Archive for the ‘Economics – macro, micro etc’ Category

Finally, Federal Reserve takes a plunge towards issuing e-dollar..

August 14, 2020

It has been a mystery all this while that Federal Reserve has been asleep while so many central banks are talking about CBDC. Infact, likes of China and France are already looking to introduce CBDC really quickly.

Lael Brainard in a speech yday said Fed has not been sleeping and is working on CBDC:

Digital currencies, including central bank digital currencies (CBDCs), present opportunities but also risks associated with privacy, illicit activity, and financial stability. The introduction of Bitcoin and the subsequent emergence of stablecoins with potentially global reach, such as Facebook’s Libra, have raised fundamental questions about legal and regulatory safeguards, financial stability, and the role of currency in society. This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation’s payment systems. Moreover, China has moved ahead rapidly on its version of a CBDC.

With these important issues in mind, the Federal Reserve is active in conducting research and experimentation related to distributed ledger technologies and the potential use cases for digital currencies. Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding CBDCs. As part of this research, central banks are exploring the potential of innovative technologies to offer a digital equivalent of cash. Like other central banks, we are continuing to assess the opportunities and challenges of, as well as the use cases for, a CBDC, as a complement to cash and other payments options. There continues to be strong demand for U.S. currency, and we remain committed to ensuring the public has access to a range of payments options.

We have been conducting in-house experiments for the last few years, through means that include the Board’s Technology Lab, which has been building and testing a range of distributed ledger platforms to understand their potential opportunity and risk. This multidisciplinary team, with application developers from the Federal Reserve Banks of Cleveland, Dallas, and New York, supports a policy team at the Board that is studying the implications of digital currencies on the payments ecosystem, monetary policy, financial stability, banking and finance, and consumer protection.

To enhance the Federal Reserve’s understanding of digital currencies, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology in a multiyear effort to build and test a hypothetical digital currency oriented to central bank uses. The research project will explore the use of existing and new technologies as needed. Lessons from this collaboration will be published, and any codebase that is developed through this effort will be offered as open-source software for anyone to use for experimentation.

The objectives of our research and experimentation across the Federal Reserve System are to assess the safety and efficiency of digital currency systems, to inform our understanding of private-sector arrangements, and to give us hands-on experience to understand the opportunities and limitations of possible technologies for digital forms of central bank money. These efforts are intended to ensure that we fully understand the potential as well as the associated risks and possible unintended consequences that new technologies present in the payments arena.

Separately, a significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and a broad set of other stakeholders. There are also important legal considerations. It is important to understand how the existing provisions of the Federal Reserve Act with regard to currency issuance apply to a CBDC and whether a CBDC would have legal tender status, depending on the design. The Federal Reserve has not made a decision whether to undertake such a significant policy process, as we are taking the time and effort to understand the significant implications of digital currencies and CBDCs around the globe.

Here is Boston Fed press release and here is MIT’s Digital Currency Initiative.

Fed may have joined the race late, but given the technology prowess the country has, it could soon leap ahead of others.

Brainard adds that Fed is collaborating with other central banks:

In addition to these experiments, the Federal Reserve continues to collaborate with and learn from other central banks. We are participating in the CBDC coalition of central banks. While each country will make decisions on whether to issue and how to design a CBDC based on its own domestic legal framework and financial and economic context, we benefit from collaboration on CBDC research. Sharing lessons learned, jointly conducting experiments, and bringing diverse expertise to bear helps us make progress in developing potential approaches to address challenging hurdles, such as threats to cybersecurity, counterfeiting and fraud, and anti-money laundering, to name a few, as well as on shared goals, such as increasing the ease and efficiency of cross-border transactions. Since financial and payments systems share extensive cross-border linkages, a poorly designed CBDC issued in one jurisdiction could create financial stability issues in another jurisdiction. A cyberattack on a CBDC arrangement in one jurisdiction could create domestic financial stress, which could, in turn, affect linked economies or have broader effects if confidence in certain technologies or payment mechanisms is eroded.

The race has become exciting…

Conversation with Dr Viral Acharya: Quest for restoring financial stability in India

August 14, 2020

The conversation with Dr Viral Acharya yesterday (recording here) was loaded with learning with a bit of fun at the end. One almost felt that you could do another conversation with him on Kishore Kumar and old Hindi music!

Apart from his deep insights on financial stability, what touched me more was dedicating the book to his late school teacher and donating the proceeds to Pratham.

