Archive for the ‘Economics – macro’ Category

What would Hayek make of behavioral economics?

September 8, 2021

Interesting debate between Cass Sunstein and Mario Rizzo on whether Hayekian ideas and behavioral economics go hand in hand:

F.A. Hayek was one of the 20th century’s most influential economic, political, and social philosophers—and a Distinguished Senior Fellow at the Cato Institute. Cass Sunstein, currently at Harvard Law School and formerly the administrator of the Office of Information and Regulatory Affairs under President Obama, invokes Hayekian concepts for a theory of “libertarian paternalism,” which uses behavioral economics to justify a range of public policy interventions to frame individual choices in ways intended to nudge them toward better outcomes. Mario Rizzo, an economist at New York University, disputes the Hayekian justification for this vision. In May, they participated in a Cato policy forum to discuss these differences as well as which is the better interpretation of Hayek’s insights.

Hirschman’s economics of possibility: democracy thrives not on strong opinions but on doubt and flexibility

August 3, 2021

Prof Michele Alacevich University of Bologna remembers Hirschman, one of the most gifted economics thinkers.

Hirschman’s focus on processes of policymaking, despite the diverse arguments and the different methodological approaches of his various books, rests on his vision of wide participation and intellectual openness. He summarised this combination of doubt, intellectual openness, moral values and pragmatism in the concept of possibilism. Trying to explain the regularities of social dynamics is obviously an important task.

Yet he cherished the opposite, more uncertain and unpredictable type of endeavour: ‘to underline the multiplicity and creative disorder of the human adventure, to bring out the uniqueness of a certain occurrence, and to perceive an entirely new way of turning a historical corner’. This possibilism is perhaps the most eloquent explanation of why Hirschman is an inexhaustible resource for those who are interested in understanding how our democracies can survive and thrive, or at least muddle through.

Alacevich has recently written a biography of the great economist.


World War I and the Restructuring of International Business

December 21, 2020

Ted Fertik & Naomi R. Lamoreaux in this new NBER paper:

This paper considers the effect of the First World War on large-scale businesses in Second-Industrial-Revolution industries like steel, electricity, and chemicals. For firms in the nations of the Entente, we argue, the war mainly interrupted long-term trends that resumed in the aftermath of the conflict. For Germany, however, the war and its subsequent territorial settlements had a disruptive impact on the economic geography of key industries.

The global restructuring that resulted from the collapse of the Habsburg, Romanov, and Ottoman empires and Germany’s loss of its colonial possessions set up a new kind of international rivalry as German firms sought to regain their dominance by contracting with emerging nations in the European periphery and the Global South to build industrial capacity, forcing Britain and the now capital-rich United States to compete for this business or see their influence in these areas decline.

The end result of this rivalry was the construction of massive steel works in Brazil and other industrializing countries around the world. These investments would provide the foundation for the import-substituting policies of the post-World War II era.


Swedish monetary policy experiences after the global financial crisis: What lessons?

October 22, 2019

Nice speech by Sweden Central Bank Governor Stefan Ingves:

Sweden is one of those rare central banks which leaned against the wind and kept interest rates higher than desired to lower financial imbalances. But lately due to low inflation, it is off the lean against the wind policies:


How “deep” parameters of central banking of 1990s are a distant memory now

October 3, 2019

Interesting speech by Mary Daly, President of San Francisco Fed. She gives the speech on 30 years of inflation targeting in NZ.

She joined the Fed in 1990s and there were three main parameters around mon policy. All those have changed now:

To understand the new environment we face, we first have to look back to the past. And here I will use the United States as an example.

When I started working at the Federal Reserve in 1996, I learned three important facts—the “deep” parameters of central banking. First, the potential growth rate of the U.S. economy averages around 3.5%. Second, the real neutral rate of interest—or r-star—changes over time but is well-bounded away from zero, mostly in the range of 2% to 3% or higher (Congressional Budget Office 2019, Laubach and Williams 2003, FRB New York 2019, Christensen and Rudebusch 2019). Third, unemployment and inflation are strongly linked through the Phillips curve.

Fast forward to 2019. These facts—these deep parameters—feel like a distant memory. As of June, participants of the Federal Open Market Committee put longer-run potential growth in the United States at about 1.9%. Estimates of the long-run neutral rate of interest were penciled in at just 0.5% (Board of Governors 2019b). As for the Phillips curve, most arguments today center around whether it’s dead or just gravely ill. Either way, the relationship between unemployment and inflation has become very difficult to spot.

Although the numbers may be a little different, the changes I’ve described are not unique to the United States. Global demographic shifts and lower productivity gains are tempering growth and reducing long-run interest rates in many countries (Holston, Laubach, and Williams 2017). And a number of central banks are finding that inflation is less responsive to labor market improvements than in the past.

These trends have important implications for monetary policy. Lower r-star and the zero lower bound mean we’ll have less room to maneuver when the next downturn occurs. One of the lessons learned from the financial crisis and its aftermath is that alternative tools like forward guidance and the balance sheet can be effective at stimulating economies. However, they’re still imperfect substitutes for the most effective tool at our disposal: traditional interest rate adjustments. And the fainter signal coming from the Phillips curve means we have less direct, real-time feedback about how monetary policy is playing out in the economy.

In other words, the jobs of central banks have gotten harder.


Don’t blame economics, blame public policy..

September 3, 2019

Prof Ricardo Hausmann in this piece tries to rescue economics and economists:

It is now customary to blame economics or economists for many of the world’s ills. Critics hold economic theories responsible for rising inequality, a dearth of good jobs, financial fragility, and low growth, among other things. But although criticism may spur economists to greater efforts, the concentrated onslaught against the profession has unintentionally diverted attention from a discipline that should shoulder more of the blame: public policy…

Economics and public policy are closely related, but they are not the same, and should not be seen as such. Economics is to public policy what physics is to engineering, or biology to medicine. While physics is fundamental to the design of rockets that can use energy to defy gravity, Isaac Newton was not responsible for the Challenger space shuttle disaster. Nor was biochemistry to blame for Michael Jackson’s death.

Although engineering schools teach physics and medical schools teach biology, these professional disciplines have grown separate from their underlying sciences in many respects. In fact, by developing their own criteria of excellence, curricula, journals, and career paths, engineering and medicine have become distinct species.

Public-policy schools, by contrast, have not undergone an equivalent transformation. Many of them do not even hire their own faculty, but instead use professors from foundational sciences such as economics, psychology, sociology, or political science. The public-policy school at my own university, Harvard, does have a large faculty of its own – but it mostly recruits freshly minted PhDs in the foundational sciences, and promotes them on the basis of their publications in the leading journals of those sciences, not in public policy.

Policy experience before achieving professorial tenure is discouraged and rare. And even tenured faculty have surprisingly limited engagement with the world, owing to prevailing hiring practices and a fear that engaging externally might entail reputational risks for the university. To compensate for this, public-policy schools hire professors of practice, such as me, who have acquired prior policy experience elsewhere.


Monetary transmission in Australia: Fairly efficient even at lower interest rates

August 16, 2019

Australian central bank has cut policy rates in June and July meetings by 25 bps. The policy rate is at 1% currently.

In this speech, Christopher Kent, Assistant Governor (Financial Markets) speaks about how interest rates are being lowered everywhere including Australia. The transmission in Aus has been quite efficient with most %age of rate cuts passed on to people:


Do closer political ties with a global superpower improve sovereign borrowing conditions?

August 1, 2019

Everything humans create is basically gamed.

Gene Ambrocio and Iftekhar Hasan of Bank of Finland in this paper look at how friends can be bought at world stage for an exchange: (more…)

Fiscal Money Can Make or Break the Euro

June 18, 2019

As European central bank controls all monetary operations, the constrained European governments are trying to figure ways to create money on their own.

Italian government is planning to issue short-term treasury bills or mini-BOTs which has led concerns over creation of parallel currency and give government avenues to spend.

Yanis Varoufakis, former FInance Minister of Greece in this piece explains how in his tenure he had proposed a variant of this proposal. But it was aimed at saving the Euro:

My idea was to establish a tax-backed digital payment system to create fiscal space in eurozone countries that needed it, like Greece and Italy. The Italian plan, by contrast, would use a parallel payment system to break up the eurozone.

Under my proposal, each tax file number, belonging to individuals or firms, would be automatically provided with a Treasury Account (TA) and a PIN number with which to transfer funds from one TA to another, or back to the state.

One way TAs would be credited was by paying arrears into them. Taxpayers owed money by the state could opt for part or all of those arrears to be paid into their TA immediately, instead of waiting for months to be paid normally. That way, multiple arrears could be eliminated at once, thus liberating liquidity across the economy.

For example, suppose Company A is owed €1 million ($1.1 million) by the state, while owing €30,000 to an employee and another €500,000 to Company B. Suppose also that the employee and Company B owe, respectively, €10,000 and €200,000 in taxes to the state. If the €1 million is credited by the state to Company A’s TA, and Company A pays the employee and Company B via the system, the latter will be able to settle their tax arrears. At least €740,000 in arrears will have been eliminated in one fell swoop.

Individuals or firms could also acquire TA credits by purchasing them directly, via web-banking, from the state. The state would make it worth their while by offering buyers significant tax discounts (a €1 credit purchased today could extinguish taxes of, say, €1.10 a year from now). In essence, a new dis-intermediated (middlemen-free) public debt market would emerge, allowing the state to borrow small, medium, and large sums from the private sector in exchange for tax discounts.


Indeed, if my parallel, euro-denominated system had been operational in June 2015, when the European Central Bank closed down Greece’s banks to blackmail its people and government into accepting the third bailout loan, two outcomes would have been possible. First, transactions would have shifted massively from the banking system to our TA-based public payment system, thus reducing substantially the ECB’s leverage. Second, it would be common knowledge that, at the push of a button, the government could convert the new euro-denominated payment system into a new currency.

In our case, the idea was to keep Greece viably within the eurozone by using the additional bargaining power afforded by the parallel payment system to negotiate the deep debt restructuring needed to revive economic growth and ensure long-term fiscal sustainability. As long as our creditors saw that our redenomination costs were lowered, while our demands for debt restructuring were sensible, they would think twice before threatening us with Grexit. Joint action by the ECB and my ministry would allow the parallel system to be portrayed as a new pillar of the euro, thus quashing any financial panic. By ending the popular association of the euro with permanent stagnation, the parallel system would be the single currency’s friend.

What about Italy?

This brings us to Italy. There are two technical differences between the system I designed and Italy’s planned mini-Treasury bills (or mini-BOTs). First, mini-BOTs will be printed on paper, something I opposed, to avoid a grey market. Our total supply of digital credits would have been managed by a distributed ledger, to ensure full transparency and prevent the inflationary overproduction of credits. Second, the mini-BOTs will be interest-free, perpetual bonds, without future tax discounts.

But the real difference between the Italian scheme and mine remains political. The parallel payment system I proposed was designed to use the reality of lower eurozone exit costs to create new fiscal space and help civilize the monetary union in the process. Italy’s system is the first step toward a parallel currency by which to bring about the eurozone’s end.

European politics around moneys is never boring.


Real effective exchange rates (REER) should incorporate Global Value Chains

April 18, 2019

Nice article by Nikhil Patel and Shang Jin Wei:

Standard calculations of the REER by most central banks and statistical agencies assume that countries export only final goods. But GVCs spread the different stages of production among different countries. They can do so thanks to technological improvements, lower trade barriers, and the closer integration of emerging markets into the global economy. Ignoring this reality can lead to substantial mismeasurement of the REER, resulting in questionable policy inferences.

To see how the standard approach could be wrong, consider a hypothetical value chain for the production of smartphones. Suppose Japan manufactures the components and ships them to China, where the phones are assembled and exported globally as finished products. Traditional REER models would assume that Japan exports final goods to China, and that the two countries are competitors. A depreciation of the Japanese yen, therefore, would help Japan’s competitiveness and hurt that of China.

In this case, however, a weaker yen would lower the price of Japanese components, which may lead to lower prices and increased demand for Chinese phones – leading to an improvementin China’s competitiveness. This example shows that the standard REER calculation is getting not only the magnitude wrong, but also the direction of change.


They also explain how adjusting for GVCs lead to Chinese Renminbi showing appreciation trend compared to the oft cited depreciation trend…

Interview of Deirdre McCloskey

March 22, 2019

This interview of Prof McCloskey appeared a month earlier:

She says liberalism should not be adopted selectively but comprehensively:


The Fed should buy recession insurance…

March 18, 2019

Brad DeLong in this article says Fed should buy recession insurance:

…if the next downturn is looming, North Atlantic central banks do not have the policy room to fight it effectively. Should a recession arrive, the US Federal Reserve would ideally be able to cut interest rates by five percentage points, as is customary in such situations. But with short-term safe interest rates currently at 2.4%, it cannot. And with euro and yen interest rates still around zero, the European Central Bank and the Bank of Japan would be unable to help much, either. 

Looking ahead, therefore, the big risk is not that inflation will start spiraling upward, with the Fed unable to raise interest rates fast enough to stabilize the economy. Rather, it is the downside risk that a year from now, the North Atlantic will be in recession, governments will not provide enough fiscal stimulus, and the Fed won’t be able to reduce interest rates enough – leaving it nearly helpless to even try to stabilize the economy.

The logical response to such an asymmetric risk is – or ought to be – to buy insurance to cover it. Worryingly, however, the Fed is not taking out any policy insurance at all against a possible recession, despite having at least three possible options from which to choose.

Three options are: raise policy rates today, cut interest rates today to try to compensate for its inability to reduce rates enough in a future downturn and leave interest rates unchanged for now. It is doing the third option but is not explaining what happens if a recession occurs.


Reflections of an economics textbook author: Greg Mankiw

March 18, 2019

Nice essay by Prof Greg Mankiw. He recently stepped down as the instructor of Harvard’s EC10 course (introductory economics). This is a huge moment in economic teaching as people believe this would give an opportunity for other textbooks such as Core economics to get their dues.

In the essay, Mankiw takes one through what led him to write a book on economics. Also how should one write write a book and the changes brought to the books world by digital technologies:

In this essay I reflect on textbook writing after three decades participating in the activity. I address the following questions: What perspective should textbooks take? What is the best approach to teaching microeconomics? What is the best approach to teaching macroeconomics? How does the content of the introductory course evolve? How much material should textbooks include? Are textbooks too expensive? How is digital technology changing the market for
textbooks? Who should become a textbook author?

Some more from Prof Tim Taylor on Mankiw’s essay and his own experiences..

How Israel lowered concentration in banks’ credit portfolio and cleaned up its banking system (lessons for India?)

November 27, 2018

Interesting remarks by Dr. Hedva Ber, Supervisor of Banks at Bank of Israel:

The supervisor points how from 1990-2010, Israel’s credit market was highly concentrated in hands of few companies. Since then, they have cleaned up the system taking stringent steps involving firing several key people:


Linking Reserve Bank of New Zealand Maori heritage: A case of central bank communications gone too far?

October 1, 2018

Last week, RBNZ released this long document linking Maori heritage with the central bank and the economy:

Te Pūtea Matua is the Māori name for the Reserve Bank of New Zealand. This article presents a broad picture of Te Pūtea Matua’s heritage, role, and interdependencies both within the Bank and economy-wide.

“The Reserve Bank team want to tell our story of how we fit together, and show respect to past, present, and future New Zealanders. Understanding our origin is especially important in times of change, which we are experiencing at present – including our legislation being reviewed,” Reserve Bank Governor Adrian Orr says.

“The establishment of the Reserve Bank of New Zealand in 1934 meant the people and government of New Zealand were better able to manage the economy independent of foreign banks’ credit cycles. In that sense, and drawing on Māori mythology, the Reserve Bank became the Tāne Mahuta of New Zealand’s financial system, allowing the sun to shine in on the New Zealand economy,” Mr Orr says.

“Te Pūtea Matua’s activities include issuing currency to the public, and maintaining price and institutional stability in New Zealand’s money exchange systems. Te Pūtea Matua’s roots are in its legislation. The money exchange systems and functions are its trunk, allowing the money – the sap – to flow throughout the system. The branches are the regulated financial institutions grafted onto the trunk, for their legitimacy and access to the Bank’s money and banking system.

“These functions are inter-related and allow Te Pūtea Matua to protect, nurture, and grow New Zealand’s wider financial ecosystem for the greater benefit of all New Zealanders.”

Mr Orr says the Reserve Bank is standing in good stead for the future, but will continue to grow and adapt to its environment. “We face challenges and changes that are driven by technology, economic development, global connectedness, and broader government, public and employee expectations. This is an exciting and challenging time for the Reserve Bank,” he says.

“We aim for this document to be a living story that evolves as people add their insights and share their knowledge and perspectives.”


Croaking Cassandra blog has torn apart this publication:

Tomorrow will mark six months since Adrian Orr became the most powerful unelected person in New Zealand, as Governor of the Reserve Bank.  Six months on we’ve had not a single serious and substantive speech on the policy areas he is responsible for, and where he exercises a huge amount of barely-trammelled power.  No speech on monetary policy, no speech on banking regulation, and nothing either on the less prominent things the Governor is responsible for –  such as, for example, insurance prudential supervision, a New Zealand insurer having failed, regulated by the Reserve Bank just before the Governor took office.  He hasn’t substantively and openly engaged with, or responded to, the damning survey results on the Bank’s performance as a financial system regulator.

Instead, we’ve heard the Governor on almost everything else.  There was infrastructure, climate change (repeatedly), the failings of capitalism, geopolitics, women in economics, and of course bank “conduct” (playing distraction from his institution’s own failings, by trying to butt into a field for which the Bank has no statutory responsibility).    There have been lots of words, but not much sign of in-depth reflection or distinctive insights, and even less sign of doing him well, and being open about, the jobs Parliament has actually given the Bank.   Throw in some considerable complacency about monetary policy and it should be a pretty disquieting picture.

Some of it is probably just the Governor’s well-known propensity to talk.  Some of it might even be an understandable (if misguided in application) desire to lift the esprit-de-corps at the Reserve Bank after the demoralising Wheeler years.  And a lot seems to be about winning the turf battles, ensuring that in the reviews of the Reserve Bank Act that the government has underway as much as possible of the Bank’s powers are kept, in effect, under the Governor’s control, and that the existing powers and functions of the Reserve Bank are all kept in the Reserve Bank.  Part of that seems to be about openly subscribing what should be a non-partisan agency to every trendy left-wing cause that is going (and which, presumably, the Governor believes in personally.) A power play in other words –  and, with a weak government that probably doesn’t care much, quite likely to succeed,  somewhat to the detriment of New Zealand.

The latest example was the release on Monday of a rather curious 36 page document called The Journey of Te Putea Matua: our Tane Mahuta.   Te Putea Matua is the Maori name the Reserve Bank of New Zealand has taken upon itself (such being the way these days with public sector agencies).  It isn’t clear who “our” is in this context, although it seems the Governor  – himself with no apparent Maori ancestry – wants us New Zealanders to identify with some Maori tree god that –  data suggest –  no one believes in, and to think of the Reserve Bank as akin to a localised tree god.  Frankly, it seems weird.  These days, most New Zealanders don’t claim allegiance to any deity, but of those of us who do most –  Christian, Muslim, or Jewish, of European, Maori or any other ancestry – choose to worship a God with rather more all-encompassing claims.

But the Governor seems dead keen on championing Maori belief systems from centuries past.    In an official document of our central bank we read

A core pillar of the evolving Māori belief system is a tale of the earth mother (Papatūānuku) and the sky father (Ranginui) who needed separating to allow the
sun to shine in. Tāne Mahuta – the god of the forest and birds – managed this task after some false starts and help from his family. The sunlight allowed life to flourish in Tāne Mahuta’s garden.

This quote appears twice in the document.

All very interesting perhaps in some cultural studies course, but what does it have to do with macroeconomic management or financial stability?  Well, according to the Governor (in a radio interview on this yesterday) before there was a Reserve Bank “darkness was on our economy”.  The Reserve Bank was the god of the forest, and let the sun shine in.  Perhaps it is just my own culture, but the imagery that sprang to mind was that of people who walked in darkness having seen a great light.   But imagine the uproar if a Governor had been using Judeo-Christian imagery in an official publication.

Looks like a case of central bank communications and linking with history gone too far…

Profile of Raj Chetty: Data evangelist

September 26, 2018

IMF’s F&D Sep-2018 issue profiles Raj Chetty.

In some cases, Chetty’s work strikes out in new and unexpected directions. In others, it confirms earlier studies by sociologists or specialists in early-childhood education. Either way, what gives it such impact is his innovative use of massive data sets, which has put him on the cutting edge of a trend that’s transforming the field.

“Big data has been revolutionary in applied microeconomics,” says Emmanuel Saez, a frequent collaborator who teaches at the University of California at Berkeley. “Raj has been in the vanguard of this movement.”

For Chetty, big data promises to bring economics closer to the certainties of the natural sciences. The hope is that economists will have a greater impact on public policy by presenting evidence that’s convincing enough to bridge the ideological divide, especially at the local government level, where partisan rancor is less intense.

“He zealously preserves his ideologically neutral stand,” says David Grusky, a Stanford sociology professor who has worked with Chetty. “He wants the data to speak, and let the chips fall where they may.”

Grusky describes Chetty as a relentless investigator who roams widely through relevant literature, regardless of the discipline, and tests every conceivable hypothesis as he works toward a conclusion. “He considers it an abject failure if there’s ever a question coming from an audience that entails an analysis he hasn’t already undertaken.”

Speaking to audiences, on campus and off, is something Chetty does frequently in his role as evangelist for big data. He cultivates contacts with journalists and makes his articles available online, along with easy-to-understand summaries, which has helped attract widespread coverage of his work in publications including the Atlantic, the Economist, and the New York Times.

“If what we’re doing is important for the world, we should make it accessible to the world,” Chetty explains.


Economists (and Economics) in Tech Companies

September 25, 2018

Profs Susan Athey (of Satnford who once worked for Microsoft) and Michael Luca (HBS) in this paper look at role of economists in tech sector:

As technology platforms have created new markets and new ways of acquiring information,
economists have come to play an increasingly central role in tech companies – tackling problems
such as platform design, strategy, pricing, and policy. Over the past five years, hundreds of PhD
economists have accepted positions in the technology sector. In this paper, we explore the skills
that PhD economists apply in tech companies, the companies that hire them, the types of
problems that economists are currently working on, and the areas of academic research that have
emerged in relation to these problems.


Does It Pay to Study Economics in Australia?

September 21, 2018

James Bishop and Rochelle Guttmann of Reserve Bank of Australia in this Bulletin article:

The Bank has increased its efforts to encourage more students to study economics at school and university. This could improve the quality of public discourse and have benefits for society as a whole. Our analysis suggests that an economics degree also confers substantial private benefit to graduates in terms of their earnings, relative to many other degrees. This arises from the development of analytical and maths skills, which command a wage premium in the labour market. However, our analysis also reveals that the probability of finding work as an economist is low, given the small number of jobs relative to qualified graduates. Nonetheless, the wide range of disciplines in which economics graduates work suggests it is a degree that is useful beyond the narrow discipline. As Heath (2017) explained, doing an economics degree appears to give one a set of skills that are currently rewarded quite well and looks set to continue in importance in the future.


What Keynes should have said: Central banks/government should target stock markets

September 20, 2018

Prof Roger Farmer of UCLA has this proposal:

Should Federal Reserve provide accounts to all?

August 30, 2018

JP Koning in his new piece points to a new research which suggests to open a FedAccount, a bank account for the excluded:

What if you and I could bank at the Federal Reserve? This is the premise behind a new paper by Morgan Ricks, John Crawford, and Lev Menand titled “A Public Option for Bank Accounts (or Central Banking for All).” Under the authors’ plan, the Fed would provide the public with FedAccounts, interest-paying no-fee accounts that could use the Fed’s underlying payments platform to effect free transfers to other accounts and enable point-of-sale purchases via a Fed-provided debit card. The Fed would not provide account holders with loans. 

While the authors provide a number of motivations for providing FedAccounts, a key one is financial inclusion. Around 7 percent of American households, or 9 million households, are currently unbanked, which means no individual in the household has bank-account access. Not only would the welfare of each individual who gains financial access improve, according to the authors, but society would enjoy significant positive externalities as those on the other side of the equation, say employers or businesses, could use a more efficient payments option.

The authors present central banking for all as a plan targeted at the United States rather than a universal one, and for good reason. Bank penetration is at 99 percent in the United States’ northern neighbor Canada, illustrating that banking is quite capable of filtering into most of society’s nooks and crannies.

Canada provides a natural foil for the United States because it shares many characteristics including geography, culture, and history. Why would bank penetration rates suddenly rise dramatically just a few meters north of the 49th parallel? If we can answer this question, the United States might simply copy whatever Canada is doing rather than experimenting. 

It is amazing how Canada almost has everything better compared to US in monetary matters. But its achievements are barely discussed…



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