Archive for the ‘Central Banks / Monetary Policy’ Category

Institutional identity of Indian central bank has been damaged….

January 10, 2017

This blog had warned that we should be more careful while judging central bank appointments. There was a wide feeling by wide number of experts that the appointments at the Indian central bank signals recognition for expertise, need for continuity and what not. Others added how the newly constituted MPC had put India in the league of global peers and how they along with the government will power India into the next set of growth.

How quickly all these beliefs have changed. Even skeptics like this blog are stunned by the sheer pace of the events. Enough has been said about state of governance within the central bank. Even the MPC members will not know their role as they just paused in December meeting. The experts said that this was a clear signal that RBI independence is back (so quickly!). The bankers all praised the move only to cut the rates in new Year of 2017 like not seen before. Not one statement has been made on the relevance of having so many experts decide interest rates when they can be changed so easily. It has taken

In the interim of all this we had another announcement of a new central bank appointment. And again we saw similar views as made in August. One would think there would be some learnings but alas there is nothing of this kind. All these repeated mistakes keeps taking you to this stinging piece on state of media in India.

All this while, it has been disappointing to see former central bank officials not coming to help the organisation. This has been the practice in India for a long time as outgoing officials don’t comment on policy much letting successors do their job. But this is not a day to day thing and clearly requires former heads to come and share their views. But instead they were telling us things which could have been best left to analysts.

Now, finally we have Dr YV Reddy raising concerns:


Would postal stamping the old notes have helped in cash crunch?

January 9, 2017

JP Koning’s blog is the goto blog for monetray history especially post demonetisation.

In his recent post, he highlights how the postal stamping of old notes could have helped the government tide the cash crunch.

He starts with how the government missed a monetary historian in the team:


Post 30 Nov 2016, How cash is being allocated district-wise in India? Central planning at its best..

January 5, 2017

Central banks have cleverly avoided the tag of a central planner but that is what they eventually do. Their interest rate decisions attract so much attention just because we see the power of one body controlling/managing interest rates and monetary flows like no other. But somehow they have managed to create the image of a benevolent government player which wants markets to function.

The last 2 months in India we have seen how eventually central banks are nothing but central planners. The way in which the entire currency show has been managed tells us once again that these things are really difficult to manage centrally. These were lessons which were understood by the central bank in the 1940s and 1970s but were somehow missed in 2016.

Anyways coming to the point, one just stumbled upon this few days old press release of Indian central bank. In this, central bank suddenly wakes up and says more cash needs to be distributed to rural areas:


In 19th century, images of Santa Claus could be found on the banknotes of which country?

January 5, 2017

To answer this and 9 more questions take this insightful quiz prepared by Underground Blog of Bank of England.

Crowds continue outside RBI Bangalore for day 2..

January 4, 2017

The nightmare continues for people. First Indian citizens realised late that Govt/RBI have gone back on their earlier promise. Only those citizens who were outside India in the period 8 Nov 2016 to 30 Dec 2016 and can prove so could exchange old notes of Rs 500 and Rs 1000 at RBI offices. RBI just allowed this facility at 5 of its offices  – the 4 metros plus Nagpur.

People who were outside the country and are from Bangalore (and from other places than those five) realise that Bangalore is not part of the list. So now,  they have to travel to one of those 5 places to exchange:


Doves, hawks … and pigeons: How bevaioral biases influence central bankers decisions..

January 4, 2017

Donato Masciandaro of Bocconi University has a piece showing how behavioral biases impacts decision of central bank officials:

…what happens if we assume that psychological drivers can influence the decisions of the central bankers? In a recent paper, my co-author Carlo Favaretto and I simulated a monetary policy setting with three different kinds of central bankers (Favaretto and Masciandaro 2016).

The members of an MPC (i.e. central bankers) can be split into three groups – doves, pigeons, and hawks – depending on their monetary conservativeness. In the monetary policy literature, a specific jargon has been coined: a “dove” is a policymaker who likes to implement active monetary policies, including inflationary ones, while a “hawk” is a policymaker who dislikes them (Chappell et al.  1993, Jung 2013, Jung and Kiss 2012, Jung and Latsos 2014, Eijjfinger et al. 2013a, 2013b, Neuenkirch and Neumeier 2013, Wilson 2014, Eijffinger et al. 2015); “pigeons” fall in the middle. Throughout time, the dovish/hawkish attitude has become one of the main focuses of the analysis of monetary policy board decisions.

