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

What led colonial states to invest much more in some districts than others?

April 19, 2021

Prof Joan Ricart-Huguet of Loyola University Maryland in this article tries to answer the colonial question:

What led colonial states to invest much more in some districts than others? This study shows that natural harbors and capes led some places to become centers of pre-colonial trade. These areas, in turn, attracted the lion’s share of colonial public investments not only in infrastructure but also in health and education. Public investments were considerably lower in places further away from the centers of pre-colonial trade.


Reducing reserves and central bank balance sheets

April 19, 2021

Chris Papadopoullos in this OMFIF post discuss ways for central banks to reduce balance sheets if at all:

More than a decade of government bond purchases has put central banks firmly in the fiscal equation. Central banks have always had some impact on fiscal policy, but now it is more direct. To raise interest rates, they must pay interest on reserves. Selling the bonds they have bought may be difficult while government debts are high.

This threatens their independence, but there is a way out. Central banks could swap their bonds for shorter maturing debt and then sell that back to the market. As central bank reserves are like short term government debt securities, it should not have a noticeable economic impact. Easy in theory, tricky in practice.

fall in demand for reserves by banks is needed though. Under Basel III banking rules, banks are required to hold a certain level of ‘high quality liquid assets’, which include reserves and short-term government bonds. The key to significantly reducing reserve levels is to create a system that allows banks to hold mostly Treasuries for their HQLA requirements in normal times and quickly convert these to bank reserves in a crisis.

To achieve this, two senior Federal Reserve economists, Jane Ihrig and David Andolfatto, have proposed a standing repurchase agreement facility that would allow banks to convert US Treasuries to central bank reserves. This would make it easier for central banks to reduce reserve levels in calm periods without generating upsets.

Labor Migration in Asia: Impacts of the COVID-19 Crisis and the Post-Pandemic Future

April 19, 2021

New ADB report:

This report by the Asian Development Bank Institute (ADBI), the Organisation for Economic Co-operation and Development (OECD), and the International Labour Organization (ILO) analyzes labor migration trends in Asia and puts them in the context of economic and policy developments and the changes wrought by the coronavirus disease (COVID-19) pandemic. It examines the policy settings in the major origin and destination countries of labor migrants and the medium- and long-term factors that will shape the future of labor migration in Asia. It further provides recommendations for building back better in a post-pandemic world.

The report offers up-to-date comparative statistics on labor migration, including evidence of the impacts of COVID-19 on labor migration flows and remittances. Two statistical annexes offer detailed country fact sheets and coverage of intra-Asia and cross-regional migration flows. The report also includes discussions on the future of labor migration in the aftermath of the pandemic and the role of technology and digitalization on labor mobility and its management.

This analysis partly draws on discussions that took place at the 10th ADBI-OECD-ILO Roundtable on Labor Migration: Future of Labor Migration in Asia: Challenges and Opportunities in the Next Decade, held in Bangkok, Thailand in February 2020, an annual event co-organized by ADBI, the OECD, and the ILO that brings together regional experts and policy makers. In response to the COVID-19 pandemic, the publication focuses on the pandemic’s impacts on labor mobility.


Rest in Peace: John Williamson who coined the phrase Washington Consensus

April 19, 2021

John Williamson of Peterson Institute who worked and coined the term Washington Consensus passed away on 11 Apr 2021.

The Peterson Institute for International Economics mourns the passing of John Williamson, a renowned international economist, and a founding senior fellow at the Institute, who died April 11 at his home in Chevy Chase, MD, at the age of 83. Williamson’s pioneering work on development economics, exchange rate regimes, international monetary reform, and many other subjects influenced the entire field of international economics. He was a prolific author and treasured mentor to many generations of scholars and policymakers, especially during his 32 years at PIIE.

