Archive for the ‘Central Banks / Monetary Policy’ Category

Impact of Taper was more on countries with stronger fundamentals

March 18, 2014

The research on impact of taper on emerging world continues (see previous research as well - one and two).

This one is by Joshua AizenmanMahir Binici and Michael M. Hutchison and has a contrarian result. It looks at two kinds of countries – one with better macros and other with fragile macros. One would imagine the second group would have got hit harder because of taper. The authors say it was the opposite- the robust group got hit more:


Sacrifice Ratio and Cost of Inflation for the Indian Economy

March 14, 2014

Prof. Ravindra Dholakia of IIMA has this interesting paper revisiting the issue of sacrifice ratio of  Indian economy. The ratio measures how much output growth the country has to give up in order to lower inflation by 1%. This is how much of the earlier debates on inflation were based on..

The author says, the costs of lowering inflation are much higher than estimated:

Traditional concept of the Sacrifice Ratio measures the loss of potential output sustained by the society in the medium term to achieve reduction in the long-run inflation by one percentage point. This concept is critically examined and generalized to include episodes increasing the long-run inflation rate to gain higher growth of output and employment and hence reduction in the poverty proportion in the medium term. Since the concept needs measurement through a shifting short-run equilibrium of dynamic aggregate demand and supply in terms of inflation rate and output attributable to monetary policy interventions, its estimation is challenging.

There are two alternative approaches to estimate the ratio, the direct one and regression based. Both have their relative merits and demerits. The regression based approach provides one unique average estimate of the Sacrifice Ratio for all episodes but allows holding other factors constant. The direct approach provides separate estimates by episodes but fails to hold other factors constant.

The Sacrifice Ratio turns out to be in a narrow range of 1.8 to 2.1 for deliberate deflation and 2.8 for inflation in India. On the other hand, benefits of one percentage point reduction in trend rate of inflation are at best 0.5 percentage points increase in long-term growth of output that occurs after 4-5 years. This has implications on policy to disinflate.

… It is necessary to consider the cost of inflation in India in view of the Sacrifice Ratio estimates. Thus, reducing the long-run inflation say, from 8% to 5%, would entail the social cost of sacrificing 5.4% to 6.3% of potential output as per our estimates in the previous section.

So,disinflation leads to a mid-term loss of output which is sort of well-known. What is interesting is time needed to recover the lost potential output gap which is way too long..

Problems of plenty for policy-making.

RBI needs to seriously consider achieving disinflation at a relatively high cost compared to the gain from it with respect to the time element involved.


Whether and how entrepreneurship and multinationals have driven globalization..

March 14, 2014

Geoffrey Jones, the eminent business historian at HBS discusses business history and his new book (Entrepreneurship and Multinationals: Global Business and the Making of the Modern World).

He says firms are missing from history of globalization:


Three dimensions of a successful finance professional…

March 13, 2014

Rave Menon of Monetary Authority of Singapore speaks on finance sector and jobs in Singapore… He says fin professionals in Asia need three competencies:


Irish exceptionalism in the world economy..

March 13, 2014

Patrick Honohan gives this nice historical perspective to Irish economy.

He says Irish economy keeps swinging from one side to other..thus the exceptionalism..


How Fed missed the crisis? A sociological perspective..

March 10, 2014

WSJ Blog points to this interesting paper on how group think at Fed caused the crisis.

The paper is written by Neil Fligstein, Jonah Stuart Brundage and Michael Schultz, sociologists at UCB.


How deflation/low inflation situations are different in US, Japan and Europe..

February 21, 2014

Mickey Levy, Chief Economist of Bank of America explains the topic in voxeu.

He says there are no real reasons for worry with respect to US. Though Europe has to prevent itself from becoming another Japan. For Japan, it has to continue to make efforts to come out if its nearly 25 year mess:


Of dentists and economists – the importance of a consistent economic policy framework..

February 19, 2014

A nice speech by Jens Weidmann, President of the Deutsche Bundesbank.

It is obviously based on the famous Keynes quotes on how econs would be seen doing a good job if they are as respected as dentists:


Why did RBI hold its TAC just before submission of Patel Committee report?

February 18, 2014

Imagine coming for a meeting not knowing that in the next you are likely to get fired for no real fault of yours.

RBI’s recent TAC was one such meeting. The minutes were released recently which said the meeting happened on 20th Jan. The policy was held on 28th Jan. It is ironical that  on 21st Jan 2014, Patel Committee submitted its mon pol framework report. And as we know the PC recommends scrapping TAC and instead make a MPC much like BoE etc.

