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

Is the Reserve Bank of India toothless?

March 16, 2018

Prof M.S Sriram of IIM Bangalore who has deep knowledge of institutional matters in banking space has a piece. He responds to the recent speech by RBI Governor:

So, having identified that the framework for regulating public sector banks is different, can the governor cry victim, and does this let the RBI off the hook? Not really. How about exercising autonomy by suo motu recommending corrective action to the government if it has a problem with a specific bank? The government may not accept it, as it has not been accepting many of the recommendations of the central bank, but it would have at least done its duty.

Second, the governor is treading an even more dangerous path by pinning the blame on limited powers. Very much like the government exercising control through the board and through circulars, even the RBI has a board position in each public sector bank. Further, the RBI representative is on the management committee (that approves loans beyond a certain ticket size), the audit committee, the committee of directors (for reviewing vigilance cases) and the remuneration committee of each of these banks. So, not only does the RBI have regulatory oversight, it has board and sub-committee presence in each public sector bank, which should give the RBI much greater insights than it would get into a private bank. 

Also, the RBI is party to the selection of the whole-time directors of the bank through the selection committee and through its membership on the Banks Board Bureau. The RBI has powers to remove the non-official directors appointed by the Union government as well as the shareholder directors if they do not fulfil the fit-and-proper criteria— section 3AB and 3B of the Banking Companies (Acquisition and Transfer of Undertakings) Act. 

Moreover, the RBI has powers to appoint an additional director as per section 9A of the above Act. Theoretically, the RBI has a significant say in the constitution of the board of a public sector bank.

While there is a great deal of reform to be undertaken in the governance and management of public sector banks, the line that the governor has taken, of inadequate powers to act, may be untenable. The framework for the exercise of powers in private sector banks is different from the framework for public sector banks. This has to be recognized. 

In the current instance, it would have been more honourable for the governor to own up the failure, and use this opportunity for deep reform, than play victim. That there is a crying need for reforming the governance structure of public sector banks is a valid point—but that is a matter for a separate debate.

Not very different from what this blog also said..


Did UK monetary policy spillovers to US during first age of financial globalisation (1880-1913)?

March 15, 2018

Food for thought post by Georgina Green of Bank of England (full paper here).

She questions the conventional wisdom that UK monetary policy led to monetary spillovers to US in the first age if globalisation. We think of it other way round in second age of globalisation. What is interesting is how she uses the archival material with econometrics:


What has changed since the 2008 financial crisis?

March 13, 2018

The more we say they have changed, the more they remain the same.

V. Anantha Nageshwaran in his Mint piece asks What has changed since the 2008 financial crisis:

So, what do we have now? Post-2008, Greenspan blamed lack of regulation but still maintained that markets would self-regulate. That has not happened. The industry has replaced one set of derivatives products (credit default swaps) with another (ETF). These products have enjoyed exponential growth. Not all ETFs are alike. Some of them hold illiquid assets and yet promise daily liquidity to ETF holders. Volatility is now traded; derivative products have been launched on volatility and they are spiced with leverage (debt). Despite strong growth, investors expect interest rates to stay on hold or stay low. To round it off, regulators now suspect manipulation after having watched these products being launched and leverage piled on top of them. So, what has changed since 2008?

Two things have changed. One is that we have a new chairperson of the Federal Reserve. There are tentative signs—based on his past public comments—that he does not set as much store by asset prices as three of his predecessors had done. As I had noted in my piece on his testimony to the US congress two weeks ago, he is willing to take into consideration the overheating, as evident in financial market prices, even if consumer prices are rising at a slower pace. Gavyn Davies argued in his regular blog in the Financial Times that not just the Federal Reserve chairperson but six of the seven board members would be nominated by the current administration when the process is completed next year. Davies thinks the new Federal Reserve board might be inclined to confront rising asset prices, and might be less gradual in raising interest rates. Both might be welcome departures from the monetary policy framework of the last one or two decades.

The second thing that has changed is that the US 10-year government bond yield appears to have ended its long-run trend of declining. It now stands at 2.90%. In July 2016, it had reached a low of 1.38%. If it breaches 3%, it could create big losses for leveraged investors. On Friday, American stocks greeted the employment report showing strong job gains and tame wage gains with glee. James Montier calls this a cynical bull market. I am not sure if providence is known to be kind to cynics.


FinTech cooperation between Maharashtra State and Singapore

March 9, 2018

Came across this Memorandum of Understanding signed between Monetary Authority of Singapore and Maharashtra State.

One thought finance/banking was a Centre subject under the Indian Constitution. One also does not see RBI mentioned in the press release. Not sure about political economy around such decisions.


Artificial intelligence (AI) in finance – six warnings

March 9, 2018

Prof Joachim Wuermeling of the Deutsche Bundesbank cautions against all this rise of tech and AI in finance:


Should Czech issue e-koruna?

March 8, 2018

Central bankers of different countries are joining the debate of whether they should issue digital currencies. This blog has pointed to several such views: NZ, Denmark, Sweden, Finland, Australia and so on.

Mojmír Hampl, Vice Governor of the Czech National Bank in a recent speech gives the Czech perspective.

He says though there are many limitations with the idea , the philosophy behind the idea needs to be supported. It is ironical that econ academia was sleeping over any possible monetary reform and these ideas have instead come from IT sector. Atleast one central banker has honestly admitted this.


The case for central bank electronic money and the non-case for central bank cryptocurrencies

March 8, 2018

Aleksander Berentsen and Fabian Schar of University of Basel have a piece on the hot topic of cryptocurrencies.

They point to this interesting diagram on types of money (Just like the money flower):

They say yes to central bank e-money but not for central bank cryptocurrencies. They say e-money is a straight forward case and is easily doable.

We believe that there is a strong case for central bank money in electronic form, and it would be easy to implement. Central banks would only need to allow households and firms to open accounts with them, which would allow them to make payments with central bank electronic money instead of commercial bank deposits. As explained earlier, the main benefit is that central bank electronic money satisfies the population’s need for virtual money without facing counterparty risk.9 But there are additional benefits.

We believe this because we conjecture that “central bank electronic money for all” would have a disciplining effect on commercial banks.11 To attract deposits, they would need to alter their business model or to increase interest rate payments on deposits to compensate users for the additional risk they assume. The disciplining effect on commercial banks will be reinforced by the fact that, in the event of a loss of confidence, customers’ money can be quickly transferred to central bank electronic money accounts. In order to avoid this, the banks must make their business models more secure by, for example, taking fewer risks or by holding more reserves and capital, or they must offer higher interest rates. This simplicity of moving funds to central bank accounts has the potential to create additional volatility. For example, there could be rapid shifts of large quantities of money from commercial bank deposits to central bank accounts that have no real causes (bank panics that are unrelated to fundamentals). In this case, the central bank is called upon to provide commercial banks with the necessary temporary liquidity by offering standing facilities where commercial banks can obtain central bank money against collateral in a fast and uncomplicated way.

In a way, the authors agree with the ongoing Swiss initiative of Sovereign money .

Recently Denmark had rejected electronic money for the opposite reason that it will lead to instability in banking. This is also like monetary policy coming full circle. How central banks emerged to monopolise the currency function from private banks and now they are being seen as competition to these banks over deposits!

Though, they reject that central banks issue their own cryptocurrency:

The distinguishing characteristic of cryptocurrencies is the decentralized nature of transaction handling, which enables users to remain anonymous and allows for permissionless access. These key characteristics are a red flag for central banks, and we predict that no reputable central bank would issue a decentralized virtual currency where users can remain anonymous. The reputational risk would simply be too high. Rather, central banks could issue central bank electronic money. This money would be tightly controlled by them, and users would be subject to standard KYC (“know your customer”) and AML (“anti-money laundering”) procedures.

Some central banks supposedly are evaluating the issuance of a central bank cryptocurrency. However, a closer look at these projects reveals that these are not cryptocurrencies according to our definition in Figure 1. The projects usually are highly centralized.

In general, we don’t think that a central bank should be in the business to satisfy the demand for anonymous payments. We believe that such a demand can and will be perfectly satisfied by the private sector, in particular through cryptocurrencies. History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.

Whatever be the outcome of all this e-money and c-money, it is fascinating to go through the same debates when physical currency was issued…

How a historic meeting laid the foundations of US fiscal policy and choice of Washington as capital…

March 8, 2018

Interesting bit of history by Vitor Gaspar and David Amaglobeli of IMF.

On the evening of June 20, 1790, James Madison and Alexander Hamilton met at Thomas Jefferson’s home on Maiden Lane, in New York. Over a long dinner, the three struck a historic deal that laid the financial groundwork for the fledgling nation. Madison agreed to have the US federal government take over the states’ Revolutionary War debt; in return, Hamilton agreed to support the move of the nation’s capital to the banks of the Potomac River, a location favorable to Madison’s home state of Virginia. The deal is an early and vivid example of how fiscal politics can shape history. The episode remains relevant because it shows that politics plays a crucial role in far-reaching reforms of public finances. Public finance reform is fundamentally political, and it has the potential to shape the political system itself. As this most famous dinner shows, political negotiation can help overcome apparently insurmountable obstacles and become a force for institutional transformation. Today’s policymakers who disregard political realities are doomed to be ineffective.

The whole narrative is fascinating to read…

Understanding cultural persistence and change

March 8, 2018

Paola Giuliano and Nathan Nunn on the topic. Their findings are fairly intuitive:

When does culture persist and when does it change? This column examines a determinant that has been put forth in the anthropology literature: the variability of the environment from one generation to the next. It finds that populations with ancestors who lived in environments with more stability from one generation to the next place a greater importance in maintaining tradition today, and exhibit more persistence in their traditions over time. 


Comparing Japan’s Lost Decade with the U.S. Great Recession

March 7, 2018

Guillaume Vandenbroucke of St Louis Fed has a nice piece.

He says that in Japan growth rate of GDP per capita slacked whereas in US the levels of GDP per capita declined:

Japan’s economy began its “Lost Decade” in the 1990s, with persistent slow growth and low inflation. One could argue, however, that the Lost Decade has persisted for nearly three decades.

In 2008, the United States entered into what is now called the “Great Recession.” The Great Recession was also characterized by slow growth and low inflation. These similarities between the Lost Decade and the Great Reces­sion have led many analysts to wonder whether the United States is in for the same persistent economic slump as Japan. 

In this analysis it is critical to draw a distinction between a change in the growth rate of gross domestic product (GDP) per capita and a change in its level. For instance, a country can experience a sudden decline in the level of its GDP per capita after a major recession, but its growth rate can remain constant. Conversely, a country’s rate of growth can decline without any sudden drop in the level of its GDP per capita. The Japanese data reveal that the Lost Decade is clearly a case of slow growth rather than of a sudden negative shock to GDP per capita. The U.S. data, slightly varied, reveal that the Great Recession is the opposite case.

The difference is that Japan will take much longer to double its income compared to US:


Seven fallacies concerning Milton Friedman’s ”The Role of Monetary Policy”

March 6, 2018

Edward Nelson says there are 7 common fallacies around Friedman’s paper – The Role of Monetary Policy – which celebrated 50 years recently.

This paper analyzes Milton Friedman’s (1968) article “The Role of Monetary Policy,” via a discussion of seven fallacies concerning the article. These fallacies are:

(1) “The Role of Monetary Policy” was Friedman’s first public statement of the natural rate hypothesis.
(2) The Friedman-Phelps Phillips curve was already presented in Samuelson and Solow’s (1960) analysis.
(3) Friedman’s specification of the Phillips curve was based on perfect competition and no nominal rigidities.
(4) Friedman’s (1968) account of monetary policy in the Great Depression contradicted the Monetary History’s version.
(5) Friedman (1968) stated that a monetary expansion will keep the unemployment rate and the real interest rate below their natural rates for two decades.
(6) The zero lower bound on nominal interest rates invalidates the natural rate hypothesis.
(7) Friedman’s (1968) treatment of an interest-rate peg was refuted by the rational expectations revolution.

The discussion lays out the reasons why each of these seven items is a fallacy and infers key aspects of the framework underlying Friedman’s (1968) analysis.


Amidst talks of higher inflation target, Norway reduces its target…

March 6, 2018

This is interesting from Norway. In a new remit to the central bank, the Finance Ministry reduced the inflation target from 2.5% t0 2%.

The numerical target is 2
When inflation targeting was introduced, Norway was experiencing a period where substantial oil revenues were to be phased into the economy. This would entail a real appreciation of the krone, and the reasoning was that this could occur in the form of somewhat higher inflation than in other countries. This was a key reason for setting the inflation target at 2.5 percent. The period of phasing in oil revenues is now largely behind us. A key argument for maintaining a higher inflation target than other countries is therefore no longer relevant. Against this background, the inflation target for Norway is now set at 2 percent, in line with that prevailing in comparable countries.

Econs are debating about the need to have a higher inflation target. Infact, Krugman in his recent paper says inflation targeting has opened a can of worms for advanced economies.

Further, the govt, has also added financial stability to the objective, in line with global sentiments:


Should real estate agents charge fixed rent or flexible based on sale price?

March 5, 2018

Pieter Gautier, Arjen Siegmann and Aico van Vuuren analyse changes in Dutch regulations to figure the differences:

It’s Baaack, Twenty Years Later

March 5, 2018

In 1998, Paul Krugman wrote a paper on Japan’s woes.

He recently revisited the paper on its 20th anniversary:

This paper is an exercise in self-indulgence and self-aggrandizement…

In early 1998 I set out to reassure myself by writing down a little model to show that if Japan was having troubles, it was simply because the Bank of Japan wasn’t trying hard enough. But as sometimes happens when you try to model your intuitions explicitly (and is one of the main reasons for doing formal analysis), the model ended up telling me something quite different –namely, that when short-term interest rates are near zero it is not, in fact, easy for the central bank to reflate the economy. In fact, even very large increases in the monetary base will have essentially no effect unless the private sector is convinced that there has been a permanent shift in the central bank’s objectives, a new willingness to accept and even promote inflation. As
I put it, the central bank needed to “credibly promise to be irresponsible.”


These tractors show 150 years of farming history

March 2, 2018

Nice photo essay showing history of tractors in US.

The word tractor came from traction engine:


A brief history of Harvard’s EC 10 (introductory economics) course

March 2, 2018

Interesting bit by Cher Applewhaite.

“For the umpteenth year in a row Economics 10, ‘Principles of Economics,’ led the list of largest courses taken at Harvard.” This reads like a Crimson headline from last semester, but in fact it’s from the Fall of 1978.

To the many undergraduates who take it, and the many graduate students who teach it, Ec10 is—for better or worse—a pillar of Harvard’s liberal arts education, perennially popular but oft-critiqued. The history of the course shows that the unbound textbook used today, priced at $131, was not always how Harvard students got their start in the discipline of economics.

“Contrary to popular belief, Ec10 was never designed to be a pipeline for lower Manhattan,” says David W. Johnson, a former head teaching fellow who taught sections from 1980s until 2014.

Indeed, lower Manhattan was the furthest thing from Harvard’s original introductory economics course, Economics 1. According to a 1896 syllabus entitled “Lectures on Economic Development,” students were required to read books on topics ranging from philosophy to anthropology. This interdisciplinary focus meant students had to consider why economic history was a useful topic of study.

Only three professors have led the course since the 1960s: Otto Eckstein, Martin Feldstein, and N. Gregory Mankiw. All were, at some point during their careers, either members or chairs of the government’s Council of Economic Advisors.


Failing banks, bail-ins, and central bank independence: Lessons from Cyprus

March 1, 2018

Panicos Demetriades, Former Governor of the Central Bank of Cyprus shares insights on the Cyprus banking crisis.

Banking woes have only become worse since the crisis.

You can’t have Denmark without Danes: What it can and can’t teach us?

February 26, 2018

Superb piece by Megan McArdle of Bloomberg View.

She recently traveled to Denmark and tried figuring out what makes it such a livable country. Despite the country known for high social cohesion and surveys showing people return your wallet etc.  But what followed showed what Denmark actually stood for – total trust: (more…)

Banking crises and frauds: An Indian history..

February 26, 2018

My new piece in Mint.

I take a deep dive into Indian banking history of around 200 years and show that frauds and scams have been a fairly integral part of Indian financial history. Most banking euphoria whether in terms of opening new banks or giving loans is eventually met with some fraud or failure. Most bank crises are nothing but accounting adventures and misrepresentations.

I want to add how banking is not just an Indian problem but of most countries today. Post 2007, the malaise started with French bank BNP Paribas and then quickly the base shifted to US banks. Then it quickly spread to most western European countries. It has been more than  ten years since but no signs of abetting.We see continued signs of distress in banking system across countries: US, UK, Italy, Ireland, Greece, Spain, Russia, Australia, South Africa, Latvia and many more (still counting). There have been all kinds of problems starting from how LIBOR was rigged by players.

How greed and lack of ethics has got deeply entrenched in banking makes us go back to Amartya Sen’s words as mentioned in the article.


Politics of inflation measurement in UK: Why RPI is preferred over CPI?

February 22, 2018

Mark Carney in a recent speech asked for cautionary withdrawal of Retail Price Index as a measure of inflation in UK.

Prof. Robert O’Neill of  University of Huddersfield in this piece tells us why:


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