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

When Climate Activism and Nationalism Collide

January 15, 2020

Kemal Dervis sums up one of the key battles of 2020s decade:

There is an overwhelming consensus among scientists that this decade will be the last window for humanity to change the current global trajectory of carbon dioxide emissions so that the world can get close to zero net emissions by around 2050, and thus avoid potentially catastrophic climate risks. But although the massive technological and economic changes required to achieve this goal are well understood, their political implications are rarely discussed.

While climate activists have built an impressive international movement, broadening their political support and crossing borders, the nationalist narrative has been gaining ground in domestic politics around the world. Its central message – that the world consists of nation-states in relentless competition with one another – stands in sharp contrast to the climate movement’s “one planet” emphasis on human solidarity. And these two trends are on a collision course.


In fact, this clash may become a defining feature of politics, with the nationalist right facing a coalition of climate-oriented voters comprising not only today’s Greens, but also those from the social-democratic center-left and the traditional center-right. Moreover, other issues will be connected to this fault line, not least the need for domestic compensation of those groups that temporarily lose out as a result of ambitious climate mitigation efforts.

If the dominant divide of the 2020s is between the nationalist narrative and green internationalism, then the climate debate may import global issues into national politics like never before. The outcome, of course, remains to be seen.

From reforms to stagnation – 20 years of economic policies in Putin’s Russia

January 15, 2020

Laura Solanko of Bank of Finland in this research note tracks Putin era.

This paper gives a concise overview of the economic difficulties and policy responses in Putin’s Russia from the late 1990s to present. The discussion concludes with thoughts on future challenges facing Russia.


A network analysis of economic history: how economic historians are interconnected through their research

January 15, 2020

Gregori Galofré Vilà of Universitat Pompeu Fabra in this voxeu piece:

The origins of microfinance

January 14, 2020

Marvin Suesse and Nikolaus Wolf in this article:

There was a rapid spread of credit cooperatives in rural 19th-century Germany providing small-scale savings and loan services to previously unbanked people. This column shows how these cooperatives helped shift farm investment from grains to potentially profitable but more capital-intensive products, such as the production of meat and dairy. In cases like this, changes in the sector of economic activity are a better metric for the impact of microfinance than comparing income pre- and post-credit.

A monetary policy framework for all seasons?

January 13, 2020

Mark Carney of Bank of England in this speech argues that Inflation targeting has been a framework for all seasons in UK:

To set the stage for today’s discussions, I would like to do two things. First, I will review the conduct and performance of inflation targeting during my time as Governor. This period, which roughly coincides with the post-crisis recovery and which has seen more than its share of shocks and structural developments,
provides some insights to the ability of inflation targeting to deliver price stability and support macroeconomic outcomes. I will suggest that, so far at least, inflation targeting has proven to be a framework for all seasons, an essential part of a robust foundation for economic prosperity.


To conclude, the flexibility in the UK monetary policy framework means that the MPC has been able to support the UK economy through the changing of the seasons.

Despite the economy being buffeted by diverse and sizable shocks since the recovery began, inflation has averaged 1.7%; GDP growth has generally been robust, averaging around 2%, and above the subdued rate of potential supply growth. The wide margin of spare capacity present after the crisis was absorbed,
unemployment is at multi-decade lows and employment at an all-time high. Real wages have finally returned to relatively strong rates of growth. Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.

This performance underscores that the bar for changing the regime is high. But it is nonetheless healthy to review it periodically, and that review is supported by the Bank’s active research agenda. Today’s workshop is organised with that in mind, and we appreciate all your contributions to help focus our research efforts.

There is an old saying that there is no such thing as bad weather, just inappropriate clothing. With the economic climate changing, let’s ensure that the Bank remains well suited to deliver its mission to maintain price and financial stability in support of the Good of the people of the United Kingdom


I would actually argue that more than the framework, central bankers have been really flexible to bring all kinds of changes in the monetary policy.

The Dilemma of Central Banking: To follow Keynesian, Fisherian or Neo Fisherian

January 13, 2020

Nice Proj Synd piece by Miao Yangling:

Neoclassical thinkers in the tradition of Alfred Marshall, Knut Wicksell, and Irving Fisher believe that real interest rates are determined by real economic forces. Money (or monetary policy) is neutral, and the rate of interest is that which equilibrates saving and investment, as determined by time preference and returns, respectively. (Hence, the title of Fisher’s 1930 book on the topic is: The Theory of Interest, as Determined by Impatience to Spend Income and Opportunity to Invest It.) Using the neoclassical framework, one can identify a range of structural factors – from demographic changes driving up savings to slower technological progress reducing demand – to explain the secular decline in interest rates.

By contrast, according to John Maynard Keynes’s “Liquidity Preference Theory,” interest is best understood as a reward for parting with liquidity for a specified period of time. As such, it is not about saving in general, but about the saving of money in particular. The interest rate, then, is determined jointly by the supply of liquidity and economic agents’ preference for money.

In normal times, these two schools of thought run in parallel and can coexist. Keynes focused on the nominal rate, while Fisher focused on the real rate; Keynes emphasized the short term, and Fisher the long run. Keynes’s principle of monetary non-neutrality in the short run does not directly conflict with Fisher’s principle of neutrality in the long run. Usually, when central banks act in a Keynesian manner by cutting nominal rates, real rates will fall, owing to the sticky-price effect.

Yet, with interest rates now stuck near or at the zero-lower bound (ZLB), these two views might collide: a nominal-rate cut will elicit an immediate one-for-one reduction in inflation expectations, leaving the real rate unchanged. Some economists refer to this change in expectations as the “neo-Fisherian effect,” because the traditional Fisher effect – whereby inflation tracks the nominal rate by a factor of one to one – is supposed to happen only in the long run. A Fisherian effect will not happen if inflation expectations remain well anchored. But once rates are trapped at or near the ZLB, inflation expectations begin to fall; the usual Keynesian effect comes to be dominated by the neo-Fisherian effect.

Hence, a distinct feature of the ZLB is that it is where Fisher crowds out Keynes. Central banks can cut nominal rates to zero or into negative territory all they want, but real rates will remain unchanged. The more Keynesian a central bank acts (by trying to stimulate demand through rate cuts), the more Fisherian the economy becomes, at least in terms of inflation expectations. And when this happens, monetary policy becomes not just impotent but potentially harmful.

To be sure, the neo-Fisherian perspective is controversial in academic circles. But even if there is no perverse Fisherian effect, interest-rate pegging or a situation in which rates are involuntary trapped at the ZLB could still amplify shocks. For central banks, avoiding these conditions can pose a dilemma. Should they cut rates when necessary, even if doing so might bring on a Fisherian trap?

Look beyond Mon Policy:

An overdose of monetary policy may create conditions of monetary “non-neutrality” by pushing down the equilibrium real rate. This can happen through at least two channels. The first is the financial boom-bust cycle. Persistently low interest rates encourage risk-seeking, and can result in financial imbalances and debt build-ups. When the music stops, central banks must reduce rates even further to counter the inevitable bust. The second channel is resource misallocation, which can happen when too much liquidity inhibits Schumpeterian “creative destruction” by offering a lifeline to uncompetitive firms.

Resolving the dilemma will require a fundamental change in the design and implementation of economic policy. We need far better policy coordination at the national and international levels. At the country level, monetary policy cannot be the “only game in town.” Not only should fiscal policy and structural reforms play a larger role, but macroprudential policy should be made a top priority, in order to contain financial boom-bust cycles.

At the international level, a well-integrated financial safety net would help reduce the need for self-insurance through safe assets. One good way to pool resources would be to enhance the International Monetary Fund’s firepower through quota reforms. A  new and improved international monetary system won’t be built in a day, but we have to start somewhere.


Researching on history of Central Bank of Spain sitting anywhere

January 10, 2020

The Governor of Central Bank of Spain had earlier announced that it wants to promote research in economic history.

To take this further, the central bank has launched a new portal containing the digital collection of the Banco de España’s Library:

The Banco de España makes its institutional repository, a new portal containing the Library’s collection in digital format, available to researchers and users in general. When launched, the repository will provide access to 2,182 documents, including a selection of volumes
that are of particular interest due to their historical value, importance or rarity.

The volumes that are already available include historical legal documents which reflect how economic activity was regulated in the past, and historical publications relating to the activity of the Banco de España and its predecessors, from the time of the Banco de San Carlos.

In the coming months, the aim is to increase the number of available documents until they account for at least a third of the more than 16,000 printed volumes and manuscripts housed in the Banco de España.

The repository allows for full-text searches of documents and to retrieve within them references to persons, institutions, places or quotations. In addition, digital documents are in the public domain and may be used by any individual or institution. This project will also allow for the Banco de España’s digital
collections to be added to other projects, such as Europeana or Hispana, which give researchers access to the world’s cultural heritage.

As well as the digitalised volumes in the historical collection, the repository will also contain the Banco de España’s current publications, which will gradually be uploaded onto this new system. Access to the Banco de España’s institutional repository will be unrestricted and free of charge from any internet-connected device.

The portal is here and looks promising.

What makes a safe asset?

January 10, 2020

Interesting paper by ECB econs:

There is growing academic and policy interest in so called “safe assets”, that is assets that have stable nominal payoffs, are highly liquid and carry minimal credit risk. They are particularly valuable during periods of stress in financial markets, as they maintain their nominal value while the value of other assets typically falls. In order to hold such assets, investors are typically willing to pay a premium, often referred to as “convenience yield”, a term usually used with reference to US Treasuries.

We study what makes government bonds a safe asset. Building on a sample of monthly changes in government bond yields in 40 advanced and emerging
countries, we analyse the sensitivity of yields to country specific fundamentals interacted with changes in global risk (VIX). We find that inertia (whether
the bond behaved as a safe asset in the past) and good institutions foster a safe asset status, while the size of the debt market is also significant, reflecting
the special role of the US. Within advanced and emerging markets, drivers are heterogeneous, with external sustainability in particular being relevant for the
latter countries after the global financial crisis. Finally, the safe asset status does not appear to depend on whether the change in global risk is driven by
financial shocks rather than by US monetary policy.


Celebrating Ecuador’s Dollarization

January 8, 2020

Lawrence Reed in this piece writes on benefits of Ecuador Dollarisation:


The 3 E’s of central bank communication with the public

January 8, 2020

Andrew Haldane, Alistair Macaulay and Michael McMahon in this paper point to 3 Es of central bank communications:

In this paper we explore both theoretical and empirical evidence on communication with the general public. The model provides guidance for policymakers by highlighting some potentially important risks in communicating simply with a broader audience. In particular, in a model where trust and engagement are low, there are benefits to engaging a wider audience. But doing so risks ultimately lowering welfare unless guided by the 3 E’s of public communication: Explanation, Engagement and Education. Central banks have made great strides in all three, but numerous challenges remain.


War on cash: Dutch edition

January 7, 2020

Dutch Government has recently passed a law:

The draft law intends to reinforce the measures taken to prevent money laundering by limiting the use of large amounts of cash.

The draft law prohibits natural or legal persons trading in goods, in the course of their business or professional activities, from receiving or making a payment in cash in an amount equal to or greater than EUR 3 000, regardless of whether the transaction is carried out in a single operation or in several operations which appear to be linked. The ECB understands that the draft law is addressed to professional parties and will only affect consumers if they buy or sell goods from such a professional party. Transactions between consumers are not covered by the draft law.

ECB’s view:

The ECB understands that electronic payment instruments are increasingly used as the method of payment in the Netherlands, while the use of cash is declining. Nevertheless, as indicated above, cash is a well-established means of payment providing for immediate settlement of debts and direct  control over the payer’s spending, and also facilitates the inclusion of the entire population in the economy by allowing it to settle any kind of financial transaction in this way.

The ECB notes that cash could play an important role in the event of a disturbance in the payment systems, even though cash machines and other service points may also be affected as these are dependent on interaction with the account holding institutions. The ECB considers it important that all Member
States take appropriate measures to ensure that credit institutions and branches operating within their territories provide adequate access to cash services, in order to facilitate the continued use of cash..


Financial Supervisory Authority and Central Bank of Iceland merge

January 7, 2020

More and more central banks are becoming responsible for banking/financial supervision.

Iceland joins the growing list:


25 years of WTO: Why Keynes would be a worried man!

January 6, 2020

My piece in Moneycontrol reflecting on 25 years of WTO.

In 2019, the IMF completed its 75 years. IMF historian Atish Ghosh wrote a fascinating piece “bringing” Keynes to visit IMF headquarters. Ghosh wrote how Keynes would be surprised by changes in the world economy, particularly transition from fixed exchange rates to flexible exchange rates and proud that the IMF has adapted to the changes and remains relevant — though some may not agree.

What would Keynes say of the WTO? He would be surprised that it took so long for the WTO to deliver, but still happy to note of the progress world economies have made under the GATT/WTO umbrella. He might show concern that post 2008 crisis, the world has increasingly turned protectionist. Some historians make references to how today’s times are similar to the end of the World War-I (1919), which would really worry Keynes (WW-3 was trending on Twitter recently). Keynes would say that it is exactly for such times that he had suggested creation of the ITO and unhappy that just in these times, the WTO has been sidelined!

Keynes would remind the current world polity to be aware of the fateful history and work in all possible ways to ensure this history is neither repeated nor rhymed.


Libra’s shockwave to central bankers: Germany edition

January 6, 2020

Interview of Jens Weidmann of Bundesbank.

Mr Weidmann, Facebook sent shockwaves through the financial community with its plans for Libra, the group’s own digital currency.
You’re right to call them “shock waves”. But I would hesitate to dub Libra a currency. Facebook is looking to roll out a new digital payment medium pegged to a basket made up of multiple currencies like the euro and the US dollar. This exposes users to exchange rate risk, however. We’ve got a stable currency – the euro – with a proven track record over the past decades.

So there’s no potential for Libra?
I see greater potential in countries with weak official currencies and underdeveloped payment infrastructures, such as a number of emerging market economies.

Why, then, has Facebook’s announcement made such waves?
Payments is an area where network effects and scale can be decisive. Facebook has more than two billion possible users. This clout would give Libra the potential to become a dominant market player from the outset.

Do you think the European Central Bank needs to push back with a digital currency of its own?
I’m not a fan of always calling on the government to intervene. In a market economy, firms should be the first to come up with the right products and services to satisfy customer needs, Competition is what spurs market players into action. For example, the prospect of new rivals arriving on the scene was one reason for the banking industry’s campaign to offer an improved pan-European payment system.

Christine Lagarde, the new ECB President, says that central banks need to be ahead of the curve, not behind it.
First and foremost, it is a question of understanding the pros and cons of central bank digital currency. Then, it can be decided whether central bank digital currency is needed and the risks can be kept in check.

How is Germany reacting to all this?

And yet for all that, the Bundesbank itself is also experimenting with a digital currency.
That concerns payment transactions between the Bundesbank and credit institutions. What we are trialling here is a blockchain-driven solution to complement our existing centralised account-based solution.

And is that working well?
In our specific context with a small number of trusted counterparties, our initial finding is that blockchain is no more efficient than centralised settlement. It does, however, allow automatic functions to be integrated for smart contracts. For example, the transfer of a security would simultaneously trigger a payment.

With reluctance so widespread in Europe, isn’t there a danger of being left behind? China has already responded to Libra by announcing plans to create a central bank digital currency of its own.
China might be quicker off the mark, but then again it has a different political system. It’s a country where the state has abundant powers which would not be to the liking of many of us. My view is that a social market economy in a liberal society will ultim..

The last words are missing..Perhaps it is “will ultimately prevail/win”..


Exchange Rate Pass-through in Emerging Economies

January 6, 2020

New RBI WP by Michael Debabrata Patra, Jeevan Kumar Khundrakpam and Joice John.

This paper provides estimates of exchange rate pass through (ERPT) to consumer inflation for a panel of 17 emerging market economies (EMEs), after controlling for long-run dynamics of domestic prices and external cost variables; potential endogeneity of the exchange rate; non-linearity and heterogeneity. These estimates are useful guideposts for monetary policy authorities in emerging economies to condition their responses to exogenous price shocks that are transmitted to domestic inflation through imported prices.

This paper also finds that ERPT in EMEs is asymmetric – larger for depreciation than for appreciation and non-linear – size does matter, even as exchange rate pass through to domestic inflation has been declining for these countries in the years following the global financial crisis.


Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018

January 6, 2020

Fascinating paper by Paul Schmelzing of Bank of England.

With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed. A gradual increase in real negative‑yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis.

Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of ‘non‑human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

Phew…That is a lot of historical work…

Central Bank of Bahamas to issue digital currency in 2020

January 3, 2020

Attention is usually on central banks of big economies but some of the smaller ones are doing interesting things. Lithuania just introduced a collecter digital coin based on blockchain which is the first such digital currency.

I had blogged about how Bahamas is planning a digital currency under the project name Sanddollar.  The project has gained pace and the central bank is on course to issue digital Bahama Dollar in 2020:

The Central Bank will introduce a digital version of the Bahamian dollar, starting with a pilot phase in Exuma in December 2019, and extending in the first half of 2020 to Abaco. This initiative has acquired the name Project Sand Dollar, with the sand dollar also being the name assigned to the proposed central bank digital currency (CBDC). This is a continuation of the Bahamian Payments System Modernization Initiative (PSMI), which began in the early 2000s.

The Bahamian PSMI targets improved outcomes for financial inclusion and access, making the domestic payments system more efficient and non-discriminatory in access to financial services.

Although average measures of financial development and access in The Bahamas are high by international standards, pockets of the population are excluded because of the remoteness of some communities outside of the cost effective reach of physical banking services. More onerous customer due diligence standards for AML/CFT international tax compliance have also resulted in forms of exclusion, including more recent responses to tighter “know your customer” (KYC) systems introduced to preserve international correspondent banking relationships. As recent policy and regulatory reforms have begun to tackle these barriers, the Central Bank is intent on accelerating payments system reform, admitting new categories of financial services providers and using the digital payments infrastructure to make the supply of traditional banking services accessible to all segments of the population.

Recent surveys document that as part of a financial literacy campaign, there is room to improve both knowledge and awareness of financial products and responsible financial behavior. Opportunities also exist to reduce transaction costs for businesses and consumers. Feedback from Exuma, show a high penetration of mobile phone usage, and a likelihood that a higher share of the population would be willing to use digital financial services including electronic payments. The public though will need more assurances around the safety of conducting online transactions. The digital currency design and public education will tackle these issues.

Most of the benefits of introducing a digital currency are still unquantifiable. However, they include a potential suppression of economic costs associated with cash usage, and benefits to the Government from improved expenditure and tax administration systems. It is expected that the Government, as participant and user, would be a strong promoter of digital payments adoption, alongside non-bank payment services providers as the initial lead intermediaries in this space.

As the pilot progresses in Exuma, the Central Bank will simultaneously promote the development of new regulations for the digital currency, and strengthen consumer protection, especially around data protection standards. The Bank will also advance reforms to permit direct participation of non-banks in the domestic payments system. Early passage of the new Central Bank of The Bahamas Bill will support the creation of some regulations, while additional reforms will be possible under the existing Payment Systems Act.


Central Bank of Philippines tries unconventional ways to central banking under a new governor

January 3, 2020

There have been articles on how RBI under Mr Shaktikanta Das (completed 1 year the central bank in Dec-2019) is using unconventional policies .

Similar article on Central Bank of Philippines whose new Governor Benjamin E. Diokno is going the unconventional way as well:

The Bangko Sentral ng Pilipinas (BSP) has a lot more focus thinking of unconventional ways to central banking since Benjamin E. Diokno – a name more familiar in the exercise of public or government budgeting – took over the helm as BSP’s fifth governor in 2019.

Dokno has said many times that under his watch, the BSP will be “closer to (the) people)” since the beneficiary of a successful BSP doing its mandate of promoting price and financial stability, as manifested in a low and stable inflation and financial services that are accessible to the public, are the Filipino consumers.

So far, so good. Inflation is expected to settle at 2.4 percent in 2019 and a stable 2.9 percent for 2020 and 2021, firmly in the middle ground of the two-four percent target until 2022. The 2.4 percent forecast for 2019 is more than half of what was reported at the end of 2018 of 5.2 percent.

As for further bringing BSP as an institution working for Filipinos, the BSP has set into motion reforms and regulatory changes that will make this happen sooner than planned. It continued to pursue the strengthening of the payments system through policies that will encourage financial technology solutions.


Unconventional has become the new conventional…

Furor over the Fed : Presidential Tweets and Central Bank Independence

January 3, 2020

Trump using Twitter to criticise Federal Reserve was quite something to witness in 2019. I blogged on the topic earlier where a NBER paper showed that Trump attack transmitted to lower interest rates.

Antoine Camous and Dmitry Matveev of Bank of Canada in this paper have similar findings as the NBER paper:

We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions. By relating price movements of these contracts with President Trump’s tweets on monetary policy, we explore how markets have perceived presidential attempts to influence monetary policy decisions. Overall, our results indicate markets expected the Federal Reserve to adjust monetary policy in the direction suggested by President Trump.

Financial markets reacted to President Trump’s tweets by assigning a higher probability of a policy rate cut in the future. We find that market adjustments on the FOMC decision days correct for expectations of larger interest rate cuts, suggesting that the Fed did not surrender to political pressure, at least not as much as financial market participants anticipated.

Legal Issues regarding Central Bank Digital Currency: Bank of Japan edition

January 3, 2020

Bank of Japan formed a Study Group on Legal Issues regarding Central Bank Digital Currency (CBDC).

Here is a summary of the report of the study group:

Based on four stylized models of CBDC issuance, the Report discusses what legal issues would arise within the Japanese legal framework if the Bank of Japan were to issue its own CBDC.

The Report finds a wide range of issues to be addressed. These include, among others, whether or not CBDC can be regarded as legal tender; what would happen in the case of counterfeit or duplication under current private law; whether or not issuance of CBDC is consistent with the purposes of the Bank as currently specified by the Bank of Japan Act; and whether the Bank can restrict the use of CBDC by certain individuals. The Report also discusses the legal issues related to the acquisition of information with respect to Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) regulations; protecting personal information; and the penalties for counterfeiting/duplicating CBDC as Crimes of Counterfeiting of Currency under current criminal law.

The four models are shown nicely using flow of funds from one entity to another: (more…)

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