 The model introduces sequentially the assumptions that each central banker is a high-ranking bureaucrat – i.e. a career-concerned agent – with his/her conservativeness, that a monetary policy committee formulates monetary policy decisions by voting with a simple majority rule, and finally that loss aversion characterises the behaviour of the central bankers – i.e. for every monetary policy choice, losses loom larger than gains, and both are evaluated with respect to the status quo.

The framework shows that, given the three types of central bankers, the introduction of loss aversion in individual behaviour influences the monetary policy stance under three different, but convergent, points of view. First of all, a moderation effect can emerge, i.e. the number of pigeons increases.  At the same time, a hysteresis effect can also become relevant: both doves and hawks soften their stances. Finally, a smoothing effect tends to stabilise the number of pigeons. The three effects consistently trigger greater interest rate inertia, which is independent of both the existence of frictions and the absence or presence of certain features of central bank governance.

Loss aversion can explain delays and lags in changing the monetary policy stance, including the fear of lift-off after a recession. Needless to say, the behavioural motivation doesn’t rule out the other motivations already stressed in the literature.

No owls?

It is surprising to see it take so long for such literature to emerge…

RIP: Sir Dwight Venner, one of the longest serving central bank governor…

January 4, 2017

Just learnt of this.

Sir Dwight Verner was the Governor of Eastern Carribean Central Bank from 1989 t0 2015. The implies a 26 years tenure, one of the longest tenure in the world.  which is the longest tenure for a central bank chief in the world. He just passed away on 23 Dec 2016.

Thy year end also saw the demise of Hans Tietmeyer, the former chief of Bundesbank (1993-99). He played an instrumental role in transition of European countries towards Euro.


The post is not correct as pointed by one of the vistors to this blog – Mr. G Sreekumar. He points  Mr. Erik Hoffmeyer of Denmark central bank having the longest tenure of 30 years. I just checked and this seems to be correct. Thus, have made changed in both the title and content of the post. So much so for central bank history.

Citizens protest as RBI refuses to exchange old notes..

January 3, 2017

Endless changes regarding currency rules post demonetisation order on 8 Nov 2016 has really taken a toll on people. It is a huge issue for this blog which has been tracking the episode fairly religiously. One can just imagine the case for other people.

Yesterday, there were protests outside RBI offices (Mumbai, Ahmedabad, Bangalore) as people thought they could exchange/deposit old notes at RBI offices:


The recent Financial Stability Report should have analysed central bank’s own contribution to rising banking risk..

December 30, 2016

Blogging is back after a short break. One remonetised energies but time to get back to demonetising it..

One does not know in recent history a central bank/banking regulator which has enforced the kind of stress on its own banking system. The kind of stress Indian central bank has imposed on Indian banks (and its staff is appalling) and shocking. A former RBI Governor once said the purpose of Indian central bank is to safeguard the Indian public from the Government! But what happens when a central bank attacks all possible safeguards itself? Who saves from the so called saviour?

What is even worse is to see the central bank just excuses itself from the ongoing mess so easily. In the recent Financial Stability Report (Nov 2016), RBI raises concerns on the banking system:


Just 8 of the 10 members present at RBI Board meeting on 8 Nov 2016!

December 24, 2016

Against expectations, there was a RBI Board meeting on demonetisation evening. However, the number of members present were 8, even lesser than the 10 appointed members.The 10 appointed members at the first place are even lesser than the required 21 as per RBI Act. This blog was quite early to point to this governance issue and now others are waking up to it as well.

HT got this crucial info via RTI from RBI (another RTI revealed puzzle about currency data and Rs 2000 printing).


Argentina’s continued love affair with inflation…

December 23, 2016

Prof Martin Feldstein points to recent valiant efforts by Argentina to lower inflation:


Demonetization on Five Continents..

December 23, 2016

Prof Jeffry Frankel says demonetisation is the new trend in world economics.