The gap between TAC and monetary policy struck me as have been tracking this for a while. The gap between the two looked a bit wide. So  just looked at the dates of the two events. As TAC minutes were published from Jan-11 policy onwards, So here it goes:

TAC date MP date Gap
20-Jan-14 28-Jan-14 8
23-Oct-13 29-Oct-13 6
24-Jul-13 30-Jul-13 6
25-Apr-13 3-May-13 8
23-Jan-13 29-Jan-13 6
23-Oct-12 30-Oct-12 7
25-Jul-12 31-Jul-12 6
11-Apr-12 17-Apr-12 6
18-Jan-12 24-Jan-12 6
19-Oct-11 25-Oct-11 6
20-Jul-11 27-Jul-11 7
27-Apr-11 3-May-11 6
19-Jan-11 25-Jan-11 6

I was kind of right. Mostly the gap has been 6 days (9 out of 13 times). It was 7 days in 2 cases and 8 days in 2 cases, including the recent one.

It can’t be just a matter of coincidence that the report was submitted on 21st. The head of the committee was part of TAC being the DG of RBI.  So surely, things were known. Either the TAC could be held on 22 or the report submitted a little earlier. some might say this was because of travel issues. Not sure as during policy time  most of the seniors are present. And you could ask them to be present..

This could have led to some debates within TAC members on their comments on the new framework. This is no small policy change as the whole framework is expected to undergo change. RBI top brass could have sought suggestions/comments on the proposed policy change. Fed I know calls experts to comment and share their views apart from mon pol decision. Something similar could be done for this so called change as well.

As this blog has said earlier as well, one does not know why RBI has been following such an adhoc approach with respect to this report. It looks like a pet project of RBI top brass. I mean the committee did not even invite comments from public/experts and in 7 days flat has adopted some suggestions from the committee. No one knows what is the status of the report and how it just gives the Parliament a miss on critical decisions related to RBI Governance..

I am wondering what RBI top brass was thinking when the TAC members were giving their suggestions. Perhaps laughing and thinking that this is your last meeting and lecturing us. In that case why did RBI really waste their time and resources to bring them to RBI and give their policy suggestions. The policy decision on 28 Jul was anyways beyond logic and one did not need TAC suggestions which largely argued to pause.

Perhaps RBI did not want any comments on this seeing some resistance. So just kept it secretive just like the debt swap deal..So much so for transparency in mon policy..

Should Asian central bankers emulate the Fed by employing more and more Phds in economics?

February 17, 2014

Two articles on this. First by Justin Fox who argues how Fed has become an econ PhD safe haven lately. The second is by Michael Arnold in WSJ written in a follow-up to Fox on experiences in central banks of Asian economies.

First Fox:


The Greek financial crisis – from Grexit to Grecovery

February 14, 2014

A nice speech by Greece central bank head George A Provopoulos. He presents a complete and thorough picture on The Greece crisis.

He joined GCB just on the verge of the crisis:


As RBI tries to become a BoE clone, BoE tries to become like RBI…

February 13, 2014

As RBI evades Government/Parliament to adopt the fancied inflation targeting regime, things are changing in the inflation targeting world.  They still say they are inflation targeters but are looking at all kinds of things. Call it flexible inflation targeting which is nothing but RBI’s now discarded multiple indicator approach.

One such case is Bank of England which is even more interesting as RBI is going to try and become like BoE over the years. The RBI committee report borrows heavily from Bank of England framework.

There has been lot of discussion on forward guidance of these central banks and more in case of BoE. The inflation targeting central banks have all kinds of targets (in the name of flexibility) like BoE has for unemployment. So it had this target that it will keep stimulating till unemployment touched 7%. As it touched 7.1% there were debates over whether BoE will stop its easy policy.

There were two solutions. One to lower the unemp threshold to say 6.5% like Fed did (though US unemp has touched tantalising close to 6.6%) or to revamp its fwd guidance statement. BoE chose the second option.

In its recent inflation report (which is also going to be taken out by RBI), BoE explained its changed stance. And interestingly, BoE will look at many indicators for its future policy just like RBI policy.

BoE head Carney explained:


A Century of Central Banking: Was the Fed a Good Idea?

February 12, 2014

A nice discussion at Cato Institute on the topic.

Four people from different  streams discuss whether Fed/central banks are a good idea:


German constitutional court ruling on ECB’s OMT…

February 11, 2014

You can never really leave EZ out of action….It had been quiet for sometime and then comes this interesting verdict by German constitutional court. It says that ECB’s Outright Monetary Transactions are against the EU law. The EU law states that monetary financing of Eurozone governments is not allowed and OMT just does that.