John’s career included service at the UK Treasury, the International Monetary Fund (IMF), the World Bank, the University of Warwick (UK), the University of York (UK), Pontifícia Universidade Católica do Rio de Janeiro (Brazil), the Massachusetts Institute of Technology, and Princeton University. Beyond his career, he was a legendary and lifelong birdwatcher and conservationist, who observed and recorded more than four thousand species of birds throughout the world. His scholarship and policy leadership were matched by his unflinching integrity, infused with wit, kindness, and humility. The Peterson Institute is profoundly grateful for the many condolences it has received.

Lots of tributes highlighting how his career was much more than Washington Consensus.

Inflation in the aftermath of wars and pandemics: Evidence since 1300s

April 15, 2021

Kevin Daly and Rositsa D. Chankova in this voxeu article:

How well does New Zealand’s financial system serve the Maori community?

April 15, 2021

Roanna McLeod and Victor Lam in this RBNZ research analyse how well the local community of Maoris is served by financial system. The paper evaluates the role of iwis, largest group amidst Maori society play in providing financial services:


Report on the public consultation on a digital euro

April 14, 2021

ECB has published the public consultation of Digital Euro:

Although not representative of the European population as a whole, the input received from citizens and professionals signals that privacy, security, usability, low cost and accessibility are among the most popular features that respondents expect from a possible digital euro. Most respondents stress the value of privacy, often acknowledging requirements to avoid illicit activities while protecting the confidentiality
of payments data.

The vast majority of respondents see intermediaries playing a role in the digital euro ecosystem, mainly as a way of enabling the introduction of innovative and efficient services and facilitating integration with existing offerings. Mixed views are expressed on the use of tools to avoid unwanted macroeconomic consequences, which is a technical topic but with a substantial amount of public interest. Generally, respondents expect cross-border and cross-currency payments to be supported in a fast, interoperable and low-cost manner.

Overall, most of the respondents are willing to support a digital euro, especially given the Eurosystem’s commitment ever since its public engagement on the topic began that it would not use a digital euro to either discontinue cash or lower interest rates in the economy.

The responses from the public consultation provide valuable input to the Eurosystem’s ongoing assessments and upcoming decisions on a possible digital euro, even though it is accepted that the sample of respondents is not representative of the European population. At the same time, experiments to assess the strengths and weaknesses of different design options and further analysis of the policy implications of a digital euro are necessary to obtain a comprehensive assessment of the technical input received.

This analysis does not pre-empt decisions, reach conclusions or commit the Eurosystem to provide a digital euro of any kind. Nor does it prevent the Eurosystem  from further investigating and engaging with the general public and relevant stakeholders on the topic of a digital euro.


Real interest rates and demographic developments across generations: A panel-data analysis over two centuries

April 14, 2021

Lucas Fuhrer and Nils Herger in this Swiss National Bank paper:

This paper empirically examines the effect of population growth on long-term real interest rates. Although this effect is well founded in macroeconomic theory, the corresponding empirical results have been rather tenuous and surprisingly unstable. As the demographic interest rate impact is theoretically based on intergenerational relationships, we not only contemplate gross population growth rates but also distinguish between demographic growth resulting from a birth surplus and net migration.

Within a panel covering 12 countries and the years since 1820, our results suggest that there is a positive, statistically significant, and stable effect from the birth surplus on real interest rates. Conversely, the corresponding effect of net migration seems to be much more volatile. Hence, our results suggest that it is mainly population growth occurring through a birth surplus that affects the equilibrium real interest rate.


The challenge of Big Tech finance: Bloodhounds ore regulators are at risk of losing the scent.

April 13, 2021

Barry Eichengreen in this Proj Synd article:

Traditionally, regulators require credit providers to list the variables that form the basis for lending decisions so that the regulators can determine whether the variables include prohibited group characteristics. And they require lenders to specify the weights attached to the variables so that they can establish whether lending decisions are uncorrelated with ethnic or racial characteristics once conditioned on those other measures. But as Big Tech companies’ artificial intelligence-based algorithms replace loan officers, the variables and weights will be changing continuously with the arrival of new data points. It’s not obvious that regulators can keep up.