Around the world, several countries are currently undergoing “demonetization,” or currency reforms in which the government removes banknotes of a certain denomination from circulation and replaces them with new notes. Governments pursue demonetization for a variety of reasons, and some of the recent initiatives are going better than others.

He says there are three kinds of demons:

  1. To tackle hyperinflation like in Venezuela
  2. To decommission and replace bills for more benign, technical reasons, such as to remove unpopular notes; introduce new counterfeit-proof bills; switch national currencies (like Euro).
  3. To crack down on illegal activities as India did.

The experience of India shows that too much boldness also backfires:

Western leaders could probably be bolder when they phase out big bills as slowly as they do. But Modi has been too bold.


What if currency is not a liability of the public authorities and some counter-intuitive ideas on demonetisation..

December 23, 2016

Prof Gurbachan Singh of Indian Statistical Institute has a piece which has some  counter-intuitive ideas on demonetisation.

He says currency is no more a liability of the government as we are told:


How is it that RBI MPC members have so similar and sanguine views about demonetisation ?

December 22, 2016

It is amazing to read the recently released minutes of the MPC meeting released yesterday. The meeting was held on 7th Dec 2016.

Leave questioning the modality of the move, not one member cautioned against any longer term negative outcome of the move.

The first mention of demonetisation or currency withdrawal is mentioned in para 11 which is point no 4 in assessment!


Relations between RBI, Centre strained over note ban…(have things changed?)

December 22, 2016

A lot of analysis and writing was done into how India’s monetary policy has narrowed the gap with the modern and advanced world. With things like inflation target, constitution of MPC, releasing MPC minutes and so on Indian central bank has finally taken the leap. Then came the appointment of the new central bank chief and people jumped to all kinds of conclusions (see this as well). One should list all those views  and ask the same experts of their opinions now. Am sure some would quote Keynes

It just took one decision from the Government to change all this. Post 8 Nov 2016, we are back to what we saw in the 1950-1980s when RBI was treated just like another department of the government. Finance Ministry is back at the helm of the monetary affairs (it always is at the helm but had played a more secondary role in recent times). The major decisions are being announced by the Finance Ministry officials. Given the decision was taken by the RBI Board and most circulars come from the central bank, one should see central bank atleast taking some initiative. But nothing of this sort is happening. Even more amazing is how the old lost skills of writing circulars are back and giving us a lesson in Victorian English! The name of the bank has been changed by public given frequent changes and rollbacks.

Now Times of India tells us that the relation between the two has been strained. Central bank believes that its reputation is being compromised whereas teh government says that the central bank has been slow to enact. Really? One wonders the level of chaos if central bank was faster:


RBI’s notice restricting deposits above Rs 5000 has been withdrawn (and its new name)….

December 21, 2016

The Twitter is trending with RBI’s new name: Reverse Bank of India.

This is because the central bank has again tweaked its notice. This time it has rolled back previous notice which said deposits above Rs 5000 will be allowed only once that too under some stiff restrictions. End result was banks stopped accepting deposits above Rs 5000 asking for clarity on the matter. With clock ticking fast towards 30 Dec 2016 there was panic amidst those who were waiting for crowds and queues to lessen before despsiting their monies.

Now RBI has rolled back the notice. Even here central bank prefers to go to the older skills of writing these amazing notices:

Withdrawal of Legal Tender Character of existing ₹ 500/- and ₹ 1000/- Bank Notes (Specified Bank Notes) – Deposit of Specified Bank Notes (SBNs) into bank accounts- Modification

1. Please refer to our circular DCM (Plg) No. 1859/10.27.00/2016-17 dated December 19, 2016. On a review of the above, we advise that the provisions of the above circular at sub para (i) and (ii) will not apply to fully KYC compliant accounts.

