Archive for the ‘Financial Markets/ Finance’ Category

What may happen when central banks wake up to more persistent inflation?

October 27, 2021

We are seeing inflation rise across most economies in the world. However, most central banks have treated the inflation as transitory.

Charles Goodhart and Manoj Pradhan look at this question of What may happen when central banks wake up to more persistent inflation:

Challenges to monetary policy: lessons from Medieval Europe

October 27, 2021

Prof Nathan Sussman of Graduate Institute of Geneva in this post on Bank underground blog discusses monetary policy in Medieval France:

The monetary system is going through significant changes: the rise of cryptocurrencies, negative interest rates, and the decline in the role of traditional banks as intermediaries. History offers policymakers and academics useful case studies that can serve as distant mirrors beyond the study of crises and policy responses to them. Medieval Europe was a period of monetary experimentation and development. The rulers of this period faced similar challenges to those of modern central banks: competition with private monies, no recourse to interest rates as policy tools, and limited use of inside money created by deposit banks. This post draws on my research on monetary policy in late Medieval France to demonstrate the principles that guided policymakers in addressing these challenges.


The historical record shows that state currencies dominate private currencies in general public use for two main reasons. First, states enjoy a comparative advantage in establishing reputation and commitment and therefore are best suited to provide a medium of exchange – a public good – at the lowest cost. The debate about the environmentally unfriendly blockchain verification technology used by cryptocurrencies exemplifies this. Second, the state has a monopoly of the legal system that allows it to provide a legal – contracting – advantage to the state’s unit of account. Then, as now, the legal status of private (crypto) currencies is key to their ability to function as a medium of exchange rather than a financial asset (Rogoff (2017)).

The comparative advantage of the state in circulating a national medium of exchange creates a moral hazard. Historically, private currencies and competition from foreign currencies were a constraint on the state’s opportunistic behavior. However, this did not prevent occasional recourse to inflation tax. Only the independence of monetary policy from fiscal considerations, as Oresme advocated, can prevent this from happening.

Finally, the Medieval experience, which was not unique to France (Cipolla (1982)), shows that monetary policy can be conducted without going through the banking sector. This should be comforting news to central bankers in a world where the role of banks as financial intermediaries will decline (Benes and Kumhof (2012)). It also predates solutions to monetary policy at the effective lower bound based on the distinction between reserve money and the medium of exchange (Agarwal and Kimball (2015)). In the modern version, the government could vary the amount of reserves private institutions are required to hold against the issue of (digital) cash.

Fascinating to read and figure this monetary and banking history.


Inflation, Interest, and the Secular Rise in Wealth Inequality in the U.S.: Is the Fed Responsible?

October 25, 2021

Prof Edward Wolff in this new NBER paper shows that Fed’s monetary effects have reduced wealth inequality:

Are Banks still ’Too Big to Fail’? – A market perspective

October 22, 2021

Nicole Allenspach, Oleg Reichmann and Javier Rodriguez-Martin in this Swiss National Bank paper:

This paper aims at deriving the market’s assessment as to whether banks worldwide still benefit from a Too Big To Fail (TBTF) subsidy. Such a subsidy reflects the market’s expectation of government support in the event of a crisis and results in reduced funding costs
for the benefiting bank. To capture this effect, we use two different extensions of the Merton (1974) framework. We find that large banks
benefit from a TBTF subsidy, while large nonfinancial firms do not. This subsidy has declined somewhat since the Global Financial Crisis
(GFC) but remains larger than before the crisis. These conclusions also hold when considering Contingent Convertible (CoCos) and bailin bonds as fully loss-absorbing. Moreover, we find differences in the TBTF subsidy across jurisdictions and provide evidence that these can to a large extent be explained by differences in bank health.

They also find TBTF subsidy appears to be more pronounced in Europe:

Second, over most of the period considered, the TBTF subsidy appears to be more pronounced in Europe than in the US. We show that in the
CreditGrades model, a large part of this differential is statistically explained by the US banks’ better “health”, as reflected by their higher leverage ratios and standalone ratings. Nevertheless, there remains a small but increasing differential in favour of European banks since 2017 after controlling for these factors. One cannot rule out at this stage that the market perceives US banks as less likely to be bailed out, other things being equal. This could be the case if, for instance, the market perceived resolution policies in the US as more effective than in Europe.

