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

Italy joins China’s Belt and Road Initiative – here’s how it exposes cracks in Europe and the G7

March 25, 2019

Winnie King, Teaching Fellow at University of Bristol explains:

While the current Italian government has not been fully unified toward China, a severe economic downturn has made the world’s second largest economy look more appealing to it. Alberto Bradanini, Italy’s former ambassador to China, has stressed that Europe’s own indecision and inability to tackle trade deficits with China (of which Italy contributed approximately €176m, or an eighth of the EU’s total trade deficit) is a key motivator behind this decision.

Italy wants to enhance its “Made in Italy” brand through increasing trade – especially in the form of exports – to China. The BRI is seen as a vehicle to achieve this. Italy offers goods (in particular luxury goods and foodstuffs) that are attractive to China’s growing middle class and increasingly affluent population.

China is also interested in investing in Italian firms. More significant, however, are Italy’s key infrastructure assets. This would enhance the transport and trading network of the BRI, giving it strategic access to Europe. Less than 2% of Italy’s sea imports come from China so there are substantial prospects for growth in that area.

A deal between Genoa’s port authority and shipping firm China Communications Construction Company (CCCC) has already been approved by the Italian government. And the port city of Trieste hopes for something similar. This would offer China and the BRI a more direct route to move goods onto the European continent and an ideal hub for accessing new rail lines and transport networks to Germany, Austria, Slovenia and other regional economies. By giving China access to its ports, Italy is hoping for infrastructure investment from China’s Asian Infrastructure Investment Bank (AIIB) – something the Italian government is trying to link to its role in the BRI.

Interesting! The game of power ensures there are no permanent allies and enemies.

Italy’s status as a G7 country is a coup for the Chinese leadership and the legitimacy of the BRI. While the prospect of Italy’s participation underscores growing fault lines in the EU’s joint approach to China, China has also been effective at dividing and conquering EU member states by targeting them individually.

So Italy’s decision to join the BRI is significant. But four years ago we saw Italy, France and Germany join China’s AIIB, contrary to US wishes. Therefore, Italy is neither the first, nor will it be the last European economy that will “go rogue” and follow its own national interest with regard to China.



Bretton Woods at 75: History and current relevance

March 25, 2019

In July 2019, BW will mark its 75th anniversary.

Arminio Fraga, a former president of the Central Bank of Brazil (1999-2002) has a piece on its history and current relevance:

So, what can we say about Bretton Woods in a world in transition?

First, with the US less dominant and less willing to provide global economic and financial leadership, systemic instability is likely to increase. As the American economic historian Charles Kindleberger famously warned, this typically occurs in transitional moments when a global hegemon is absent. Some signs of this are already visible in trade and regional tensions, growing leverage, and rising nationalism.

Second, “Bretton Woods” should now be seen to include not only the original institutions, but also more recently established global forums and regional arrangements. These mechanisms of cooperation constitute a realistic practical response to current challenges.

Third, one must ask whether developing countries will continue trying to converge with more advanced economies, and whether the expanded Bretton Woods family of institutions can remain meaningful stewards of global progress. My answers tend toward yes to both, if one takes a long-term view. Developing countries will aim to emulate the earlier successes of the Asian Tigers and Eastern Europe. And countries will prefer dialogue and cooperation to the failures of those such as Venezuela and North Korea that opted out of the global system.

Lastly, this hopeful vision may now be under threat from the disturbing shift toward illiberal and populist political regimes around the world. But history shows that liberal politics and economic policies have undoubtedly delivered more progress and peace than any other system.

Seventy-five years ago, economic policymakers gathered at Bretton Woods to create a new financial order for the postwar world. Today, their successors can still draw on some of these achievements in designing a global economic governance system for the twenty-first century.


Building a gender inclusive economy: Case of Iceland..

March 22, 2019

Katrin Jakobsdóttir, Prime Minister of Iceland has an interesting article in IMF’s F&D (Mar-2019 theme is Women and Growth).

She writes on how Iceland has tried to make women participate in their workforce:


Eastern Carribean central bank to launch blockchain-based digital currency..

March 20, 2019

ECCB conducts monetary policy for eight island economies:

 Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, Saint Lucia, and St Vincent and the Grenadines.

