper by Robert N McCauley of BIS.

There are two broad hypothesis which are responsible for the 2008 crisis: Savings glut of Asian economies or Banking glut of European economies:

This study analyses two hypotheses that ascribe the 2008 US financial crisis to capital inflows.

The Asian savings glut hypothesis posits that net inflows into high-grade US public bonds from countries running current account surpluses led to the housing boom and bust. An excess of savings over investment abroad led to an excess of US investment over savings.

The European banking glut hypothesis holds that gross inflows into private bonds led to the boom. Leveraging-up by European banks enabled the leveraging-up of US households.

They show the European story fits the data and trends better than Asian story. Hence, more of a European banking problem:

Gross flows from Europe better matched US mortgage market trends towards private credit risk, floating interest rates and narrow spreads. What is more, European banks produced, not just invested in, US mortgage-backed securities. Their US securities affiliates held huge exposures to such securities that deserve recognition. Furthermore, European banks’ leveraging-up also provided credit that enabled housing booms in Ireland and Spain. These findings favour the European banking glut hypothesis.

 

Ornithology and RBI MPC members: Moving from hawks/doves/owls to swans/canary/turkey…

Manas Chakravarty keeps coming up with amazing pieces. He wrote an interesting piece on economic consequences of Arvind Subramaniam’s grandchild.

Now he has written this piece on applying ornithology to RBI’s MPC members. These ornithology pieces are mostly centered around Governors and interesting to see them being applied to MPC members. I recently blogged about Rajiv Mailk piece hoping the new Governor is not a lame duck.

Manas moves onto the 6 MPC members and as a result many more birds:

Let’s start with Urjit Patel, the former governor, who left the RBI like a bat out of hell. A bat, though, is not a bird. This meeting was his swan song, which I suppose makes him a swan, though a rather unlikely one. Some have said a goose would be more appropriate because his goose was cooked, but the flaw in that reasoning is he wasn’t cooked but his goose was, although there’s some difference of opinion on that. The government, of course, has no doubt whatsoever that he was an albatross around its neck.

Ravindra Dholakia has been classified as a dove ever since we started giving them bird names and there’s no reason to change it now. I would merely like to emphasise he isn’t a turtle dove, since he doesn’t bill and coo, at least not in monetary policy meetings. The latest meeting however does open up the possibility of him being a wet hen since he ranted that ‘retaining the stance of calibrated tightening seems totally inconsistent and unjustified.’ He seems as mad as a wet hen against the decision to keep interest rates high.

There can be absolutely no doubt that Chetan Ghate is an owl. Only someone as wise as an owl could say ‘two interlaced variables pose the potential of un-anchoring inflationary expectations, and thereby making it difficult to ensure price stability on an enduring basis’ without batting an eyelid at the monetary policy meeting.

Some say Pami Dua is neither fish nor fowl, more of a dark horse really. But she might be a turkey, on the rather slender basis that she talks turkey. Thankfully, she survived the Thanksgiving cull.

What about Michael Patra? He’s traditionally been known as a hawk, although his enemies who want lower interest rates say he’s a loon, no doubt inspired by the ‘crazy as a loon’ idiom. But we don’t have loons in India. His statement at the monetary policy meet that it was ‘apposite to persevere with the stance of calibrated tightening to head off inflation pressures from potentially corroding the foundations of the growth path that is evolving over the medium-term’ may or may not make him as graceful as a swan, but there’s no doubt he’s in fine feather. A swan? Nah, not really, those are borrowed plumes, you can’t hide the hawk in him.

We come then to Viral Acharya. In the last monetary policy meeting, his eagle eye spotted a ‘divergence in the direction of price movements in data in key food items provided by the Department of Consumer Affairs (DCA) and realised food inflation for October.’ Such divergence, he said, is rarely observed. That firmly makes him an eagle.

Others say his famous speech on the independence of the RBI that so rattled the government was the canary in the coal mine. That makes him a canary, but it’s not known whether he sings like one at monetary policy meetings. Others believe that, given what the government thinks of him, he is most likely a sitting duck. On the other hand, the whole controversy may well be water off a duck’s back. Either way, he’ll be a duck.

Everyone is agog to know what Shaktikanta Das, the new RBI governor and chairman of the MPC, will be. But there is little doubt he’ll be cock of the walk, besides being happy as a lark.

Lastly, just in case anybody thought otherwise, this is of course a cock-and-bull story.

Phew..

 

RBI MPC Minutes: MPC would run the risk of being considered neither current nor relevant!