Impact of RBI’s Operation Twist (OT) and Long-Term Repo Operations (LTRO) on liquidity and transmission

August 14, 2020

Satadru Das, Saurabh Ghosh, and Vidya Kamate of RBI in the Aug-20 Monthly Bulletin article:

This article analyses two sets of special market operations recently undertaken by the Reserve Bank of India (RBI) – Operation Twist (OT) and Long-Term Repo Operations (LTRO) – designed to ensure comfortable liquidity and to facilitate monetary policy transmission. We use Overnight Indexed Swap (OIS) rates to separate out expected and unexpected components of monetary policy announcements
and analyse the impact of monetary policy surprises and the special operations on government bond yields. Event study analysis around announcement days indicates that (i) Government Security (GSEC) yields generally react to monetary policy surprises, and (ii) OT and LTRO had significant impact on GSEC yields of some maturities. 


Singapore’s Significantly Rooted Foreign Bank Framework

August 14, 2020

Singapore announced Significantly Rooted Foreign Bank (SRFB) Framework in 2012.

Under the framework, Standard Chartered Bank has qualified as a SRFB:

The Monetary Authority of Singapore (MAS) announced today that it will award Significantly Rooted Foreign Bank (SRFB) privileges to Standard Chartered Bank (Singapore) Limited (SCBSL), allowing it to operate additional places of business (POBs). SCBSL is the first bank to qualify as an SRFB.

MAS will also enhance the SRFB Framework so that in the future, an SRFB that substantially exceeds the criteria for significant rootedness in Singapore may be given additional privileges, including the ability to establish a separate subsidiary to develop alternative business models.

Under the SRFB Framework announced in 2012 by Chairman, MAS, Mr Tharman Shanmugaratnam,  Qualifying Full Banks (QFBs) that are significantly rooted in Singapore and from jurisdictions that have a Free Trade Agreement (FTA) with Singapore are allowed to establish up to 50 POBs, of which up to 35 may be branches [1] . The assessment of significant rootedness is made by MAS on the basis of a range of quantitative and qualitative attributes.

The first FTA that includes SRFB commitments, the EU-Singapore Free Trade Agreement (EUSFTA), entered into force on 21 November 2019. SCBSL is the first QFB to qualify for SRFB privileges under the EUSFTA commitments. With effect from 3 August 2020, SCBSL will be able to operate up to 50 POBs.

Interesting. One would think that international financial centres such as Singapore would be more interested in globally rooted banks. But not really..

Reviewing five years of India’s Inflation Targeting regime

August 13, 2020

Ila Patnaik and Radhika Pandey in this NIPFP paper:

The adoption of an inflation targeting regime has been one of the most fundamental reforms in the Indian financial sector. The RBI Amendment Act of 2016 established a modern monetary policy framework with a clear objective of achieving price stability while keeping in mind the objective of growth and a committee-based approach to decision-making. This paper describes the key elements of the inflation targeting framework. The inflation target was set in terms of the year-on-year change in CPI. The target was set at 4% with an upper and lower tolerance level of 2%. The RBI Amendment Act laid down a six member MPC: comprising of three internal and three external members. The external members are appointed by the Central Government for a period of four years. The task of the MPC is to fix the policy rate to achieve the inflation target. The policy rate is determined by a majority of votes by members present in the meeting. The Governor has a casting vote in the event of equality of votes.

With more than four years passed since the inception of the modern monetary policy framework, the paper offers some suggestions which if incorporated could enhance the effectiveness of the monetary policy regime. A non-voting representative from the Ministry of Finance in
the MPC meetings, publication of transcripts of MPC meetings with a sufficient time lag and staggered appointment for MPC members are some of the next steps that could strengthen the conduct of the inflation targeting regime.

Comparing 2020 recession with Great Depression

August 13, 2020

David Wheelock of St Louis Fed in this research compares the two crises across different economic indicators:

By almost any measure, the 2020 recession began with sharp declines in economic activity, employment, and equity prices that rivaled or exceeded the initial declines of the Great Depression. The Great Depression persisted, however, and when it finally reached a trough nearly four years later, economic activity, employment, and consumer and equity prices were all far below their initial levels. The 2020 contraction might turn out to be the sharpest, but also the shortest, in modern times and perhaps of all time in the United States. The debate among forecasters has recently focused on the likely pace of the recovery and whether the increase in economic activity since May will be sustained or turn out to be merely an uptick before a second dip. The virus and the public’s response to it will likely make that determination.