Apart from Sweden, ECCB is now looking to issue its own digital currency:

The Eastern Caribbean Central Bank (ECCB) and the Barbados-based fintech company, Bitt Inc. (Bitt) have signed a contract to conduct a blockchain-issued Central Bank Digital Currency (CBDC) pilot within the Eastern Caribbean Currency Union (ECCU).

The watershed contract was signed on 21 February at the ECCB’s Headquarters in Basseterre, St Kitts and Nevis.

This ECCB CBDC pilot is the first of its kind and will involve a securely minted and issued digital version of the EC dollar (DXCD). The digital EC dollar will be distributed and used by Licensed Financial Institutions and Non-Bank Financial Institutions in the ECCU. The DXCD will be used for financial transactions between consumers and merchants, including peer-to-peer transactions, all using smart devices. For example, an individual in St Kitts and Nevis will be able to send DXCD securely from his/her smartphone to a friend in Grenada in seconds – and at no cost to either party.

The Governor of the ECCB, Timothy N. J. Antoine, emphasised that in contrast to previous CBDC research and experimentsthe ECCB is going a step further.

“This is not an academic exercise. Not only will the digital EC Dollar be the world’s first digital legal tender currency to be issued by a central bank on blockchain but this pilot is also a live CBDC deployment with a view to an eventual phased public rollout. The pilot is part of the ECCB’s Strategic Plan 2017-2021 which aims to help reduce cash usage within the ECCU by 50 per cent, promote greater financial sector stability, and expedite the growth and development of our member countries. It would be a game-changer for the way we do business”.

CEO of Bitt Inc., Rawdon Adams, said, “I thank the ECCB for choosing Bitt. Our mission is the practical application of cutting edge technology to solve persistent financial problems. It is about a successful currency union building on its impressive record of financial stability, development and integration to deliver a quantum improvement to the lives of all its 630,000 citizens. Enhancing economic growth and the quality of life of ordinary people is the aim.”

The ECCB is now poised to embark on the DXCD pilot from March 2019. The pilot will be executed in two phases: development and testing, for about twelve months, followed by rollout and implementation in pilot countries for about six months. As part of pilot implementation, the ECCB will ramp up its sensitisation and education initiatives to facilitate active public engagement throughout all member countries.

The ECCB is being technically supported on this Project by Pinaka Consulting Ltd. 

The Governor in a later speech explained the motivation:


Hold those hagiographies of Mario Draghi as ECB chief

March 19, 2019

V Anantha Nageshwaran in his new piece cautions against praising Mario Draghi, who would soon retire as ECB head:


The rage called Modern Monetary Theory (MMT)

March 19, 2019

My piece in moneycontrol on MMT.

How failing banks paved Hitler’s path to power: Financial crisis and right-wing extremism in Germany, 1931-33

March 19, 2019

Sebastian Doerr, José-Luis Peydró and Hans-Joachim Voth in their research:

Reflections of an economics textbook author: Greg Mankiw

March 18, 2019

Nice essay by Prof Greg Mankiw. He recently stepped down as the instructor of Harvard’s EC10 course (introductory economics). This is a huge moment in economic teaching as people believe this would give an opportunity for other textbooks such as Core economics to get their dues.

In the essay, Mankiw takes one through what led him to write a book on economics. Also how should one write write a book and the changes brought to the books world by digital technologies:

In this essay I reflect on textbook writing after three decades participating in the activity. I address the following questions: What perspective should textbooks take? What is the best approach to teaching microeconomics? What is the best approach to teaching macroeconomics? How does the content of the introductory course evolve? How much material should textbooks include? Are textbooks too expensive? How is digital technology changing the market for
textbooks? Who should become a textbook author?

Some more from Prof Tim Taylor on Mankiw’s essay and his own experiences..

Independent monetary policy versus a common currency: case of Czech Republic

March 15, 2019

Interesting research by Jan Br˚uha and Jaromír Tonner of Czech National Bank.

The Czech Republic joined the EU in 2004, i.e. after 1993, and it is therefore obliged to adopt the euro sometime in the future. Obviously, euro adoption would have its benefits and costs. This paper aims to contribute to the macroeconomic analysis of the costs and benefits. By “macroeconomic”, we mean those costs and benefits which are related to business cycle fluctuations, to positive trade effects and to the nominal convergence of the Czech economy. We therefore do not investigate other costs and benefits, such as the change of legal tender, the change in the country’s credibility after adopting the euro and the costs of potential fiscal free riding by other member countries. This is not to say that these other aspects are not important, but this paper concentrates on the above-mentioned well-defined aspects of euro adoption.