Dr Ravindra Dholakia, MPC member does not mince words. His latest statement in the minutes of the MPC held in Dec-2018 is worth highlighting (HT: Avinash Tripathi for the pointer):

Drastic and sudden changes in external economic environment have taken place after the last meeting of MPC in October 2018. Should these changes evoke a response through an appropriate policy action? – yes, if they are not purely temporary and have reasonably long term impact on the economy. RBI’s own downward revision of the forecast of inflation 12 months ahead to a substantial extent in response to those developments, is a clear indication of their long-term impact on the economy. Thus, a policy response is called for. If there is no policy action in response to such a major favourable shock, MPC would run the risk of being considered neither current nor relevant!

With inflation forecast coming down by around 120 basis points and quarterly growth forecasts marginally revised downward opening up output gap going forward, there is hardly any justification in retaining calibrated tightening stance. In my opinion, this would be the right time to cut the rate and bring the unduly high real interest rates in the country back to around 2 per cent. It was, however, unfortunate that in October 2018, MPC had changed its stance to calibrated tightening with 5:1 majority despite my unsuccessful persuasion to maintain neutral stance. As a result, any rate cut is off the table for now and any such action would not be advisable at this point. The best we can do under the circumstance is to hold the rate, but change the stance to neutral to take care of all possible uncertainties. We should not deny any possibility of either a rate cut or a rate hike in the near future depending on data coming in.

43. More specific reasons for my vote on the rate and the stance are:

Central Bankers and Ornithology: Hawks, doves, owls and lame ducks…

Rajeev Malik in this Mint piece:

Das should also take note of the following: First, differences in opinion will often exist. However, domain specialization doesn’t mean a licence to be selectively accountable, or to switch off the common sense approach to communication and consultation. Equally, governments cannot continue treating the RBI like a vacuum cleaner, to sort out the mess caused by, say, their delayed actions, policy mishaps, or unexpected outcomes of their shoddy implementation.

Second, central banking isn’t a popularity contest. Given the sweeping powers the current RBI Act gives to the government, it is only the strength of the spine of the RBI governor that prevents a government from bulldozing its way through with politically self-serving and reckless initiatives that could compromise long-term economic stability. The legality of an initiative isn’t the final word on deciding if it is responsible and in our long-term interest.

Third, central banks are prone to forecasting errors. This isn’t appreciated by those who don’t have to be accountable for forecasts, or by those blessed with selective amnesia about their own forecasts. Recall that the majority was singing the same worry in October when Brent oil prices were threatening to march towards $90-100 per barrel.

Separately, the RBI should review its forecasting track record and explain the misses to enhance its transparency and credibility. Also, liquidity management is one of the most basic jobs of a central bank. It is worth exploring why the RBI has often struggled with it and done a dissatisfying job of answering the concerns.

Finally, there has to be a greater focus on ensuring sustained macro stability, not just enjoy it as a lucky outcome. India’s growth is frequently interrupted by concerns about macro stability because policymakers rely heavily on optimistic assumptions and insufficient policy buffers. People in government pump up how big the Indian economy will be in 10-20 years, but there is no thoughtful assessment of how to get there.

RBI governors are kept on a tight leash by New Delhi via the typical initial appointment for a mere three years. It is up to Das to become a dove, a hawk, an owl or any other monetary bird, but hopefully not a lame duck.

Lame duck looks like a new addition to the ever growing list of tagging central bank governors as some bird type…

20 years of Euro: Why single market is not just an extension of the globalisation process

Interesting speech by Mario Draghi of ECB.

He discusses the Euro project and tries to dispel several myths around the project. European countries were struggling after WW-II and wanted to avoid future wars. This led to the political leaders to try and build economic integration within members. They first started allowing easier trade policies between the  countries. After initial gains from intra-EU trade, the growth from trade began to plateau. This was largely because trade was mainly done in intermediate goods.

The Single Market was conceived during a period of weakness in the European economy. Annual growth had averaged just 2.2% from 1973 until 1985 in the 12 countries that would go on to form the euro area^[1], down from 5.3% between 1960 and 1973. Growth potential had also fallen from about 5% per year at the beginning of the 1970s to around 2% per year by the beginning of the following decade.

The typical response of governments to low growth was to increase fiscal deficits. From 1973 to 1985, public deficits in the euro area 12 averaged 3.5% of GDP, while in Italy the average was 9% of GDP. Unemployment rose from 2.6% in 1973 to 9.2% in 1985 for the euro area 12. In Italy, it climbed from 5.9% to 8.2% over the same period.

But the EU had a powerful tool at its disposal to raise growth: the common market. 

One reason that growth potential had decelerated was that intra-EU trade growth had stalled in the early 1970s, because the common market covered mainly intermediate goods where growth was already saturated. Trade in sectors with high R&D and skill content was restricted by non-tariff barriers, preventing productivity spillovers.^[2]

The Single Market offered a way to remove these barriers, reverse the decline in economic potential, and bring more people back into work.

The Single Market was different than Globalisation: