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

CRR and SLR as macroprudential tools: Some Historical Lessons

August 22, 2019

Nice paper by Eric Monnet (Banque de France) and Miklos Vari (IMF):

Liquidity regulations similar the current Basel III Liquidity Coverage Ratio (LCR) have been used from the 1930s to the 1980s in many countries as monetary policy tools. They took the form of required deposits at the central bank (“cash reserve requirements”) or minimum holdings of liquid securities (“securities reserve requirements”). As with the LCR, these two types of liquidity requirements (cash and securities) were computed as a percentage of short-term deposits.

India obviously had Cash Reserve Ratio since 1935 and SLR since 1949 and continues to have both these ratios.

Our paper presents three contributions.

First, based on detailed readings of historical central banks’ reports and documents, we describe how and why liquidity ratios were used in many
countries (especially Europe) from the 1930s to the 1980s , following the American experience. By emphasizing the distinction between “securities-reserve requirements” and “cash-reserve requirements,” we provide details on central bank practices whose history is largely unknown, and shed light on the dual nature of liquidity ratios as prudential and monetary policy tools.

Second, we show how “securities reserve requirements” were at the crossroad of monetary policy and sovereign debt management. It explains why they were phased out by central banks in the 1980s, as they had been associated with the so-called “financial repression” era (Reinhart and Sbrancia (2015)). Securities-reserve requirements were typically used in a period when banks held a large share of government bonds, and they reinforced such phenomenon. Central banks increased liquidity ratios during times of restrictive monetary policy in order to prevent banks from selling government securities, which were the main type of assets eligible to fulfill the requirement. As such, banks were discouraged to shift their assets from government securities to corporate loans.

Third, we build a theoretical model, and show that the mechanisms previously described can be rationalized with a simple model of the interbank market. By this, our paper introduces a new mechanism in the current literature on liquidity regulation and sheds new light on the history of monetary policy.

Hmm. Even without CRR and SLR, RBI has been using macropru policies much before they became buzzword. See these 2010 speeches by Shyamala Gopinath of RBI and James Caruna of BIS. 

SLR in particular has long been seen as a villain and something which led to financial repression. Several RBI Governors and other officials have written to either remove SLR or bring it to zero. Similar story was played in West too but much earlier than RBI.

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How banks lobby and capture regulations..

August 21, 2019

Superb paper by Deniz O Igan and Thomas Lambert:

In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes.

The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis.

While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.

I think in other sectors regulatory capture is not as straight forward. In financial sector it is blatant. You see central bankers and securities regulators join financial firms pretty freely.

Philippines economy: Weaving an unprecedented 20 year growth story (without much hype)

August 21, 2019

There is much hype around Indian economy and how high its growth has been all these years. There are some others who manage it without much hype.

Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (their central bank) in this speech highlights how Philippines economy has been growing for 20 years:

Let me begin with our growth story thus far in the Philippines. Our economy has experienced uninterrupted growth for over 20 years since 1999 despite challenges such as the 2004 fiscal crisis and the 2007 global financial crisis-that is 81 consecutive quarters of continuous growth, with annual growth averaging 6.4 percent in the past five years (2014-2018).

Growth in recent years has become more broad-based.

On the demand side,  private consumption remained robust in the first quarter of 2019, as in the previous quarters through the years. This is further supported by rising contribution from investments from 2010 up to present.

On the supply side, services remain the main driver of growth-but the industry sector has also stepped up in recent years.

Meanwhile, the government’s economic managers remain optimistic about achieving our GDP growth target of 6 to 7 percent this year despite the lower than expected 5.6 percent growth in the first quarter of this 2019.

Private consumption is expected to remain robust, aided by remittance inflows and sustained “cooling” inflation. Private capital formation, on the other hand, should likewise contribute more significantly to economic growth, with construction and investments in durable equipment expected to remain solid in light of the government’s projects and other infrastructure programs.

The International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) share these expectations. In fact, all three forecast that the Philippine economy will grow by about 6.2 to 6.5 percent this year.

This has been due to three measures:

The bold reforms and initiatives in the past three years have prompted the government to capitalize on and sustain these gains. It is because of this that we believe the Philippine growth momentum will be sustained moving forward.

First is the government’s ambitious infrastructure program-“Build, Build, Build” which aims to boost the economy’s mobility and connectivity, enabling equitable growth and development. At present, there are 75 high-impact national government infrastructure, with 46 projects (61 percent) already in the implementation stage. 

The government is expected to invest over PhP 4.6 trillion (or US$90 billion at PhP52:USD1) in public infrastructure from 2019 to 2022.

Second, is the recent passage of reforms aimed at strengthening our investment climate. The Ease of Doing Business and Efficient Government Service Delivery Act, the revised Corporation Code, and the Philippine Innovation Act support the government’s agenda of improving competitiveness and ease of doing business in the country, promoting transparency and cutting red tape in the government for a more conducive business environment.

At present, the Philippines’ current standing has improved based on different third-party assessors. For instance, the Philippines’ ranking rose from 68th to 56th place under the 2018 Global Competitiveness Report.

It also received an upgrade in its sovereign credit rating from Standard & Poor’s to “BBB+” from “BBB.” These favorable standings are also boosted by the improved business sentiment and the stable consumer outlook based on the BSP’s latest round of expectations surveys.  

Finally, the continued demand for Philippine skills locally and abroad are evident in the growth of our BPO industry and strong remittance inflows. This further highlights the importance of our country’s most prized resource-our labor force. Based on our estimates, production efficiency has improved over the years with the incremental capital-output ratio (ICOR) declining steadily. As you know, the higher the ICOR, the less efficient the production process is.

Recognizing the skills of our workforce, the government has invested heavily in various social programs such as the Universal Health Care Act and the Access to Quality Tertiary Education Act (RA No. 10931).

You may not know this but 40% of our budget goes to social services.

He goes on to highlight the role central bank has played and is playing to maintain the momentum.

India and its policymakers make much noise about how growth rates have been higher during their tenure and getting into a lot of mud slinging. They make it look as if India is the only country growing and they are the sole reasons for this growth. Examples from smaller countries such as Philippines tells us none of this is needed really.

Devotion and development: Religiosity, education, and economic progress in 19th-century France

August 19, 2019

What happened to Macrinomics in Argentina?

August 19, 2019

When Mauricio Macri was elected as President, lot was written on how Macrinomics will change the fate of Argentina.

However, nothing much could change. Argentina continues to be a royal mess. People have voted for return of left, leading to concerns for the investors.

What drives Trump to nominate Judy Shelton at Federal Reserve? Try push countries towards Fixed exchange rates?

August 19, 2019

All kinds of things happening.

Barry Eichengreen writes that Trump wishes to go back to the earlier days when exchange rates were fixed. Why? The idea is to compress US Trade deficit by raising tariffs. However,  other countries allow currencies to depreciate netting out the effects of tariff. This means countries should be pushed to fix their exchange rates which leads to nomination of Judy Shelton who is a major votary of gold standard:

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Europe works best with the Russians out, the Germans down, and the Americans in: Does this apply today?

August 19, 2019

Europe works best, as the old quip has it, with the Russians out, the Germans down, and the Americans in. Today’s new European order has the Russians up, the Germans on the way down, the Americans potentially bowing out, Britons struggling toward Brexit – and France rising.

Lots of history in these two lines…

Does 2019 look lot like 1929?

August 19, 2019

Wharton dean Geoff Garrett in this piece fears 2019 looking lot like 1929:

In my darkest moments, I fear that 2019 is looking more like 1929. Ninety years ago, economic inequality was at an all-time high in America and Europe. The seeds of authoritarian nationalism were sprouting in Asia, Europe and Latin America. World War I had destabilized the old global order without creating a new one. Against this backdrop, the stock market crash of October 1929 then ignited the horrendous cascade of depression, fascism and World War II—arguably the worst 15 years in history.

The notion that we could even remotely be near such a global paroxysm may seem unthinkable today. But I bet that is how everybody living the life of The Great Gatsbyand Downton Abbey in the late 1920s felt, too.

The good news today is that while a market correction and a potential recession seem likely sometime, the chances of a crash on the scale of 1929 appear remote. This gives us some time—time to do all we can to reverse the big trends, time to make sure the 2020s are not a replay of the 1930s.

Part of what we must do no doubt requires demanding more of our political leaders—to be more open about the challenges we face and more creative about the potential solutions. But I implored our students to embrace the real difference they can make: that bottom-up actions by the many can change the world as much as, or more than, the actions of even the most effective leaders.

So, my suggestions for change are part policy wonkism, part personal wisdom. 

Hmm..

A tale of two countries: Cash demand in Canada and Sweden

August 9, 2019

Superb paper by Walter Engert and Ben S. C. Fung (Bank of Canada) and Björn Segendorf (Riksbank). They try and understand why cash demand is different in the two countries.

First, Sweden and Canada economies are quite similar:

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Locating Equality: Real estate the main driver of rising inequality?

August 9, 2019

Harold James has a fascinating piece:

For years, wealth and income inequalities have been rising within industrialized countries, kicking off a broader debate about technology and globalization. But at the heart of the issue is a fundamental good that has been driving social and economic inequality for centuries: real estate.

Inequality is the leading political and economic issue of the current era, yet debates about it have long suffered from a degree of imprecision. For example, the standard measure of inequality, the Gini coefficient, reduces a country’s entire income distribution to a single number between zero and one, and is thus highly abstract. Similarly, while inequality is rising in many parts of the world, there is no simple correlation between that trend and social discontent or unrest. France is much less unequal than the United States, and yet it has similar or even greater levels of social polarization.

Today’s inequality debate effectively began in 2013 with the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century, which found that the rate of return on capital tends to outpace the rate of growth, thereby causing inequality to increase over time. Specifically, appreciating real-estate values seem to be a fundamental driver of rising inequality. But here, too, one encounters a degree of imprecision. Real estate, after all, is not a homogenous good, because its value famously depends on “location, location, location.” There are elegant castles and palaces that now cost less than small apartments in major cities.

Wealth stirs the most controversy where it is most tangible, such as when physical spaces become status goods: the corner office is desirable precisely because others cannot have it. More broadly, as major cities have become magnets for a global elite, they have become increasingly unaffordable for office workers, policemen, teachers, nurses, and the like. While the latter must endure long, tiresome commutes, elites use global cities as they see fit, often hopping around from place to place. Large swaths of Paris and London are eerily shuttered at night. Manhattan now has nearly a quarter-million vacant apartments.

Whenever violence and revolution have  unequal societies, real estate has been a focus of discontent. 

Hmm..

Can ethics be taught: Doing a RCT to figure?

August 8, 2019

Pert Singer in this piece wonders whether teaching ethics can shape behavior:

In The Righteous Mind, Haidt draws support for his views from research by the philosopher Eric Schwitzgebel of the University of California, Riverside, and Joshua Rust of Stetson University. On a range of ethical issues, Schwitzgebel and Rust show, philosophy professors specializing in ethics behave no better than professors working in other areas of philosophy; nor are they more ethical than professors who don’t work in philosophy at all. If even professors working in ethics are no more ethical than their peers in other disciplines, doesn’t that support the belief that ethical reasoning is powerless to make people behave more ethically?

Perhaps. Yet, despite the evidence, I am not entirely convinced. I have had a lot of anecdotal evidence that my classes in practical ethics changed the lives of at least some students, and in quite fundamental ways. Some became vegetarian or vegan. Others began donating to help people in extreme poverty in low-income countries, and a few changed their career plans so that they could do more to make the world a better place.

How to figure this? Do a RCT!:

Two years ago, Schwitzgebel offered me an opportunity to test, more rigorously than had ever been done before, whether a class on the ethics of eating meat could change what students eat. Together with Brad Cokelet, a philosophy professor at the University of Kansas, we ran a study involving 1,143 students at the University of California, Riverside. Half the students were required to read a philosophical article defending vegetarianism, followed by a small group discussion with the option of watching a video advocating avoiding meat. The other half were a control group. They received similar materials and discussion on donating to help people in poverty.

We used information from campus dining cards to find out what food purchases the students in the two groups made before and after these classes. We had data on nearly 6,000 food purchases from 476 students. The purchases were identified with students who had, or had not, read and discussed the ethics of eating meat, but the data we received were made anonymous so that we could not identify any named student’s purchases.

The result was a decline, from 52% to 45%, in meat purchases among students in the meat ethics group, and the lower rate of meat purchases was maintained for a few weeks after the class. There was no change in the level of meat purchases in the charitable giving group (and we had no way of discovering whether these students gave more to charity).

Our results are, at this stage, preliminary and have not yet undergone peer review. We are seeking further data on the significance of watching the video – which may have appealed to students’ emotions more than their reason. Nevertheless, to our knowledge, this is the first properly controlled study, in the real world and not in a laboratory setting, of the impact of university-level philosophy classes on student behavior. The decline in meat-eating is not dramatic, but it is statistically significant, and suggests that in some contexts, ethical reasoning in the classroom can change behavior.

Hmm..

 

When Central European countries gave loans in Swiss Francs and it backfired..

August 7, 2019

Before the 2008 crisis, certain Central Europeans took loans in Swiss Francs given the stability etc. As Swiss entered the crisis and did their own thing, the CHF appreciated given its safe haven status. This led to problems for these countries as the borrowers had to pay more due to CHF appreciation. Some respite was there when Swiss National Bank decided to target their currency to prevent this appreciation. But once they removed the target, the problems again continues. This led to some of these economies to restructure their loans in either Euro or local currency.

For instance, the Slovenian government has decided to restructure in Euro and asked their central bank to face losses if any. They sent a letter to ECB for its view as per the law. ECB replied raising concerns over this move saying it is the role of the government and not Slovenia central bank.

Andreas Fischer and Pınar Yeşin in this SNB working paper look at evidence from other countries:

This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in
Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period.

Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased currency mismatches in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.

 

How private prisons affect sentencing?

August 6, 2019

Christian Dippel and Michael Poyker in this voxeu piece:

Was Mr Say the ultimate nemesis of Lord Keynes?

August 6, 2019

Profs. Alain Béraud and Guy Numa in this piece says we usually think that Keynes and Say were at opposite ends of each other. However, they are far more proximate than it is imagined:

In economics we love this comparison of this vs that. But if we analyse closely, there are more similarities than differences.  

The situation in the (Slovenian) banking system remains good, while risks have increased?

August 5, 2019

One is increasingly seeing how central bankers are saying both things at the same time:

The situation in the banking system remains good, while risks have increased

The Bank of Slovenia finds that the situation in the banking system remains good, according to the latest information, even as risks have increased. The profitability of the Slovenian banking system increased again, while this year has also seen growth in the balance sheet total and bank lending activity. The quality of the credit portfolio is continuing to improve, most evidently in the corporate segment. The capital adequacy of the Slovenian banking system remains comparable to the euro area average. The Bank of Slovenia draws attention to increased risks: while economic growth gradually slows, the key challenge for the banking system remains generating stable income in the low interest rate environment.

Call it Economists’ English!

It also suffers from these behavioral biases. You ask a fund manager and she always says we are doing well and risks have increased but they lie elsewhere. Now it cannot be the case that everyone is doing well and yet risks are rising.

Sweden’s march towards a cashless economy got a slight jolt

August 5, 2019

As one thought Sweden will go cashless in just a few years, there has been some fightback from cashusers.

John Detrixhe reports that notes and coins in circulation has gone up by 7% for the first time in 10 years:

Sweden is at the vanguard of countries embracing digital payments, so much so that the Scandinavian country could go effectively cashless in less than four years. In 2018, however, the amount of banknotes and coins in circulation increased for the first time in more than a decade.

Swedish banknotes and coins in circulation rose 7% last year, to 62.2 billion krona ($6.5 billion), according to the European Central Bank. It was the first yearly increase since 2007; the value of cash in circulation has dropped by around 45% over that period.

Are Swedes falling back in love with cash? Probably not. Groups that represent seniors and other vulnerable people have pushed backagainst the country’s rapid shift to digital payments, but last year’s uptick in cash circulation is due, in part, to technical factors. Namely, there was a currency overhaul in which old banknotes and coins could be exchanged for new ones (pdf).

Some Swedes may also have boosted their personal holdings of banknotes and coins in case of a crisis. The Swedish Civil Contingencies Agency recently recommended that Swedes put aside some cash in case of an emergency, such as a data center glitch that causes payments systems to go offline, or terrorism or a cyber attack.

However, at best this has halted the march a bit:

These factors are probably one-off instances, as Swedes continue to switch to card payments and mobile payment apps like Swish. This puts government officials in a tough position, as not everyone is ready for digital transactions. Poorer people and the elderly tend to rely on cash. As more and more payments take place through smartphones (even going to the toilet in Sweden can require an app), it can be difficult for people who aren’t digitally savvy to keep up. Others want to preserve their privacy, or simply want to keep their payment options open.

All eyes on Sweden..

Analysing capital flows: Push factors, pull factors and pipes

August 2, 2019

Missed pointing to this speech by Mark Carney, Governor Bank of England.

He gave the speech in June-2019 and says we need to lower volatility in capital flows:

Today, I want to examine what drives capital flow volatility and, in the process, sketch an agenda for sustainable capital flows in the new world order.

Specifically, what should be the priorities to increase sustainable cross border capital flows? How many are the responsibility of the receiving country? What about the advanced economies who set the tone for the global financial cycle? And to what extent does the structure of the international monetary financial system itself, including the global safety net, determine safe flows?

To begin to answer these questions, the Bank of England is developing a holistic “Capital Flows-at-Risk” framework that assesses the relative contribution of the three drivers of Capital Flows-at-Risk:
 ‘Pull factors’ – domestic conditions and institutions that affect the relative attractiveness of investing in an individual country.
 ‘Push factors’ – that determine global risk appetite and financial conditions, particularly the level and prospects for US monetary policy and financial stability.
 ‘The Pipes’ – the structure of the global financial system itself, particularly the degree to which it dampens or amplifies shocks.

How these three Ps drive capital flows and their volatility plays a crucial role in macro and financial markets stability.

Bringing Wellbeing into the Public Finance (Act)

August 2, 2019

New Zealand is trying to reshape its fiscal policy with compassion and giving it a human touch.

In Jan-2019, I had blogged how NZ govt plans to include well-being into its budget. The Govt presented the budget in May-2019 which plans to focus on these aspects of well-being:

The Wellbeing Budget

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How Market Design Emerged from Game Theory: A Mutual Interview

August 2, 2019

Fascinating mutual interview of Al Roth and Robert Wilson in the new edition of Journal of Eco Perspectives.

To jog our memories about the history and development of game theory and how it shaped and was reshaped by market design, we interviewed each other over coffee during Fall 2018. We also touched on what we think has been learned about markets and marketplaces by trying to design them.

What emerged from our discussion is that, when we learned game theory, games were modeled either in terms of the strategies available to the players (“noncooperative game theory”) or in terms of the outcomes that could be attained by coalitions of players (“cooperative game theory”), and these were viewed as models appropriate for different kinds of games. In either case, the particular model was viewed as a mathematical object that could be viewed in its entirety by the theorist.

Market design, however, has come to view these models as complementary approaches for examining different ways in which marketplaces operate within their economic environment. And, because that environment can be complex, there will be aspects of the game that are not entirely observable.

Mathematical models themselves play a less heroic, stand-alone role in market design than in the theoretical mechanism design literature. A lot of other kinds of investigation, communication, and persuasion play a role in crafting a workable design and in helping it to be adopted and implemented, and then maintained and adapted.

As good as it can get…

Constitution of South Africa includes mandate for its central bank..

August 1, 2019

Mr Lesetja Kganyago, Governor of the South African Reserve Bank was recently reappointed as Governor of South Africa Reserve Bank. The central bank has been under pressure as it is one of the few banks which is held privately.

In a recent speech, Kganyago talks about the mandate of the central bank. It is interesting to note that it is mentioned in South Africa’s constitution (Like Swiss):

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