In algorithmic processes, moreover, the source of bias can vary. The data used to train the algorithm may be biased. Alternatively, the training itself may be biased, with the AI algorithm “learning” to use the data in biased ways. Given the black-box nature of algorithmic processes, the location of the problem is rarely clear.

Finally, there are risks to competition. Banks and fintechs rely on cloud computing services operated by the Big Tech firms, rendering them dependent on their most formidable competitors. Big Techs can also cross-subsidize their financial businesses, which are only a small part of what they do. By providing a range of interlocking services, they can prevent their customers from switching providers.

Regulators have responded with open banking rules requiring financial firms to share their customer data with third parties when customers consent. They have authorized the use of application programming interfaces that allow third-party providers to plug directly into financial websites to obtain customer data.

In an old parable about banks and regulators, the banks are greyhounds – they run very fast. The regulators are bloodhounds, slow afoot but faithfully on the trail. In the age of the platform economy, the bloodhounds are going to have to pick up the pace. Given that only three central banks report having dedicated fintech departments, there is reason to worry that they will lose the scent.

This greyhound vs bloodhounds is interesting way to explain the problem….

Arbitrage Capital of Global Banks

April 13, 2021

Paul Krugman pays tribute to Prof Robert Mundell

April 12, 2021

Paul Krugman pays tribute to Prof Robert Mundell who passed away recently:

Is China setting the future agenda for central bank digital currencies?

April 12, 2021

My new piece in Moneycontrol:

The Chinese policymakers realise that even if China is on top of the world economic order, it is highly likely that the USD will maintain its dominance. They see a hope in CBDC and thus are trying their bit to set the agenda for CBDC driven International Monetary System.  

The Man Who Discovered Capitalism: A Documentary on Schumpeter for Use in the Classroom

April 9, 2021

John T. Dalton and Andrew Logan of Wake Forest University in this paper review the documentary on Schumpeter:

We describe how the 2016 documentary The Man Who Discovered Capitalism can be used in the classroom to provide an entry point to the life and economics of Joseph A. Schumpeter, whose work on innovation, entrepreneurship, and creative destruction remains relevant for students today.

We summarize the key ideas conveyed in the documentary and offer four criticisms: its failure to capture the role of fin-de-siecle Vienna on Schumpeter’s intellectual development, its incomplete understanding of Schumpeter’s theory of innovation, its overstatement of Keynes’s influence relative to Schumpeter, and the overly generous credit it gives to government for spurring innovation.

We show how the documentary can be used in the classroom, complete with sample discussion questions grounded in the criticisms we identify. We argue The Man Who Discovered Capitalism is an effective teaching tool suitable for a variety of courses, including those on economic growth, intermediate macroeconomics, and the history of economic thought, among others.

Superb. We need more such efforts of making documentaries on key economists and then build material to discuss the ideas. One good way to promote and make history of economic thought exciting!!

Measuring human capital: Learning matters more than schooling

April 9, 2021

Noam Angrist, Simeon Djankov, Pinelopi Goldberg and Harry Patrinos in this voxeu research:

How high-speed rail changes the spatial distribution of economic activity: Evidence from Japan’s Shinkansen

April 8, 2021

Kazunobu Hayakawa, Hans Koster, Takatoshi Tabuchi and Jacques-François Thisse in this voxeu research:

The economic and social consequences of investments in transport infrastructure generate heated academic and policy debates because they typically involve costly investments that are supposed to yield high payoffs. Particularly telling examples of large transport infrastructure investments are investments in high-speed rail.

This column shows that the Shinkansen has had a substantial effect on Japan’s spatial distribution of employment. The relative position of municipalities within the network and their underlying location fundamentals are essential in understanding why the effects of an extensive infrastructure are positive or negative at the local level.  

Supervising cryptoassets for anti-money laundering

April 8, 2021

Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo in this BIS article:

Although certain cryptoassets have the potential to make payments and transfers more efficient, some of their features may heighten money laundering/terrorist financing (ML/TF) risks. In particular, the speed of transactions, global reach, potential for anonymous activity and the potential for transactions to take place without financial intermediaries make cryptoassets vulnerable to misuse. In fact, the scale of illicit use of cryptoassets is already significant, highlighting the importance of AML/CFT regulation and supervision, as well as law enforcement, in this area.

The Financial Action Task Force has acted swiftly with a view to preventing the misuse of cryptoassets for ML/TF. However, the effectiveness of international standards depends on effective implementation by national authorities, and the supervision of cryptoasset service providers remains nascent globally. This paper aims to contribute to the international debate by assessing emerging regulatory approaches and supervisory practices and identifying policy priorities to address common challenges faced by financial authorities.

Cryptocurrencies have become cryptoassets and the technology is increasingly being seen for transferring and remitting funds.

Europe’s growth gap: reconciling Keynes and Schumpeter

April 7, 2021

Governor François Villeroy de Galhau of Banque De France in this speech points to growing growth gaps between Europe and US.

How to bridge the gap? Take advice of Keynes or Schumpeter?


RBI rejigs Deputy Governors’ portfolio yet again..

April 6, 2021

RBI rejigs the Deputy Governors’ (DG) Portfolio yet again. Shri BP Kanungo retired and his portfolio was allocated to the three DGs.

Since July 23, 2019, when Viral Acharya left the RBI, the central bank has reshuffled the DG portfolio four times with three of these reshuffles in 2020 alone.  The reshuffling happens as Government is unable to appoint a replacement for a retiring/resigning DG.

In an earlier piece, I had written about this constant rejigging and even suggested ways to avoid this…

A global minimum corporate tax rate..

April 6, 2021

Janet Yellen’s remarks yday (5-Apr-2021) attracted a lot of attention. She mentioned the need to have a global minimum tax.

She started with saying “America is strongest when we engage with the world” and points the role US has played in world polity and economy:

When I was born, the United States was still recovering from the Great Depression and World War II. These tragedies cost countless lives; too many families lost nearly everything. But from the devastation we learned an invaluable lesson: the United States must not go it alone.

In the aftermath of the destruction, the United States built strong political and security alliances that have helped keep our country safe and helped our economies flourish. We created global institutions, such as the United Nations, and financial institutions, such as the International Monetary Fund and World Bank, to reduce economic conflict and address global poverty. With strong U.S. leadership—and working together with our allies—we contained communism and created a dynamic world economy and growing markets for U.S. exports. America’s middle class prospered. Millions across the world were lifted out of poverty.

But over the years, new problems developed that were not properly addressed. In the push to grow our economies, we neglected our environment. As we embraced new technologies, we didn’t do enough to prepare our workers and our education systems for the changes underway. While we embraced trade as an engine for growth, we neglected those who did not benefit. And in the most recent period, when we might have adopted policies at home to face these issues and joined with our allies to address issues abroad, we isolated ourselves and retreated from the international order that we created.

Over the last four years, we have seen firsthand what happens when America steps back from the global stage. America first must never mean America alone. For in today’s world, no country alone can suitably provide a strong and sustainable economy for its people. Over time, a lack of global leadership and engagement makes our institutions and economy vulnerable.

She points to three things US needs to do:

The first objective is a stable and growing world economy that benefits the U.S. economy.

The second objective is to fight poverty and promote a more inclusive global economy that aligns with our values.

Finally, there are certain matters where we are in it together—where the challenges are global and no one country will be successful if it goes at it in isolation.

In the third she raised this point of a global minimum tax:

Another consequence of an interconnected world has been a thirty-year race to the bottom on corporate tax rates. Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.

President Biden’s proposals announced last week call for bold domestic action, including to raise the U.S. minimum tax rate, and renewed international engagement, recognizing that it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion.

We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom. Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity.


Will bitcoin follow the mania, panic and crash trajectory?

April 6, 2021

My new piece in Hindustan Times.

Bitcoin’s current surge is difficult to decipher. If the world was preferring bitcoin as a currency, one could still understand this frenzy. But bitcoin’s user base is still insignificant

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