The main macroeconomic benefit of adopting the euro is the elimination of exchange rate risk, which should be beneficial to trade, as the euro area countries are dominant trading partners for the Czech Republic. The macroeconomic costs include a reduction in the effectiveness of domestic macroeconomic policies and the risk of greater volatility in economic activity and consumption due to the loss of independent interest rate and exchange rate policy. This is because the common  monetary policy of the ECB cannot respond sufficiently to shocks which affect only a small part
of the euro area economy. The relative importance of the costs and benefits of adopting the common currency is ex ante unclear and the literature offers conflicting results. Therefore, it is worth investigating the macroeconomic costs of joining the euro area.

To contribute to this research agenda, we use simulations performed using the CNB’s official “g3” macroeconomic forecasting model, which is a typical small open economy new Keynesian model. As a counterfactual, we build a modified version of the g3 model with a fixed nominal exchange
rate and with the monetary policy rate equal to the ECB rate.

To evaluate the effects of euro adoption on the Czech economy, we employ two approaches. We compare the unconditional volatilities of important macro variables implied by the two macroeconomic models. The volatility of nominal variables increases after joining the common currency, as the common monetary policy does not react to purely domestic shocks.

We also simulate the counterfactual outcomes of macroeconomic variables that would have happened if the euro had been adopted in the past. We find that euro adoption would have meant an increase in the volatility of macroeconomic variables, while the effects on the levels of real output and consumption would have been positive. These positive effects on the real economy are due  mainly to the trade effect, but temporarily lower real interest rates would also have contributed. Nominal exchange rate appreciation during the ERM II phase could partly alleviate the nominal volatility caused by euro adoption.


Can Economics Shake Its Shibboleths and move to a bolder economics?

March 15, 2019

Two related pieces:


How Singapore manages its forex reserves?

March 14, 2019

Ravi Menon, head of Monetary Authority of Singapore in this nice speech:

Singapore has official foreign reserves (OFR) of almost US$300 billion. 

  • In absolute terms, this is the eleventh highest stock of OFR in the world. 
  • As a percentage of GDP and on a per capita basis, it is the third highest in the world.
  • Singapore’s OFR sit on the balance sheet of the Monetary Authority of Singapore (MAS), the central bank and integrated financial regulator.

Besides the OFR, there are two other pots of national reserves in Singapore:

  • The Government of Singapore Investment Corporation (GIC), a fund management company, manages on behalf of the Singapore Government a diverse portfolio of foreign assets – well in excess of US$100 billion.
  • Temasek Holdings, an investment company wholly owned by the Singapore Government, holds equity stakes in a variety of domestic and foreign corporates, amounting to more than US$200 billion.

This morning, let me try to answer three questions:

  • What role do the reserves play?
  • How are the reserves accumulated and managed?
  • How are the OFR managed?


Historically, GDP Growth has been Higher than the Interest Rate

March 14, 2019

Olivier Blanchard points to this chart from his new paper:

Historically, GDP Growth has been Higher than the Interest Rate
In his presidential address entitled “Public Debt and Low Interest Rates” at the annual American Economic Association, Olivier Blanchard said that public debt was not as inherently undesirable as many analysts say. In the current era of low interest rates, when GDP growth rates are higher than the interest rate on safe assets, limited deficits and debt may allow governments to expand investment and improve social welfare without producing an undue fiscal burden. This chart shows that for the United States, nominal GDP growth at a rate higher than the interest rate on risk-free assets has been the norm.


Woori Bank: witness to Korea’s modern economic history

March 13, 2019

Nice bit on Korea’s banking and economic history:

South Korea’s financial districts Yeouido and Jung-gu have experienced the country’s ups and downs throughout modern history, with few businesses surviving the political and financial upheavals.

And only a few are as steeped in the nation’s financial history as Woori Bank, one of South Korea’s four major lenders, established 119 years ago. 

The bank’s roots are embedded in Daehan Cheon-il Bank, which was established by Emperor Gojong in January 1899 with funds from the Joseon-era imperial family, according to a report from Woori on its history.


Bringing epistemology back into economics curriculum..

March 13, 2019

Fascinating short paper in EPW by M.A. Oommen, honorary fellow at the Centre for Development Studies, Thiruvananthapuram.

The concept of epistemology, derived from the Greek word episteme (knowledge) and logos (reason) refers to the theory of knowledge. An important branch of philosophy, it is the study of the nature, origin and limits of human knowledge. The nature of knowledge is as important as the origin of knowledge in generating relevant epistemology.

No scientific study can be evaluated or justified by the norms of faith or dictates of authority. For example, the discoveries of Copernicus (1473–1543) and Galileo (1564–1642) were epistemologically shocking to the College of Cardinals who had the monopoly of knowledge in the 16th century in Europe. Ultimately only scientific truth and not beliefs can promote and sustain progress. Kuhn’s (1962) view of the evolution of science as characterised by long periods of gradual “puzzle-solving normal science” followed by paradigm shifts offers an explanatory hypothesis about the nature of knowledge creation. Ola Olsson (2000: 254) argues that knowledge is created through convex combinations of older ideas and through paradigm shifts. We investigate in what manner this happened in economics.

The nature of knowledge creation in the discipline of economics, has not been subjected to any in-depth analysis or interrogation. The almost unquestioned dominance (certainly during 1980–2008) of neoclassical economics in the academic profession and the rather pathological antipathy to Marxian epistemology and institutional economics has not been subjected to proper scrutiny. What I am concerned here is not Marxism as a creed but Marx’s unique contributions to the knowledge of understanding the dynamics of economic progress and the nature of the process of social history.

On economics curriculum in India:


11 economic stats that sum Venezuela’s misery

March 12, 2019

Jon Miltimore in this piece:

A tragedy common to human history is unfolding in Venezuela. It’s impossible to predict how it will end or what the human toll will be.

As we watch events and hope for a peaceful resolution that restores liberty in Venezuela, here are some noteworthy facts about the Land of Grace.

    1. Venezuela has the largest oil reserves in the world. While the US is the top producer of oil, its total reserves represent a mere fraction—roughly 10 percent—of Venezuela’s 300-plus billion barrels of oil. (Source: UPI)
    2. In Venezuela today, the median monthly income is $8. (source: FEE)
    3. A two-pound bag of onions currently costs about $2 in Venezuela. (source: FEE)
    4. In 2016, the price of a gallon of gasoline in Venezuela was less than one cent per gallon. (source: Washington Post)
    5. Roughly 90 percent of Venezuelans today live below the poverty line. (source: The Borgen Project)
    6. In 1950, Venezuela ranked among the top ten most prosperous nations in the world. (source: Human Progress)
    7. In 2018, inflation in Venezuela topped 1 million percent. (source: Reuters)
    8. Economic projections show inflation in Venezuela is expected to hit 10 million percent in 2019. (source: Miami Herald)
    9. In 1959, the Venezuelan GDP per capita was 10 percent higher than America’s. (source: Human Progress)
    10. As of June 2018, about 2.3 million people had emigrated from Venezuela following its economic collapse, or 13 percent of its population. (Source: The Panam Post)
    11. When Hugo Chavez came to power in 1999, the Venezuelan GDP per capita was 27 percent higher than the average in Latin America. (source: Human Progress)

Pass-through of Bank of England’s policy rate to household interest rates

March 12, 2019

Michael Saunders,  External MPC Member at Bank of England in this speech discusses the monetary transmission in UK.

The transmission has been weak due to low policy rates:

Let me summarise the argument so far. Household deposit rates are unlikely to respond fully to policy rate hikes until the spread between deposit and policy rates has normalised further. With the funding gap closed, mortgage lending rates are now more sensitive to deposit rates and less sensitive to wholesale unsecured funding rates. Hence, for as long as deposit rates remain less sensitive to policy rate changes, rates on new mortgages may also respond by less than usual to changes in Bank Rate (and corresponding swap rates). 

The link from changes in the policy rate set by the MPC to changes in households’ deposit and lending rates is not permanently broken, but is likely to be less effective while the policy rate is very low. This has some general implications for monetary policy. Since the crisis, policymakers have had to pay more
attention to the issue that there may be an effective lower bound (ELB) for the policy rate – not necessarily at zero – below which a further reduction generates no extra stimulus and may even be counter-productive.

However, as the policy rate approaches the ELB, there also may be a range in which policy rate changes have progressively less impact on banks’ deposit and lending rates. Close to the ELB, a lower policy rate would be reflected mainly in wider lending spreads (over riskless rates) rather than lower mortgage rates.
Conversely, a slight rise in the policy rate would produce narrower lending spreads. Lending and deposit rates would not move much either way.

This is only part of the monetary transmission mechanism (MTM). But it is a fairly important part.

BoE models suggest that monetary policy in the UK operates through four main channels: the exchange rate; cost of capital and non-housing wealth; the cashflow effect on households and their willingness to bring forward or delay purchases; and a housing channel. The latter two channels rely on the pass-through of policy rate changes to household interest rates. For example, a higher policy rate pushes up mortgage rates and hence weakens housing activity and house prices, reducing the value of households’ collateral (the housing channel). And the combined rise in deposit and mortgage rates squeezes consumer spending because the spending of people with a mortgage is more sensitive to interest rate changes than the spending of net savers (the cashflow channel), even if this effect is less marked than it used to be.20 The Bank’s suite of models suggest that these two channels typically account for between a third and two thirds of the total expected medium-term impact on output from policy rate changes, depending on how persistent the interest rate change is and the extent to which it is anticipated. If these channels are less effective, then the overall MTM also may be less effective than usual.

It is not possible to be precise about where the threshold for such a zone of reduced policy effectiveness might be. It probably starts when sight deposit rates reach or are close to their effective lower bound, and hence when the policy rate itself is clearly above the ELB. As a rough estimate, my guess is it that for the UK this might occur at a policy rate of roughly 2% or so, reflecting a near-zero floor for sight deposit rates plus an equilibrium spread of 150-200bp between household sight deposit rates and the policy rate.

The reduction in policy effectiveness may become more marked as the policy rate approaches the ELB and a higher share of deposit rates (eg time deposits) become constrained. Of course, this is still very uncertain  and we are still learning about the effects of policy rate changes at low levels. But this issue may be a fairly regular occurrence given that the neutral policy rate is much lower than previously.


Spain planning to establish a macroprudential board..

March 11, 2019

Spain has asked ECB’s opinion on its proposal to establish a macroprudential board. ECB says it is a good idea to have one.

The organisation of the new board is interesting. It will be housed under the Ministry with central bank chiefs part of the board:


Ten Years of Research – What Have We Learnt Since the Financial Crisis? (Australia edition)

March 8, 2019

Nice speech by John Simon, Head of Economic Research at RBA:


Why many married women were banned from working in US during the Great Depression?

March 6, 2019

Erin Blakemore in this article:


How bitcoin has saved a Venezuelan economist’s family?

March 5, 2019

Nice piece by Carlos Hernández who is a Venezuelan economist.

On Tuesday, I went shopping for milk. With the chronic food shortages in Venezuela, that errand already is very complicated, but there’s an extra layer of difficulty for me: I don’t own bolívars, Venezuela’s official currency.

I keep all of my money in Bitcoin. Keeping it in bolívars would be financial suicide: The last time I checked, the rate of daily inflation was around 3.5 percent. That’s daily inflation; the annual inflation rate for 2018 was almost 1.7 million percent. I don’t have a bank account abroad, and with Venezuela’s currency controls, there’s no easy way for me to use a conventional foreign currency like American dollars.

Things just keep getting crazier here. Venezuela now has two presidents. One of them, Nicolás Maduro, wants to take on the British billionaire Richard Branson in a competition of charity concerts. While we Venezuelans are going hungry, there have been violent standoffsover humanitarian aid piling up at the borders with Colombia and Brazil. And before I can buy milk, I need to convert Bitcoins into bolívars.

Actually, that part is easier than you might think. I go through the listings on, the exchange that most Venezuelans seem to use, looking for offers to buy my Bitcoins from people who use the same bank I do; that way the wire transfer can go through immediately. Once I accept the offer, the Bitcoins get deducted from my wallet and are held in escrow by the site. I send my banking information to the buyer and wait.

Atleast some people are using bitcoin for the very purpose it was invented. And what better than an economist using bitcoin and showing its value…

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