2. Please acknowledge receipt.

I mean that is it? One has to click on the previous circular to see details:

  1. Tenders of SBNs in excess of ₹ 5000 into a bank account will be received for credit only once during the remaining period till December 30, 2016. The credit in such cases shall be afforded only after questioning tenderer, on record, in the presence of at least two officials of the bank, as to why this could not be deposited earlier and receiving a satisfactory explanation. The explanation should be kept on record to facilitate an audit trail at a later stage. An appropriate flag also should be raised in CBS to that effect so that no more tenders are allowed.
  2. Tenders of SBNs up to ₹ 5000 in value received across the counter will allowed to be credited to bank accounts in the normal course until December 30, 2016. Even when tenders smaller than ₹ 5000 are made in an account and such tenders taken together on cumulative basis exceed ₹ 5000 they may be subject to the procedure to be followed in case of tenders above ₹ 5000, with no more tenders being allowed thereafter until December 30, 2016.


Why central bank models failed and how to repair them?

December 21, 2016
John Muellbauer of Oxford University has a piece which says things which we knew but conveniently forgot:
The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions of finance and the real economy has been widely recognised since the Global Crisis. This column argues that the flaws in these models stem from unrealistic micro-foundations for household behaviour and from wrongly assuming that aggregate behaviour mimics a fully informed ‘representative agent’. Rather than ‘one-size-fits-all’ monetary and macroprudential policy, institutional differences between countries imply major differences for monetary policy transmission and policy.
To take into account all the feedbacks, a macroeconomic policy model needs to explain asset prices and the main components of household balance sheets, including debt and liquid assets. This is best done in a system of equations including consumption, in which shifts in credit conditions – which have system-wide consequences, sometimes interacting with other variables such as housing wealth – are extracted as a latent variable.7  The availability of home equity loans, which varies over time and between countries – hardly available in the US of the 1970s or in contemporary Germany, France or Japan – and the also the variable size of down-payments needed to obtain a mortgage, determine whether increases in house prices increase (US and UK) or reduce (Germany and Japan) aggregate consumer spending.  This is one of the findings of research I review in Muellbauer (2016).  Another important finding is that a rise in interest rates has different effects on aggregate consumer spending depending on the nature of household balance sheets.  Japan and Germany differ radically from the US and the UK, with far higher bank and saving deposits and lower household debt levels so that lower interest rates reduce consumer spending.  A crucial implication of these two findings is that monetary policy transmission via the household sector differs radically between countries – it is far more effective in the US and UK, and even counterproductive in Japan (see Muellbauer and Murata 2011).
I mean what can one even say to such issues?

Was Euro a case of demonetisation and did it work?

December 20, 2016

Prof JR Varma of IIMA points to this interesting piece by Peter Guy of Regulation Asia.

Guy says:


Why don’t central bankers disagree?

December 20, 2016

An interesting piece by Richard Barwell who is a Senior Economist at BNP Paribas

He says though there is a lot of discussion on dissent in central bank monetary policy meetings, it does not mean much. It is just talk with very little action:

If the acid test of dissent within a policy committee is how people vote – rather than how they talk – then to paraphrase Lord King, all the MPC ever does is consensus. The hawks and doves are birds of a feather: they agree, all the time.  In this column, we have focused on the MPC during the Great Moderation, but the point applies more broadly.  For example, it is interesting that there is far more dissent within the FOMC over the near-term path of interest rates (e.g. ‘the 2017 dot’) than over the current level of interest rates.

Likewise, if one looks at the pattern of votes during some of the most high profile episodes of dissent within central banks that have fascinated the media and markets alike – such as ‘Svensson versus the Riksbank’ in 2010/11 or ‘Blanchflower versus the Bank of England’ in 2008 – we see the same mismatch: material differences in views but marginal differences in votes. Whether this state of affairs is optimal is debatable.  A case can be made that the quality of the internal policy debate and the external communication strategy would benefit from policymakers providing a frank assessment of the appropriate monetary stance alongside their assessment of the economy. What cannot be disputed is that either policymakers essentially agree all the time or they do not vote their view.

One has always believed much of this MPC design, communications etc is a bell and whistle thing which is mostly noise..

Recent RTI inquiry from RBI creates confusion over reported Currency in circulation figures…

December 20, 2016

Despite RBI keeping itself off on some matters under RTI, people have managed to get some interesting information. As per a recent RTI notification by a daring Mr Anil Galgali (thank you so much), we get some data on currency figures with RBI on 8 Nov 2016.

RBI said on 8 NOv 2016, it had following denominations: