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

History of Frankfurt Stock exchange and linkages to monetary system

February 19, 2020

Super speech as always by Jens Weidmann:

People looking to realise their full economic potential need a stable currency.

That is something merchants already knew back in the Middle Ages, when they flocked to Frankfurt’s trade fair to trade in goods. Indeed, they came equipped with a variety of different coins. But what rates were they supposed to exchange their coins at? This question led a group of merchants, in 1585, to ask the city to set the rates. And Frankfurt actually went further still. It established a bourse to review the exchange rates at regular intervals. This move marked the “birth” of the Frankfurt Stock Exchange.[1]

More than 400 years later – in 1999, to be precise – many European currencies were replaced by a single currency. The euro has simplified trade in the internal market further still. The euro’s central promise back then, though, just as it is today, was to be stable money for people in the euro area.

That is why price stability is the primary objective of monetary policy. Since 1999, the average inflation rate in Germany has actually been even lower than the rate observed in the D-Mark era. This has truly been a success story, even if the two periods are difficult to compare.


Looking to the future and the willingness to modernise are important not only for monetary policy, they are also crucial for the financial markets. Back in the 18th century, Frankfurt evolved into a financial centre of international renown – thanks to the newly established trade in government bonds. However, Frankfurt bankers long wanted nothing to do with shares, which resulted in Frankfurt being eclipsed by Berlin in the 19th century.

Phew…Did not know this!

The United States as a Global Financial Intermediary and Insurer

February 18, 2020

Alexander Monge-Naranjo of St Louis Fed in St Louis Fed Eco Synopses:


Blockchain structure and cryptocurrency prices

February 17, 2020

Peter Zimmerman of Bank of England in a new working paper:

I present a model of cryptocurrency price formation that endogenizes both the financial market for coins and the fee-based market for blockchain space. A cryptocurrency has two distinctive features: a price determined by the extent of its usage as money, and a blockchain structure that restricts settlement capacity. Limited settlement space creates competition between users of the currency, so speculative activity can crowd out monetary usage. This crowding-out undermines the ability of a cryptocurrency to act as a medium of payment, lowering its value. Higher speculative demand can reduce prices, contrary to standard economic models. Crowding-out also raises the riskiness of investing in cryptocurrency, explaining high observed price volatility.


Post Brexit: London as a financial centre…

February 17, 2020

Nice speech by Jon Cunliffe on London as a financial centre

We are home to the largest and most complex financial centre in the world.

And it is a truly global financial centre, where global capital, liquidity and risk are pooled and managed, with the accumulation of the people, skills and the expertise necessary for such a concentration of international finance.

The City is home to around 250 foreign banks including all of the major investment banks. It is the same story for other financial sectors like asset management and insurance.

Its financial markets are truly global. 50% of the global market in swaps and 43% of forex trading takes place in London.1 Around 2.5 times as many USD are traded in the UK as in the US. It is the world’s second largest centre for asset management. And its role as an innovator in global financial services looks set to
continue. It is a global leader in FinTech.

Post Brexit things will change a bit:


Tweestorm: Rough chronology of economics since World War II

February 17, 2020

Beatrice Cherrier in a superb tweetstorm takes us through the history of economics since WW-II.

As good as it can get..

Narratives about the ECB’s monetary policy – reality or fiction?

February 17, 2020

New ECB Board member Isabel Schnabel questions the German criticism of ECB monetary policy. That she is German makes it even more interesting.

In recent years, Germany has experienced one of the longest economic upswings since the Second World War.[1] Since 2010 the German economy has grown at an average annual rate of 2%. Unemployment has fallen to its lowest level since German reunification.

The monetary policy of the ECB has contributed significantly to that expansion. By lowering interest rates and making use of new monetary policy instruments, the ECB has created financing conditions that support investment, growth and job creation across the euro area.

And it was the ECB’s decisive action in 2012 that prevented a break-up of the euro area.

Despite these considerable successes, the public debate about monetary policy has become more heated in parts of the euro area, and especially in Germany.

The conversation is dominated by various narratives, such as the “expropriation” of German savers through “punishment rates”, the “flood of money” that will inevitably lead to massive inflation, and the creation of “zombie firms” as a result of expansionary monetary policy.

In my remarks today, I would like to take a closer look at some of these narratives and discuss them in the light of the facts.

I will demonstrate that the ECB’s current monetary policy stance is necessary in order to achieve sustained price stability in the euro area, and that the use of unconventional monetary policy tools, such as negative interest rates and asset purchases, is largely a consequence of structural changes in the economy that lie beyond the ECB’s control.

I will also discuss the potential side effects of these monetary policy measures and show that many of the fears that are frequently being expressed are based on half-truths and false narratives. The excessive criticism of the ECB is dangerous because it not only jeopardises trust in our single monetary policy, but also undermines European cohesion.

In her interview, she explains:

You want to clear up misunderstandings about the ECB. Would you say that you are now on a type of peacekeeping mission to mediate between the central bank and the German public?

No, that is not what this is about. I am not a mediator between two parties; I am now a member of the ECB’s Executive Board. But in my new role as a board member I am committed to seeking greater public understanding and clearing up misunderstandings. For people to constantly hear that the ECB’s policy is harmful to them is misleading and it undermines their trust. This worries me. 

 Which misunderstanding do you wish to clear up specifically?

The expropriation of savers is the main misconception. Even the term itself is legally incorrect. It would imply that the ECB is taking something away from people that rightfully belongs to them. But that is not the case. 

But rather?

The real interest rate – that is, the interest rate adjusted for inflation – emerges from the economy’s growth potential in the long run. Sweeping macroeconomic trends – such as demographic ageing and weak productivity growth – have caused a worldwide decline in real interest rates. The ECB cannot change these fundamental developments but can only steer its key interest rates around the trend. If it wishes to fulfil its mandate and stimulate the economy at a time when inflation is too low, it has to lower interest rates even further. If the policy rate then approaches zero, it becomes increasingly difficult to attain its objective with conventional tools. We see this constellation all over the world.

You’re suggesting that the ECB is a victim rather than a perpetrator in respect of negative interest rates. Are there any robust economic studies that back this up?

There are countless studies that estimate the equilibrium interest rate, using various methods and delivering different outcomes. But the trend is clear, it is pointing downward. I understand the frustration about low returns on savings, but that is not the whole picture. Borrowers and property owners have benefited, as have the government and employees. Analyses have been conducted on what would have happened without the ECB’s loose monetary policy. They found that economic growth would have been considerably slower, inflation would have been lower and unemployment higher. The one-sided, negative presentation of the consequences of the ECB’s policies is misleading. All in all, Germany has benefited from the ECB’s monetary policy.

You are saying that savers are not being expropriated at all. But the ECB’s negative interest rate policy effectively means that we can forget about traditional forms of investment such as savings accounts or life insurance policies. At the same time, people are being advised to provide for their retirement. How are they supposed to do that? 

If the ECB were to increase interest rates in the current environment, it would be harmful for everyone – not least for savers. I can’t give people any investment tips. But there’s no doubt that, in today’s interest rate environment, it is not especially advisable to put all your funds in savings or time deposit accounts. Politicians also have a duty to inform citizens about the alternatives to interest rate products.


The birds, the bees and the Bank? The birth-rate channel of monetary policy

February 14, 2020

Missed this interesting paper by Bank of England economists published in Dec-2019. They figure that their is a birth rate channel of monetary policy.

In this post on Bank Underground Blog, the authors explain the findings:


Margaret Thatcher on Socialism: 20 of Her Best Quotes

February 14, 2020

Lawrence Reed in this post picks 20 quotes of Thatcher:

This autumn will mark 30 years since Margaret Thatcher departed 10 Downing Street as the first woman and longest-serving British Prime Minister of the 20th Century. What an amazing tenure it was!

No need to take my word for it, though. I offer here some of Margaret Thatcher’s most incisive remarks about the socialism some Americans seem attracted to these days. They stretch across decades of her public life.

Lots of interesting quotes in the post..


Why and how Geography matters in nomination at Federal Reserve Board

February 14, 2020

Interesting post by George Selgin. He points how Geography matters in nomination to the Fed Board:

Although one might suppose that, to be eligible to serve as a Federal Reserve governor, a candidate should know something about monetary policy or banking or both, so far as the law is concerned, only two things clearly matter: a candidate cannot serve more than once, and he or she can’t be from just anywhere.

Few Americans will know that that second requirement exists, why it does, and how it has come to be routinely ignored. Yet the question of geographic eligibility is likely to be raised during upcoming Senate confirmation hearings for two current Fed Board nominees, Judy Shelton and Chris Waller. Hence this brief “Fed Geography Lesson,” written for the sake of those who, should a fuss be raised about where a nominee comes from, wonder what it’s all about.

Unlike other central banking arrangements, the Federal Reserve System consists, not of a single central bank, but of a dozen banks each responsible for a separate territory or district. The system is overseen by a Board of Governors headquartered in Washington, D.C., whose seven members are appointed by the President for terms lasting up to 14 years.

When, in 1913, the Federal Reserve Act was being hammered-out in Congress, certain influential Democratic Congressmen, fearing that the Federal Reserve Board (as the present Board of Governors was then known) might come to be dominated by persons (and Wall Street bankers and their cronies especially) from the East Coast, took preventative action: they had the Act’s 10th Section stipulate, first, that no more than one member of the Board should be from any one Federal Reserve district; and second, that in nominating Board members the President “shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions, of the country.”

This geography constraint has led quite a few nominations to be clocked such as that of Nobel laureate Peter Diamond!:

For most of the Fed’s existence, the Federal Reserve Act’s geographical diversity provisions drew little public attention. But in 2011 they became front-page news when Richard Shelby (R-AL), then ranking member of the Senate Banking Committee, appealed to them, and to the first provision especially, in successfully opposing Nobel Laureate Peter Diamond’s appointment to the Board. Although Diamond was supposed to represent the Chicago Fed district, he had only tenuous ties to it, whereas he’d long resided in Boston, a district that was already being represented at the time by Daniel Tarullo.

Some commentators, including the CMFA’s own Mark Calabria, defended Shelby’s stand, holding it to mark a needed return to strict adherence to the law and to the intentions of the Federal Reserve’s founders. Others, however, including Diamond himself, saw it as mere cover for a strictly partisan act, namely, Republican retaliation for Democrat Senators’ having blocked  Randall Kroszner’s Board reappointment several years before.

Lots of interesting stuff in the post. This aspect of Geography would have mattered in recent Fed nominations but since the post, Trump has made changes…

A Bank of England perspective on gender diversity: past, present and future

February 14, 2020

Lea Peterson, ED of Human Resources at Bank of England tracks the history of gender diversity at Bank of England.

It is ironical that one of the first decisions of BoE took was to choose a woman as the seal of the bank. Yet, it took a few centuries to increase women participation at the central bank:


Entangled Economists: Ragnar Frisch and Jan Tinbergen

February 13, 2020

Interesting new paper on the first nobel laureates in economics:

It is 50 years since the first Nobel Prize in economics was awarded to Jan Tinbergen and Ragnar Frisch. This article analyzes, based on their correspondence, the cooperation between these pioneers of econometrics which spanned four decades and various subfields in economics. It is demonstrated that Frisch was responsible for the theoretical breakthroughs, which were then made public and popular by Tinbergen, this is true for the econometric models of the 1930s, the econometric decision-models of the 1950s, as well as the work on utility measurement. This division of labor is analyzed in relation to the goals they pursued in the research and their respective perfectionistic (Frisch) and pragmatic (Tinbergen) approaches to economic science. Both men shared a sense of deep social responsibility, but small differences in personality and approaches to science generated important differences in scientific recognition and political reception of their work. Although they are widely remembered for helping to turn into economics into a quantitative empirical science, it is demonstrated in this article that personal factors were significant in shaping their scientific approaches.


Limited liability is causing unlimited harm

February 13, 2020

Rise of shareholder capitalism is largely due to limited liability accorded to the owners.  However, nothing can be constant despite its so called success.

In this piece, Katharina Pistor says limited liability is causing much of the harm today:

The original purpose of limited-liability protection was to encourage investment in – and risk-taking by – corporations, whose resulting innovations would benefit society. Yet by allowing shareholders to profit from the harms caused by corporations, limited liability has evolved into a source of systemic market failure.


So long as shareholders can gain from these externalities, they will defend them. They will fight every attempt to force an internalization of costs, including the carbon tax that the European Union is currently promoting. Top-down regulation, they argue, is inefficient, because governments cannot possibly identify the optimal tax rate. But if that is the case, why not enable markets to price risk correctly, by removing the distortion that is currently preventing them from doing so?

The liability rules cannot be changed overnight. But changes could be phased in after a transition period that puts everyone on notice. No new multilateral treaty or complicated harmonization efforts are needed. If just a handful of countries adopted “piercing statutes” and ensured that claimants would have standing in their courts, markets would respond accordingly.

No doubt, shareholders would try to avoid liability by shifting assets to safe-haven jurisdictions, and by lobbying their own governments to protect them with the threat of trade sanctions against countries that do adopt piercing statutes. But the greater the number of countries adopting such statutes, the less successful these strong-arm tactics will be.

In the end, a subsidy that distorts markets and gives investors a license to harm is not only inefficient. It is a threat to both the market system and the natural environment upon which we all depend for our survival.

Interesting. Never thought it this way…

Distributed Ledger Technology, Blockchain and Central Banks: RBI economists perspective

February 13, 2020

The Feb-2020 RBI Bulletin has a superb article on the topic. It is written by Nalin Priyaranjan, Mohua Roy and Sarat Dha:

Distributed Ledger Technology (DLT) and blockchain have developed considerably in features and complexity to offer solutions to various industries including the financial sector. Some central banks have undertaken pilot projects to study and understand DLT and explore the potential benefits for their operations and the financial systems. So far most of these projects have been experimental in nature to explore the viability of conducting inter-bank settlements, settlement of digital assets and tokens and cross-border payments across DLT platforms with functionalities of the existing system.

In the Indian context, increasing support from the Reserve Bank of India and the Government of India for innovations and emerging technologies through regulatory sandbox and various other schemes would pave the way for the new economy, enriched with technology centric growth momentum.

The short paper explains key ideas behind blockchain and DLTs nicely:

The terms DLT and blockchain are often used interchangeably. However, it is important to understand the distinction. Blockchain, a linearly connected chain of blocks, is a specific type of DLT, whereas DLT is a decentralised ledger, which may not be a linear chain, among various participants who agree on a common state of the ledger and validates the new information/transactions and updates the ledger. Thus, all blockchains are DLT; however, all DLT platforms are not blockchains (Chart 1). A DLT is not a blockchain if the distributed ledger is not in the form of linearly connected blocks.

Lot of other stuff as well..

Paul Samuleson: The people’s economist?

February 12, 2020

Prof. Roger Backhouse of University of Birmingham is the author of Founder of Modern Economics: Paul A Samuelson, Volume I: Becoming Samuelson, 1915-1948 (2017).

He writes a short profile of Samuelson in this aeon article:

For 30 to 40 years after the end of the Second World War, Paul Samuelson was one of the best-known economists of all time. His name would have been familiar not just to other economists and students but to readers of The New York Times, The Washington Post and, above all, Newsweek, where he had a regular column for 15 years. In parts of the world, Samuelson’s fame even eclipsed that of John Maynard Keynes, who had been a major public figure as well as an economist.
And yet there is a paradox at the heart of Samuelson’s work. His reputation was based on his mathematical economics – abstract theories that would mean nothing to non-economists. At one point, some of his teachers even thought that he might be unemployable because they doubted whether he could teach ‘normal’ economics students; that is, people who knew less mathematics than he did. However, within a decade of obtaining his doctorate in 1941, Samuelson published an introductory economics textbook that became canonical in part for its success in presenting the subject in an accessible way, quite unlike the dry tomes of his predecessors in both content and appearance.
Samuelson’s Economics: An Introductory Analysis (1948) has gone through 19 editions and been translated into 41 languages. The first 11 editions sold more than 3 million copies. The book uses hardly any mathematics and is full of data about American households, firms, labour unions and government activities. How did an economist whose early reputation derived from his rarefied mathematical skills grow into one of the discipline’s great communicators?
More in the piece.

Project Stella: ECB and Bank of Japan release joint report on distributed ledger technology

February 12, 2020

ECB and BoJ keep working on the digital currency payments under their Project Stella.

The two central banks have released the 4th joint report:


Economics of Maps

February 12, 2020

The new edition of Journal of Economic Perspectives is out.

There is a fascinating paper titled Economics of Maps by Abhishek Nagaraj and Scott Stern:

The JEP edition also has three papers on India. 
Prof Timothy Taylor, editor of the the journal has a post on the issue.

The Economic Consequences of allowing people take naps at workplace!

February 11, 2020

This is a kind of paper which brings the expression: “I always knew this!”

Pedro Bessone, Gautam Rao, Frank Schilbach, Heather Schofield and Mattie Toma in the new NBER working paper:

This paper measures sleep among the urban poor in India and estimates the economic returns to increased sleep. Adults in Chennai have strikingly low quantity and quality of sleep relative to typical guidelines: despite spending 8 hours in bed, they achieve only 5.6 hours per night of sleep, with 32 awakenings per night. A three-week treatment providing information, encouragement, and sleep-related items increased sleep quantity by 27 minutes per night without improving sleep quality.

Increased night sleep had no detectable effects on cognition, productivity, decision-making, or psychological and physical well-being, and led to small decreases in labor supply and thus earnings.

In contrast, offering high-quality naps at the workplace increased productivity, cognition, psychological well-being, and patience.

Taken together, the returns to increased night sleep are low, at least at the low-quality levels typically available in home environments in Chennai. We find suggestive evidence that higher-quality sleep improves important economic and psychological outcomes.

Well, who would object to this barring the bosses?

The Making of a National Currency: Spatial Transaction Costs and Money Market Integration in Spain (1825–1874)

February 11, 2020

This looks like a really interesting paper on monetary history (freely downloadable till 28 Feb 2020).

It is written by Pilar Nogues-MarcoAlfonso Herranz-Loncán and Nektarios Aslanidis:

This article analyzes the integration of the Spanish money market in the nineteenth century. We use a Band-Threshold Autoregression model of prices of bills-of-exchange in ten cities to measure market convergence and efficiency in 1825–1875. While price gaps generally decreased during the period, progress in efficiency was limited to a small group of cities. We suggest that convergence was associated to the reduction in transaction costs, which started well before the railways through improvements in roads and postal services. By contrast, the heterogeneous behavior of efficiency might be associated to economic geography changes and their effects on monetary leadership.

For all you know, a digital national currency will also be made in similar manner. The transaction costs will have to decline and converge to near zero levels…

Understanding macro policy using the Stone Soup story

February 11, 2020

Mary Daly, President of San Francisco Fed in this speech cites the stone soup story to help audience understand the challenges the policymakers face:


Why women telephone operators kept their jobs for decades despite automated technology?

February 10, 2020

Insightful research by David Price in Rochmond Fed’s Econ Focus publication. He points to this interesting history of technology. Even though automation arrived in telephone industry, operators particularly women operators continued to have their jobs:


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