Reminder: Conversation with Dr Viral Acharya

August 13, 2020

The Conversation is today at 6.30 PM. Those interested can register here.


The Dictator’s Two Dilemmas

August 12, 2020

Andrew Nathan in this Proj Synd article

Surveys conducted in 14 Asian countries over a 15-year span show that respondents under authoritarian regimes trust state institutions more than their counterparts in democracies do. And yet, when authoritarians’ modernization efforts succeed, they unwittingly create fertile ground for liberal-democratic values.


Euro area bank bailout policies after the global financial crisis sowed seeds of the next crisis

August 11, 2020

Viral Acharya, Lea Borchert, Maximilian Jager, Sascha Steffen in this voxeu research:

Should financial stability mandate be with central banks or a seperate agency?

August 11, 2020

Fernando Restoy of BIS in this paper weighs evidence in favor of central banks:

How should policy objectives be assigned between different authorities? Traditionally, this question has revolved around identifying conflicts and complementarities between their various remits. Equally important, however, is the question of whether specific policy instruments can be neatly assigned to specific objectives. When a specific policy instrument can significantly influence more than one objective, the case for assigning each of those objectives to a different agency weakens. Following this line of thought, and based on the experience with Covid-19 policy response, there would seem to be a clear case for assigning the financial stability mandate to central banks and an even stronger one for including both macro- and microprudential responsibilities in that mandate. 

Age old debate. No easy answers.

Does FinTech Substitute for Banks? Evidence from the Paycheck Protection Program

August 10, 2020

Interesting NBER paper by Isil Erel and Jack Liebersohn:

New technology promises to expand the supply of financial services to borrowers poorly served by the banking system. Does it succeed? We study the response of FinTech to financial services demand created by the introduction of the Paycheck Protection Program (PPP). We find that FinTech is disproportionately used in ZIP codes with fewer bank branches, lower incomes, and a larger minority share of the population, as well as in industries with little ex ante small-business lending. Its role in PPP provision is also greater in counties where the economic effects of the COVID-19 pandemic were more severe. To understand whether these differences arise because certain groups are switching from traditional banks to FinTech or if they are being newly served by FinTech, we study whether FinTech-enabled PPP loans were more widespread in areas with fewer traditional loans. Using the predicted responsiveness of traditional banks to the program as an instrument, we show that borrowers were more likely to get a FinTech-enabled PPP loan if they were located in ZIP codes where local banks were unlikely to originate PPP loans.


Podcast : A 200 year History, Present and Future of Central Banks

August 10, 2020

Geroge Selgin pours years of research and thinking into this super podcast.

In this eye-opening conversation, he and NLW go deep on the history, present and future of central banks, including:

    • Why the Scottish and Canadian banking systems in the 19th century show that central banks aren’t a prerequisite for stability
    • Why the U.S. “free banking” system wasn’t free at all
    • Why the instability in the late 19th century U.S. banking system was caused by regulation, not the lack of a Federal Reserve
    • Why the Fed’s first decades were a disaster
    • Why the Fed gets more power when it underperforms 
    • The problems with the Fed’s response to 2008
    • What lessons the Fed could have learned (but didn’t) between the Great Financial Crisis and COVID-19 

Really useful stuff. As most economies try to have financial system like that of US, they should remember how fractured the US financial system is. And this fracture is not recent but has a long history.

How did Japanification of economy become a bad word?

August 10, 2020

My new piece in Moneycontrol.

Once economies prided themselves on being called as becoming Japan. Not anymore. How things ahve changed for Land of Rising Sun…

Arbitrage and reflation in the gold market

August 7, 2020

Pierre Ortlieb writes an interesting piece in OMFIF looking at reasons for rise in price of Gold:

The global gold market is recording record levels of activity. Typically, gold market discourse in recent years has tended to focus on consumer and central bank demand from Asia. Over the past few months, the US has been driving two landmark trends. One relates to market structure, the other pertains to the Covid-19 response and the future of the international monetary system.

First, travel restrictions and general pandemic uncertainty between March and May led to a temporary widening of the spread between gold spot and gold futures prices, known as the gold spot spread. Generally, London spot and New York Mercantile Exchange and Commodity Exchange futures trade tightly, with banks rapidly arbitraging nascent spreads. Yet with refinery capacity down and heightened transport frictions into early April, the spread failed to close; banks running short futures positions were not certain they would be able to deliver 100oz Swiss gold bars in New York. Gold is generally traded speculatively – it is rarely actually delivered to the end-owner. Nevertheless, doubts about their hypothetical ability to deliver caused short futures traders to bid up prices in an effort to close their naked short positions.

As uncertainty abated somewhat in early May, spot prices rose to meet futures prices, closing the spread. This produced some of the initial impulse driving gold prices, and boosted US gold imports as investors sought to cover potential delivery.

Hmm. Did not know this bit.

He disagrees the other reason that one is seeing demise of international monetary system and Dollar. Instead reflating US economy is a reason for rise in price of Gold:

Rather than suggesting imminent currency debasement, the moderate rise in inflation expectations, and accompanying decline in real Treasury yields, indicate that the US economy is doing somewhat well. This also implies that policy-makers have so far been successful in prompting some reflation of the US economy. While this is not certain to continue in the long run, given the forthcoming expiration of US fiscal stimulus packages and the growth in Covid-19 cases, the fall in real yields suggests that the US economy is in partial recovery. A strong US recovery and a moderate increase in inflation would not jeopardise the dollar’s global role. Demand for US assets and a continued lack of credible alternatives would entrench it further.

Developments in the global gold market revolve around the US. Its imports have surged in response to anomalies in market structure. Instead of pointing to panicked gold hoarding, the rise in demand partly reflects arbitrage trades. The decline in US real yields has further boosted gold’s spot price. But rather than suggesting panic about the future monetary and financial system, the yellow metal’s surge is a sign that the US economy is moderately reflating.


The Bulgarian lev and the Croatian kuna in the exchange rate mechanism (ERM II)

August 7, 2020

I had posted that Bulgaria and Croatia have joined ERM.

Ettore Dorrucci, Michael Fidora, Christine Gartner and Tina Zumer review the two economies on their roads to Euro:

The inclusion of both currencies at their current exchange rate reflects the fact that Bulgaria and Croatia have a remarkable track record of exchange rate stability, under which both economies have undergone significant external adjustment. For more than two decades Българска народна банка (Bulgarian National Bank) has operated a currency board arrangement under which it commits to exchange levs against the euro at a fixed exchange rate. Hrvatska narodna banka has maintained a managed floating exchange rate regime under which the kuna fluctuates within a relatively narrow range around its average exchange rate against the euro. While fundamentally different in their functioning, both regimes have served their economies well. In particular, they proved resilient in periods of severe financial market stress, including during the ongoing coronavirus (COVID-19) pandemic. Moreover, both countries underwent significant external adjustment after the onset of the global financial crisis. This involved the correction of large current account deficits, which have since turned into surpluses. As a result, there has been a sizeable reduction of net external liabilities, with both central banks accumulating comfortable buffers in terms of foreign exchange reserves.

External rebalancing has been coupled with nominal adjustment in both countries, with price levels clearly reflecting the state of convergence of the two economies. Both countries recorded substantial increases in prices and costs before the global financial crisis. These were partly a by-product of the real convergence process, i.e. the fact that both countries were catching up in terms of income levels relative to the rest of the European Union. Conversely, the global financial crisis brought about some correction of price and cost levels in both Bulgaria and Croatia. As a result, their price levels relative to the euro area are now well in line with their income levels relative to the euro area. While such levels remain significantly below that of the euro area, this does not in itself constitute an impediment to participation in ERM II. Past experience has in fact shown that countries that join ERM II at comparable or even less advanced stages of convergence can subsequently introduce the euro in a successful way. In this regard, a more important prerequisite for successful participation in ERM II is that price levels are commensurate with income levels (as shown in Chart A) and, more generally, with the economic fundamentals of the country.


Interview with Amartya Sen: Economics with a Moral Compass?

August 6, 2020

Timothy Taylor in his blog points to this interview of Amartya Sen where he discusses some really interesting anecdotes (HT: Good friend Niranjan). There was a time when there were all kinds of characters in economics.