Hans Werner Sinn and Marcel Fratzscher write their perspectivess for and against the decision.

Now not a penny has been spent on OMT since it was announced in 2012  but worked as a magic pill to stabilise the markets. But it took so long to produce the verdict which makes things look really crazy. If it was produced in 2012 itself, may be EZ would have struggled to stabilise.

Given the central bank activism, we need to have faster court verdicts in such cases. If a policy is against a certain law etc and court sits on it for months, it does not help. For instance, if money was spent on OMTs, what would ECB have done?

Why did Govt of India do debt switch secretively?

February 6, 2014

It is far better to do things transparently esp. while dealing with markets. You play with fire if you hide info from them. Things are figured out eventually and all hell breaks loose. However, it has been a tradition in recent years to come out with some or the other policy to manage some aspect of the budget. The PSUs have been pushed to buy help govt sail its disinvestment program. And now this debt switch thing.

RBI announced two things y’day which pleased bond markets:


From James Bond’s licence to kill to central banker’s licence to lie

February 4, 2014

Anatole Kaletsky (chief economist of GaveKal Dragonomics) has this superb piece.

He says the central bankers have a licence to lie and they do the job really well.


Before revamping mon pol framework, rethink governance at RBI first…

February 3, 2014

Just a while back, we were discussing how the government is interfering  in RBI’s affairs. There were talks of government threatening RBI’s independence by trying to meddle in functions of the central bank. So much so it forced the usually quiet RBI former governor to be quite vocal towards the end of his tenure.

Now post regime change in Sep-13, we are looking at a different problem. The issue now is how RBI is trying to undermine the Parliament by doing things as it pleases. It is even more surprising how there is no noise from either people in the Parliament (who understand what is going on and some do), media and experts. The same media which disliked the other institutions from getting into Parliament’s affairs (like courts, CAG etc) has been really quiet on this matter. Why should this  be?

The usually good Haseeb Drabu nails the issue:


In case Scotland and UK agree to form a monetary union..

January 31, 2014

On Sep-18-2014 Scots are going to vote on their independence from UK. In case they do, what choice the country has on its economic framework? Should it continue the monetary union? If it does, what else will authorities have to do? Well, because  of  the EZ crisis, we know much of what needs to be done..

Some basics first. UK comprises Great Britain, Scotland.  Northern Ireland and Wales. It has an interesting monetary framework. Though B0E is responsible for currency in the area, some private banks manage the currency it as well. Wikipedia as always does a good job of explaining the concept.

Mike Carney of BoE in this nice speech explains the economics if UK and Scotland agree to remain in a mon union:

The Scottish government has stated that in the event of independence it would seek to retain sterling as part of a formal currency union. All aspects of any such arrangement would be a matter for the Scottish and UK Parliaments. If such deliberations ever were to happen, they would need to consider carefully what the economics of currency unions suggest are the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place.

Those risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance. The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a durable, successful currency union requires some ceding of national sovereignty.

It is likely that similar institutional arrangements would be necessary to support a monetary union between an
independent Scotland and the rest of the UK.  I suspect you have reached your limits of endurance of the dismal science, so you’ll be relieved to know that economics can take us no further. Decisions that cede sovereignty and limit autonomy are rightly choices for elected governments and involve considerations beyond mere economics. For those considerations, others are better placed to comment.

He covers some interesting stats on how the union looks like compared to other unions..

Pakistan’s economics and political mess….

January 29, 2014

Couple of interesting speeches by State Bank of Pakistan Governor  Yaseen Anwar..

One on fiscal and monetary policy in Pakistan and the other on Banking sector.

In the first, he starts with fisc-monetary policies in the world and then comes to Pak:


Central bankers as Owls, Hawks and Doves…

January 29, 2014

Well jokes have started ever since RBI chiefs have mentioned that they are neither hawks, doves but owls..

In case people think it is original, well Dallas Fed Fisher said this way back in 2008 (c0vered on this blog here)

Those of you who follow my speeches—probably a very small number of you with way too much time on your hands—will recall that I like neither the term “hawk” nor “dove.” I like to think that all FOMC members are best metaphorically described in ornithological terms as “owls”—wise women and men seeking to achieve the right balance in carrying out our dual mandate. To be owlish, and to avoid the imbalance of emphasis that gave rise to needed harsh discipline imposed by the Volcker FOMC, one has to bear in mind that the seeds of inflation, once planted, can lie fallow for some time, then suddenly burst through the economic topsoil like kudzu, requiring a near-toxic dose of countermeasures to overcome.

I am not sure of anyone who referred to it earlier..In case people know, do let this blog know..


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