Third, in times of calm, the interpretation of low indicator values is ambiguous. On the one hand, a low value may imply that the market assesses government support of the bank in the event of a crisis as unlikely. On the other hand, the market may assess the probability that the bank will suffer from financial distress, and, hence, the probability that the bank will actually need financial support, as low. The probability of government support in case of a bank crisis and the probability of such a bank crisis cannot be disentangled as the indicator value is the product of both.4,5 Because of this identification problem, authorities should not exclusively rely on such TBTF indicators when periodically reviewing the TBTF issue, but rather use them in combination with expert judgement


Lessons from the History of the changing Regulatory Perimeter of US Banks

October 21, 2021

Federal Reserve researchers had released an interesting paper in June-21 on the changing regulatory perimeter of US banks.

The researchers have released a shorter version of the paper:

Banking organizations in the United States have long been subject to two broad categories of regulatory standards. The first is permissive: a “positive” grant of rights and privileges, typically via a charter for a corporate entity, to engage in the business of banking.2 The second is restrictive: a “negative” set of conditions on those rights and privileges, limiting conduct and imposing a program of oversight and enforcement, by which the holder of that charter must abide.3

Together, these requirements form a legal cordon, or “regulatory perimeter,” around the U.S. banking sector. Inside that perimeter are firms, or other legal persons, that can legally conduct a set of banking activities, subject to various forms of regulation and supervision. Outside that perimeter are firms conducting other financial and non-financial activity, under the broad heading of “commerce”—subject to other laws and restrictions, but not to the specific combination of positive grants and negative restrictions of the perimeter. A range of firms lie close to the boundary, blurring the distinctions between the two.

Today’s regulatory perimeter faces a variety of challenges and pressures—from the “unbundling” and “re-bundling” of the traditional banking business; to the growth of stablecoins, stored-value platforms, and other new technologies; to the entry of commercial firms into the financial services space; to the advent of new financial services charters, with new uses for old ones. These developments are the topic of substantial current scholarship.4

recent paper in the Finance and Economics Discussion Series (FEDS) attempts to situate these challenges within the broader history of federal banking law and, in so doing, to reveal new insights about the nature of the U.S. regulatory perimeter.5 This FEDS Note describes a handful of lessons that history holds for the perimeter challenges of today.

What are the lessons from this long history:

Lesson 1: The United States has always had a legal perimeter separating “banking” from “commerce.” That perimeter has rarely been clear; it has always been porous; and it has never been static.

Lesson 2: Challenges to the perimeter often follow a common pattern—starting with outside-in pressure, and frequently culminating in crisis.

Lesson 3: The core architecture of the U.S. perimeter is simpler than some current debates suggest.

Lesson 4: Nearly 40 years ago, Congress made an important and enduring shift in regulatory design. Over time, this shift has made the perimeter significantly more complex.

Very interesting paper which shows in pictures how the perimeter has changed. Similar paper is needed for India too!

Resignation of Bundesbank President Jen Weidmann complicates German political outlook

October 21, 2021

Central banks and central bankers see themselves as economic entities but in reality they are political-economic entities. One is now increasingly seeing news of appointments/resignations of central bankers having political tones.

Germany’s political outlook has become uncertain with recent election results. To complicate matters further, Germany Central Bank’s chief – Jens Weidmann – has resigned:

Bundesbank President Jens Weidmann today asked Federal President Frank-Walter Steinmeier to dismiss him from office on 31 December 2021. He is leaving the Bundesbank, which he has headed since May 2011, for personal reasons. “I have come to the conclusion that more than 10 years is a good measure of time to turn over a new leaf – for the Bundesbank, but also for me personally,” Weidmann wrote in a letter to the Bank’s staff.

In his words of thanks to the staff, Weidmann refers to the joint achievements: “The environment in which we operate has changed massively and the Bundesbank’s tasks have grown. The financial crisis, the sovereign debt crisis and most recently the pandemic have led to decisions in politics and monetary policy that will have long-lasting effects. It has always been important to me that the Bundesbank’s clear, stability-oriented voice remains clearly audible. With a great deal of expertise, the departments have contributed to the discussions on the right lessons to be learned from the crisis and on the framework of the monetary union. Important regulatory changes have been adopted. The reorganisation of banking supervision in Europe has not only led to completely new supervisory structures at the ECB, but also to a strengthened role for the Bundesbank. The Bundesbank’s new responsibilities in the area of financial stability also underline our central role when it comes to a functioning financial system.”

Germany’s difficult coalition-building process has gained fresh complexity following the announcement of Jens Weidmann’s resignation shortly before the European Central bank takes far-reaching decisions on its expansive monetary policy. The departure of the Bundesbank president, unofficial leader of the ‘hawks’ on the ECB council for more than 10 years, is scheduled to take place on 31 December. The decision enshrines expansionary policies as the ECB’s preferred mode for the foreseeable future.

The timing, coinciding with the departure from office of his former boss, Chancellor Angela Merkel, will open decisions on the Bundesbank succession to possible squabbling among coalition partners of likely Chancellor Olaf Scholz. The current finance minister, from the Social Democratic Party (SPD), is trying to form a new government before Christmas. This would be the first SPD-led administration since 2005, marking a decisive break from 16 years of rule by Merkel’s conservative Christian Democrats, the last eight years in coalition with the SPD.

Although his bowing-out will be politically controversial in Germany, a veteran ECB official said it was an ‘elegant’ way of marking a new chapter in ECB-Bundesbank relations.

Weidmann’s most probable successor is Claudia Buch, a low-key economics professor who has been his deputy since 2014. Her promotion would match Scholz’s campaign to bring more women into front-line economic jobs. However other SPD leaders may favour a higher-profile, more political choice, such as Marcel Fratzscher, a well-respected former ECB official who heads Germany’s left-of-centre DIW economic research institute. Jörg Kukies, state secretary in Scholz’s finance ministry, a former Goldman Sachs banker, would be another prominent candidate.

Additionally, the Free Democratic Party and Greens, likely partners in Scholz’s putative ‘traffic light’ coalition, will wish to influence the choice both of Weidmann’s successor and of a possible new member of the Bundesbank board if the post is filled from within that body.

Weidmann’s exit focuses attention in Germany and beyond to growing antipathy between ECB policies of near-permanent monetary easing and the tighter stance habitually favoured by the Bundesbank and conservative German mainstream economic opinion.

According to one long-time Bundesbanker who knows Weidmann well, ‘The timing of the decision is a surprise, but the decision itself is not. He has made no secret of his opposition to the expansive policy the ECB is following. Over the longer term it was impossible to keep up this position. He’s going at the same time as Merkel. This is a political decision. It is taking place at a time when Germany has 5% inflation driven by a massive monetary overhang.’

‘He knows how little influence the Bundesbank president and Germany itself has on decisions taken by a majority of the ECB council. The decision-making is driven very strongly by Italy and France.’

This is 5th straight resignation of Bundesbank chief before completion of term:

Weidmann’s decision to step down after only two and a half years of his second eight-year term makes him the fifth consecutive German ECB governing council member to resign before the full completion of their term. Weidmann was previously Merkel’s chief economic adviser in the German chancellery. His decision bears some resemblance to Bundesbank president Axel Weber and ECB chief economist Jürgen Stark’s resignation seven months apart in 2011 in protest at the ECB’s easing policies aimed particularly at shoring up weaker members of monetary union. Both Weber (now chairman of Swiss bank UBS) and Stark have recently strongly criticised the ECB’s continued accommodative stance.

The Bundesbank says the 20 October announcement reflects 53-year-old Weidmann’s long-time consideration of his future career path. This follows his failure to become Mario Draghi’s successor as ECB president in November 2019. The official announcement paid tribute to ‘the open and constructive atmosphere’ at the ECB under Christine Lagarde, the new president, ‘in the sometimes difficult discussions of the past years’.

Weidmann’s frustration at his permanent membership of a ‘structural minority’ on the ECB council was a major element behind the decision. During his bouts of opposition to ECB policies, Weidmann fell out with both French President Emmanual Macron and with Draghi, now Italian premier. However frustrating this role may have proven, it was an indispensable one: his willingness to champion hawkish opinions while playing along behind the scenes was important in legitimating the decision-making processes of European monetary policy.


Five Ways to Build a New Macroeconomics

October 20, 2021

JW Mason reflects on the State of macroeconomics:

We need to be brutally honest: What is taught in today’s graduate programs as macroeconomics is entirely useless for the kinds of questions we are interested in. 

I have in front of me the macro comprehensive exam from a well-regarded mainstream economics PhD program. The comp starts with the familiar Euler equation with a representative agent maximizing their utility from consumption over an infinite future. Then we introduce various complications — instead of a single good we have a final and intermediate good, we allow firms to have some market power, we introduce random variation in the production technology or markup. The problem at each stage is to find what is the optimal path chosen by the representative household under the new set of constraints.

This is what macroeconomics education looks like in 2021. I submit that it provides no preparation whatsoever for thinking about the substantive questions we are interested in. It’s not that this or that assumption is unrealistic. It is that there is no point of contact between the world of these models and the real economies that we live in.

I don’t think that anyone in this conversation reasons this way when they are thinking about real economic questions. If you are asked how serious inflation is likely to be over the next year, or how much of a constraint public debt is on public spending, or how income distribution is likely to change based on labor market conditions, you will not base your answer on some kind of vaguely analogous questions about a world of rational households optimizing the tradeoff between labor and consumption over an infinite future. You will answer it based on your concrete institutional and historical knowledge of the world we live in today. 

He lists 5 changes the curriculum needs:

What should we be doing instead? There is no fully-fledged alternative to the mainstream, no heterodox theory that is ready to step in to replace the existing macro curriculum. Still, we don’t have to start from scratch. There are fragments, or building blocks, of a more scientific macroeconomics scattered around. We can find promising approaches in work from earlier generations, work in the margins of the profession, and work being done by people outside of economics, in the policy world, in finance, in other social sciences.  

This work, it seems to me, shares a number of characteristics.

First, it is in close contact with broader public debates. Macroeconomics exists not to study “the economy” in the abstract — there isn’t any such thing — but to help us address concrete problems with the economies that we live in. The questions of what topics are important, what assumptions are reasonable, what considerations are relevant, can only be answered from a perspective outside of theory itself. A useful macroeconomic theory cannot be an axiomatic system developed from first principles. It needs to start with the conversations among policymakers, business people, journalists, and so on, and then generalize and systematize them. 

A corollary of this is that we are looking not for a general model of the economy, but a lot of specialized models for particular questions. 

Second, it has national accounting at its center. Physical scientists spend an enormous amount of time refining and mastering their data collection tools. For macroeconomics, that means the national accounts, along with other sources of macro data. A major part of graduate education in economics should be gaining a deep understanding of existing accounting and data collection practices. If models are going to be relevant for policy or empirical work, they need to be built around the categories of macro data. One of the great vices of today’s macroeconomics is to treat a variable in a model as equivalent to a similarly-named item in the national accounts, even when they are defined quite differently.

Third, this work is fundamentally aggregative. The questions that macroeconomics asks involve aggregate variables like output, inflation, the wage share, the trade balance, etc. No matter how it is derived, the operational content of the theory is a set of causal relationships between these aggregate variables. You can certainly shed light on relationships between aggregates using micro data. But the questions we are asking always need to be posed in terms of observable aggregates. The disdain for “reduced form” models is something we have to rid ourselves of. 

Fourth, it is historical. There are few if any general laws for how “an economy” operates; what there are, are patterns that are more or less consistent over a certain span of time and space. Macroeconomics is also historical in a second sense: It deals with developments that unfold in historical time. (This, among other reasons, is why the intertemporal approach is fundamentally unsuitable.) We need fewer models of “the” business cycle, and more narrative descriptions of individual cycles. This requires a sort of figure-ground reversal in our thinking — instead of seeing concrete developments as case studies or tests of models, we need to see models as embedded in concrete stories. 

Fifth, it is monetary. The economies we live in are organized around money commitments and money flows, and most of the variables we are interested in are defined and measured in terms of money. These facts are not incidental. A model of a hypothetical non-monetary economy is not going to generate reliable intuitions about real economies. Of course it is sometimes useful to adjust money values for inflation, but it’s a bad habit to refer to the result quantities as “real” — it suggests that there is some objective quantity lying behind the monetary one, which is in no way the case.

In my ideal world, a macroeconomics education would proceed like this. First, here are the problems the external world is posing to us — the economic questions being asked by historians, policy makers, the business press. Second, here is the observable data relevant to those questions, here’s how the variables are defined and measured. Third, here are how those observables have evolved in some important historical cases. Fourth, here are some general patterns that seem to hold over a certain range  — and just as important, here is the range where they don’t. Finally, here are some stories that might explain those patterns, that are plausible given what we know about how economic activity is organized.

Read the comments too. Macro is another word for fights!

The low yield environment and Forex Reserves management

October 20, 2021

Ashish Saurabh and Nitin Madan of RBI in this Bulletin article write on an important but ignored issue.

Central banks of developing economies maintain and manage foreign exchange reserves. The reserves are usually invested in govt securities in developed economies primarily US. However, with interest rates remaining low, these reserves generate negligible returns. What options do central banks have in a low interest rate scenario? Ashish and Nitin discuss this topic in their paper.

Interest rates which have been on a declining trajectory over the last four decades in advanced economies, touched their historic lows in 2020. The prominent drivers of the declining trend in nominal yields are the sustained downward shift in real interest rates and low levels of
inflation, given well anchored inflation expectations. The structural low yield environment may persist in the  post COVID environment due to uncertainty about the growth outlook. This low yield environment has made it an arduous task for the Reserve Managers to generate
reasonable returns on their foreign assets. This article highlights the scope for looking beyond traditional ways to manage foreign exchange reserves in order to augment portfolio returns without undermining the predominant goals of safety and liquidity.     

Peer effects and debt accumulation: Evidence from lottery winnings

October 19, 2021

Magnus A. H. Gulbrandsen of Norges Bank in this interesting paper track the impact of lottery wins on neighborhoods:

I estimate the effect of lottery winnings on peers’ debt  accumulation using administrative data from Norway. I identify neighbors of lottery winners, and estimate an average debt response of 2.1 percent of the lottery prize among households that live up to ten houses from the winner. Analyzing heterogeneity, I find that neighborhood characteristics and shared characteristics with the winner matter for the debt response: there is a tendency for greater effects for those (1) residing closest to the winner, (2) residing in single-household dwellings, (3) with a longer tenure, and (4) with a household structure similar to that of the winner. Finally, estimates of the (imputed) expenditure response
among neighbors indicate that they accumulate debt to finance increased spending, consistent with a “keeping-up-with-the Joneses” type explanation, where neighbors react to each others expenditure. 


Should Financial Stability be a Monetary Policy Goal? Evidence from India

October 19, 2021

New paper in RBI Oc-21 bulletin by a team of RBI researchers ( Supriya Majumdar, Snehal S. Herwadkar, Jugnu Ansari, Arti Sinha, Radheshyam Verma, Jibin Jose, Sayantika Bhowmick, Arpita Agarwal and Sambhavi Dhingra).

The paper analyses whether RBI should have an explicit financial stability goal. Their paper says mix of monetary policy and macroprudential policy helps tide through both the goals of monetary and financial stability:

Empirical literature is divided on whether financial stability should be adopted by an inflation targeting central bank as an explicit policy objective. While arguments on both sides permeate, cross-country evidence suggests that there are only a few inflation-targeting central banks committing to such an explicit target, although all of them strive to achieve the financial stability goal.

In the Indian context, analysis using vector autoregression (VAR) framework suggests that while monetary policy has been most effective in containing inflation risks, macroprudential policies were efficaciously deployed to contain financial stability concerns. The present article argues that since their inception in early 2000s in India, macroprudential policies have generally complemented monetary policy and it is important to continue with the same approach.


Federal Reserve joins Central Bank Network for Indigenous Inclusion

October 18, 2021

Three Central banks – Australia, NZ and Canada- started a Central Bank Network for Indigenous Inclusion on Jan-21. The focus of the network was on:

    • Conducting research for and with Indigenous peoples on economic issues, including the development of best practices, such as using Indigenous data respectfully.
    • Building cultural awareness, recruitment practices and other aspects of corporate culture to foster Indigenous inclusion within member organisations.
    • Strengthening engagement practices with Indigenous groups and communities.
    • Supporting economic and financial education for and about Indigenous peoples.

In addition, the network will plan a recurring Central Bank Symposium on Indigenous Economics. The first symposium will be hosted by the Bank of Canada in late 2021.

Recently Federal Reserve has joined the network:

The Federal Reserve Board announced on Wednesday that it has joined the Central Bank Network for Indigenous Inclusion, which will foster ongoing dialogue, research, and education to raise awareness of economic and financial issues and opportunities around Indigenous economies.

The Board’s participation will be supported by the Center for Indian Country Development at the Federal Reserve Bank of Minneapolis and the Economic Education Partnership with Indian Country at the Federal Reserve Bank of St. Louis. The network is a collaboration with Te Pūtea Matua (the Reserve Bank of New Zealand), the Bank of Canada, and the Reserve Bank of Australia.

“The Federal Reserve Board is pleased to join the Central Bank Network for Indigenous Inclusion and I am personally looking forward to deepening our discussions with colleagues from around the world on economic issues that matter to Indigenous communities,” Governor Michelle W. Bowman said.

Inclusion and diversity are on top of central banks’ agenda..

Ageing and the real interest rate in Japan: A labour market channel

October 14, 2021

Shigeru Fujita and Ippei Fujiwara in this voxeu research:

Denmark Central Bank’s Gold – A historical overview

October 14, 2021

Nice historical analysis of role of Gold in Denmark’s monetary system from a historical perspective. The short paper is written by Kim Abidgren.

There is still public interest in Danmarks Nationalbank’s gold stock, although it has been many years since gold played an important role in the cash system and more generally in monetary and foreign exchange policies. The analysis provides an overview of the historical background of the gold stock based on source material from Danmarks Nationalbank’s archives at the Danish National Archives.


Should Keynes’s General Theory book have been titled instead as ‘Special Theory of Employment, Interest and Money’?

October 13, 2021

I had pointed that Monetary Authority of Singapore has completed its 50 years in 1971 and the central bank has released a commemorative volume on its 50 years.

In the volume there is a speech (page 8-13) by Dr Goh Keng Swee who was chair of MAS from 1980 to 1985.

He reflects on his college days when he studied economics and Keynes released the General Theory:

When I was studying economics at Raffles College in pre-War days, the Keynesian revolution broke out with the publication of John Keynes’
The General Theory of Employment, Interest and Money. Today, critics, including Sir John Hicks, are agreed that it was a badly written work and made for difficult reading. I can attest to the latter. As an undergraduate, I read the book from cover to cover no fewer than three times, some chapters even more. What puzzled me most was that Keynes measured variables and aggregates, such as National Income and Money Supply, in terms of what he called “Wage Units”. I asked my professor what this meant and why Keynes did this, but could not get a satisfactory reply. Nor did the literature of the day prove more helpful.

Years later, the truth dawned on me. The Keynesian remedy for curing unemployment — the burning issue of the day left behind by the Great
Depression years — involved a serious risk of inflation. Of course, Keynes knew this. The remedy he recommended took the form of expansion of bank credit through central bank policies to finance government expenditure. This extra spending will create additional demand for goods
and services, thereby reducing unemployment. But if economic variables are measured in wage units, inflation would be factored out as wages will rise in keeping with price increases. If variables such as the consumer price index or interest rates and aggregates like money supply, were measured in wage units, their increases would be reduced to the extent to which wages rise.

There is a further difficulty to contend with. The Keynesian system is a closed one, that is, it takes no account of foreign trade. This is admissible in theory, but in practice, since all modern states engage in foreign trade, a Keynesian stimulus will lead eventually to balance of payments deficits if governments do not exercise restraint in time. A part of the increased incomes people receive will be spent on imports and when exports do not increase in proportion, a trade deficit will occur. In the immediate postWar years, Keynesian economics won widespread acceptance in both academic and government circles in Britain and the United States. Confidence increased in the ability of governments to maintain full employment and stable economic growth through Central Bank credit policies and government fiscal (budgetary) policies.

However Keynesian policies backfired in 1960s:

However, by the mid1960s, certain stubborn difficulties appeared and refused to go away. In Britain, this took the form of balance of payments troubles which led to the devaluation of the pound in November 1967.

America experienced troubles in a different form. Because all major world currencies fixed their par values in terms of the US dollar and the 
US dollar was pegged to gold at US$35 per ounce, America could not devalue the dollar except by raising the price of gold. This the government was unwilling to do for political reasons. Eventually, what happened was an increase in inflationary pressure in the US and a decline in confidence over the convertibility of the US dollar into gold at US$35 per ounce because of increasing US dollar balances accumulated overseas as a result of trade deficits. In the end, gold convertibility of the US dollar was suspended in August 1971 and, shortly thereafter, the regime of floating currencies came into being. World currencies continue to float till this day.

He points how Singapore was watching these developments and learnt from them.

Finally he says he is not against Keynes but the General Theory should have been named as

In conclusion, I want to correct any impression this article may have given that I think poorly of Keynes as an economist. I do not. He is the greatest economist the world has produced this century. He introduced a new way of looking at an economic system, in a different way from the classical greats such as Adam Smith, David Ricardo and Alfred Marshall. The classicals saw the system as one consisting of producers and
consumers, each making his own decision as a producer or a consumer. They studied how a free market harmonises their interests. Keynes looked at how the system functions as a whole. Keynes gave birth to a discipline we now call macroeconomics.   


If one has to fault Keynes on any point, it would be the title of his book. This should have been The Special Theory of Employment, Interest and Money. His prescriptions were intended to address the special circumstances created by the Great Depression. By calling it a General Theory, he led lesser minds than his into believing that his prescriptions could be applied under all circumstances, with unhappy consequences, as we have noted.

Schumpeter had made similar comments on General Theory as well..

Could cars become mobile wallets?

October 11, 2021

Sirish Kumar, former CFO of Paypal (India and ASEAN region) in this OMFIF article points to ongoing technological changes in banking. As banks are under pressure from fintechs in their banking business, the banks need to look at facilitating online businesses:

Winds of disruption seen in consumer payments and retail banking are heavier than ever in banks’ wholesale payments and cash management business, which generates annual revenues of more than $250bn. This business provides payments solutions for suppliers and liquidity management for treasurers.

Until recently, banks as incumbents have enjoyed returns on equity of 20% to 40% and have leveraged this business as an anchor for large corporate relationships (with opportunities for cross-selling). Fintechs and other non-banks have made a dent in the market share of these banks, and other banks like Goldman Sachs are entering this space too.

To protect their turf, incumbent banks must be ready to service emerging online business models in different industries by innovating at the intersection of digital lending and digital payments.

For instance, they could look at car business which is getting digital:

One area that is becoming increasingly digitalised is the automotive sector. Let’s look at the agenda for the next five years. We are starting to see shifts in investment towards electric car manufacturing. In Asia, non-banks like SP Mobility and Oyika are focused on installing charging stations. Non-bank platforms like Cazoo, Carvana, CarMax, Cars24, CARRO and olx are focused on converting motorbike owners to used-car owners in India, Latin America and Southeast Asia, where less than 12% of the population own cars (compared to more than 50% in the US). Other priorities include lowering distribution costs by 10% to 20% by eliminating traditional dealership models and revolutionising the concept of car ownership.

In many regions like western Europe and Singapore, we can pay monthly subscriptions for car registration, road tax, 24-hour assistance, general inspection, repairs and insurance. This enables customers to make multiple payments in one transaction. Customers can access transparent pricing and choose from a menu of services to include in monthly payments. This subscription model is expected to register a compound annual growth rate of more than 80% and increase its market share to 22% by 2025, up from 3% now.

As subscription offerings scale up, particularly in online car sales, this will transform traditional leasing and renting models. Innovative platforms like Carvana have seen lending contribute to almost 50% of the gross profit per car unit and increase the transaction size of cars purchased. In 2020, leasing and financed vehicles made up 28% of Volkswagen’s vehicle sales. The growth in financial services business helped offset the contraction in new vehicle sales. JP Morgan’s recent purchase of a majority stake in Volkswagen’s payments business is likely to have a significant impact on the industry and beyond.


Innovation in digital payments can provide a better customer experience by making in-car payments for toll charges, parking and fuel or charging electric cars. Payments platforms like LogPay in Europe are steering such innovation. For this to be possible, payment processors will need to partner with fuelling stations and issue fuel cards that enable cardholders to refuel or charge at the nearest station. They will also need to integrate with car parking and toll operators directly or on aggregators of parking operators.



Stock Exchanges as Lighthouses

October 5, 2021

Came across this 2014 paper by Philip Booth of Cass Business School. He looks at history of stock exchanges and how they evolved not via government regulation but by private coordination. In several ways this is how lighthouses also evolved as pointed by Ronald Coase.

Over the years, it has frequently been argued by economists that lighthouses need to be provided by the state. Ronald Coase demonstrated, in fact, that they could be provided privately. The same is true of financial regulation. Though many economists, using blackboard economics, argue that financial markets need to be regulated by the state, it is found that regulatory mechanisms evolve in the market which are effective and stable. It is feasible that a central bank could also evolve as a private institution to regulate the banking sector. Nevertheless, there could be legitimate concern that such institutions will become concentrations of market power or will require legal privileges to operate. In fact, this was one of the concerns that was expressed in relation to the private provision of lighthouses. The analogy between private regulatory institutions such as stock exchanges and lighthouses is therefore remarkably close.


5 years of Insolvency and Bankruptcy Code – 2

October 4, 2021

The Insolvency and Bankruptcy Board of India was established on 1st October, 2016 under the Insolvency and Bankruptcy Code, 2016 (Code).

IBC and IBBI celebrated 5 years recently. IBBI released several documents/videos to mark the occasion:

Chairperson of IBBI – M.S.Sahoo – also completed his 5-year tenure. The government has not yet appointed a new chair which does not look good for an institution like IBBI.

Decrypting new age International Capital Flows via bitcoins

October 4, 2021

Clemens Graf von Luckner, Carmen M. Reinhart & Kenneth S. Rogoff in this NBER paper analyse capital inflows via a bitcoin exchange. They find that bitcoins are being used significantly in foreign capital inflows:


Doing Business Rankings once again question the US-Europe dominance of Bretton Woods institutions

October 1, 2021

World Bank stopping publishing of Doing Business rankings has led to fair bit of controversy. WB’s investigation report which found that the rankings were politically compromised led to WB stopping these rankings. The report has named Kristalina Georgieva then WB CEO and current IMF chief as one of the people who led to compromise of the rankings.

Georgieva immediately released a statement denying the charges:

“I disagree fundamentally with the findings and interpretations of the Investigation of Data Irregularities as it relates to my role in the World Bank’s Doing Business report of 2018. I have already had an initial briefing with the IMF’s Executive Board on this matter.”

Prof Joseph Stiglitz in this Proj Syndicate piece says that this is an attempt to remove Georgieva. He says that IMF’s recent policy stance where the idea is to be softer on loans towards countries is behind this coup plot:

If the WilmerHale report is best characterized as a hatchet job, what’s the motive? There are, not surprisingly, some who are unhappy at the direction the IMF has taken under Georgieva’s leadership. Some think it should stick to its knitting and not concern itself with climate change. Some dislike the progressive shift, with less emphasis on austerity, more on poverty and development, and greater awareness of the limits of markets.

Many financial market players are unhappy that the IMF seems not to be acting as forcefully as a credit collector – a central part of my critique of the Fund in my book Globalization and Its Discontents. In the Argentine debt restructuring that began in 2020, the Fund showed clearly the limits on what the country could pay, that is, how much debt was sustainable. Because many private creditors wanted the country to pay more than was sustainable, this simple act changed the bargaining framework.

Then, too, there are longstanding institutional rivalries between the IMF and the World Bank, heightened now by the debate about who should manage a proposed new fund for “recycling” the newly issued SDRs from the advanced economies to poorer countries.

One can add to this mix the isolationist strand of American politics – embodied by Malpass, a Trump appointee – combined with a desire to undermine President Joe Biden by creating one more problem for an administration facing so many other challenges. And then there are the normal personality conflicts.

But political intrigue and bureaucratic rivalry are the last things the world needs at a time when the pandemic and its economic fallout have left many countries facing debt crises. Now more than ever, the world needs Georgieva’s steady hand at the IMF.

The problems are obviously deeper. Ever since these two Bretton Woods institutions were created, US and Europe have dominated them. They have also divided the two amidst each other. US typically uses World Bank as its own arm and Europe does the same with IMF. There is also a revolving door between both the institutions as we see in Georgieva’s appointment. She was favored by both the US/Europe camps earlier and as a result was both CEO of World Bank and head of IMF. Now, she seems to have run out of favour.

In all this discussion, there is no mention of other countries. High time these institutions represent world as a whole. Else these problems will not just continue but will have even worse consequences.

How Emerging European Economies Found a New Monetary Policy Tool: Asset purchase programs

September 30, 2021

Group of IMF researchers have written this paper on how some of the Emerging European economies used asset purchases during the 2020 pandemic induced crisis. They found the asset purchases fairly effective in mitigating the crisis:

Several emerging market central banks in Europe deployed asset purchase programs (APPs) amid the 2020 pandemic. The common main goals were to address market dysfunction and impaired monetary transmission, distinct from the quantitative easing conducted by major advanced economy central banks. Likely reflecting the global nature of the crisis, these APPs defied the traditional emerging market concern of destabilizing the exchange rate or inflation expectations and instead alleviated markets successfully.

We uncover some evidence that APPs in European emerging markets stabilized government bond markets and boosted equity prices, with no indication of exchange rate pressure. Examining global and domestic factors that could limit the usability of APPs, in the event of renewed market dysfunction we see a potential scope for scaling up APPs in most European emerging markets that used APPs during the pandemic, provided that they remain consistent with the primary objective of monetary policy and keep a safe distance from the risk of fiscal dominance.

As central banks in the region move towards monetary policy tightening, the tapering, ending, and unwinding of APPs must also be carefully considered. Clear and transparent communication is critical at each step of the process, from the inception to the closure of APPs, particularly when a large shock hits and triggers a major policy shift.

The paper has been explained in this IMF article.

Interesting to see how asset purchases are becoming an important mon pol tool across central banks.


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