On Maurice Dobb and Dennis Robertson: 

When he [Maurice Dobb] first moved to Trinity College, he was a member of the British Communist Party already. Dennis Robertson—who always described himself as a liberal, but in fact was a conservative—offered Dobb this job on behalf of Trinity. Maurice accepted it immediately. He was then a research student at Pembroke College. He went home, and being a good Englishman, he wondered, “Shouldn’t I have mentioned that I’m a member of the Communist Party?” Then he wrote a letter of apology to Robertson—a very English letter: “When you offered me this job, I was so overwhelmed with the prospect of becoming a teacher in Trinity that I overlooked to tell you, for which I apologize, that I’m a member of the British Communist Party, and if after knowing that, you decide that you want to withdraw your offer, I would like you to know that I would not hold that against you.”Dennis Robertson replied, “Dear Dobb, So long as you give us a fortnight’s notice before blowing up the chapel, it would be all right.”


Persistence through Revolutions: Lessons from Chinese Communist Revolution in the 1950s and Cultural Revolution (1966 -1976)

August 5, 2020

Alberto F. AlesinaMarlon SerorDavid Y. YangYang YouWeihong Zeng in this NBER paper

Can efforts to eradicate inequality in wealth and education eliminate intergenerational persistence of socioeconomic status? The Chinese Communist Revolution in the 1950s and Cultural Revolution from 1966 to 1976 aimed to do exactly that. Using newly digitized archival records and contemporary census and household survey data, we show that the revolutions were effective in homogenizing the population economically in the short run.

However, the pattern of inequality that characterized the pre-revolution generation re-emerges today. Almost half a century after the revolutions, individuals whose grandparents belonged to the pre-revolution elite earn 16 percent more and have completed more than 11 percent additional years of schooling than those from non-elite households. In addition, individuals with pre-revolution elite grandparents hold different values: they are less averse to inequality, more individualistic, more pro-market, and more likely to see hard work as critical to success. Through intergenerational transmission of values, socioeconomic conditions thus survived one of the most aggressive attempts to eliminate differences in the population and to foster mobility.

Interesting. Riches to rags and back to riches as suggested by this NBER digest summary.

Predicting Monetary Policy Using Artificial Neural Networks

August 5, 2020

Prof Natascha Hinterlang in this Deutsche Bundesbank paper:

This paper analyses the forecasting performance of monetary policy reaction functions using U.S. Federal Reserve’s Greenbook real-time data. The results indicate that artificial neural networks are able to predict the nominal interest rate better than linear and nonlinear Taylor rule models as well as univariate processes. While in-sample measures usually imply a forward-looking behaviour of the central bank, using nowcasts of the explanatory variables seems to be better suited for forecasting purposes. Overall, evidence suggests that U.S. monetary policy behaviour between 1987-2012 is nonlinear.



Central Bank of Croatia issues a commemorative coin marking the 25th Anniversary of the Military and Police Operation Flash

August 5, 2020

Usually central banks issue commemorative coins marking peaceful events, revolutions, 100/150 years of great political leaders and so on.

Central Bank of Croatia issued a commemorative coin marking 25 years of their Military and Police Operation Flash:

The Croatian National Bank has issued a commemorative silver coin to mark the 25th anniversary of the military and police operation Flash (1995–2020), a historical and political event of major importance for the Republic of Croatia. The operation liberated 500 square kilometres of the occupied territory of Western Slavonia and established control over the Zagreb–Lipovac highway and the railroad towards Eastern Slavonia.

The commemorative silver coin was minted in proof quality with brilliant flat surfaces decorated with matte relief details showing commemorative motifs. It was released for sale on 4 August 2020.

Interesting how government/central banks issue commemorative coins for different kind of events.

Webinar with Profs Chinmay Tumbe and Jeemol Unni: Crisis within a Crisis: Domestic Migration in India

August 5, 2020

After a short break, Ahmedabad Univ’s Conversation Series is back with another webinar.

This one is between two of my favorite professors: Chinmay Tumbe and Jeemol Unni:

It is estimated that 122 million jobs were lost during April 2020 alone. A large share of them were migrants. Besides loss of jobs and income, reasons for the exodus of migrant labourers from cities were lack of social protection and immediate support from the government or private sector during this time of crisis.

We will discuss the Hotspots of Migration and the geographical flow of domestic migrants in the country. In the current context, and as our speaker is an Economic Historian working on past pandemics such as the plague and the influenza pandemic of 1918, we will discuss their impact on the population in India and whether there are any similarities with the current pandemic. How did India respond to the plague and flu back then, and how are we doing it differently this time? Given the already existing economic slowdown, how can this ‘crisis within a crisis’ be best handled as the return of the migrants to the cities appears crucial? What lessons can we learn regarding the gearing up of the public health system in the country?

Interested folks could register here.

%d bloggers like this: