Archive for the ‘Financial Markets/ Finance’ Category

What explains the differences between rising stock markets and declining economic prospects?

July 10, 2020

Prof Robert Shiller in this Proj Synd piece:

The performance of stock markets, especially in the United States, during the coronavirus pandemic seems to defy logic. With cratering demand dragging down investment and employment, what could possibly be keeping share prices afloat?

The more economic fundamentals and market outcomes diverge, the deeper the mystery becomes, until one considers possible explanations based on crowd psychology, the virality of ideas, and the dynamics of narrative epidemics. After all, stock-market movements are driven largely by investors’ assessments of other investors’ evolving reaction to the news, rather than the news itself.

That is because most people have no way to evaluate the significance of economic or scientific news. Especially when mistrust of news media is high, they tend to rely on how people they know respond to news. This process of evaluation takes time, which is why stock markets do not respond to news suddenly and completely, as conventional theory would suggest. The news starts a new trend in markets, but it is sufficiently ambiguous that most smart money has difficulty profiting from it.

Central banks in parliaments: a text analysis of the parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve

July 9, 2020

Nicolò Fraccaroli, Alessandro Giovannini and Jean-François Jamet in this ECB WP:

As the role of central banks expanded, demand for public scrutiny of their actions increased. This paper investigates whether parliamentary hearings, the main tool to hold central banks accountable, are fit for this purpose. Using text analysis, it detects the topics and sentiments in parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve from 1999 to 2019.

It shows that, while central bank objectives play the most relevant role in determining the topic, unemployment is negatively associated with the focus of hearings on price stability. Sentiments are more negative when uncertainty is higher and when inflation is more distant from the central bank’s inflation aim.

These findings suggest that parliamentarians use hearings to scrutinise the performance of central banks in line with their objectives and economic developments, but also that uncertainty is associated with a higher perceived risk of under-performance of central banks.

It will be interesting to go through some of these hearings..

New Testament’s Matthew effect and modern finance: on the nexus between wealth inequality, financial development and financial technology

July 9, 2020

Jon Frost, Leonardo Gambacorta and Romina Gambacorta of BIS in this paper:

In the social sciences, the idea of the well endowed receiving further privilege, eg the rich getting richer, is often called the “Matthew effect” (New Testament Book of Matthew, 25:29). In economics, this effect is relevant particularly for wealth inequality. The effect could be amplified by financial development and technological advances that give investors access to better financial services or to assets with higher returns.

This paper analyses the role of financial development and financial technology in driving inequality in (returns to) wealth. Using micro data from the Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy for the period 1991-2016, we find evidence of the “Matthew effect” – a capacity of wealthy households to achieve higher returns than other households. With an instrumental variable approach, we find that financial development (number of bank branches) and financial technology (use of remote banking) both have a positive association with households’ financial wealth and financial returns. While households of all wealth deciles benefit from the effects of financial development and financial technology, these benefits are larger when moving towards the top of the wealth distribution. Still, the economic significance of this gap fell in the last part of the sample period, as remote banking became more widespread.


Comparing the financial centres of Tokyo, Singapore, and Hong Kong in FX Markets

July 8, 2020

Washimi Kazuaki and Kadogawa Yoichi of BOJ in this research article:

In recent years, turnovers of Foreign Exchange (FX) trading in Singapore and Hong Kong SAR have outweighed those of Japan, and the gap between the two cities and Japan continues to stretch. The two cities consolidate trading of G10 currencies by institutional investors and others by advancing electronic trading.

Additionally, a number of treasury departments of overseas financial/non-financial firms are attracted to the two cities, contributing to the increasing trading of Asian currencies in tandem with expanding goods and services trades between China and the ASEAN countries.

this juncture, FX trading related to capital account transactions is relatively small in Asia partly due to capital control measures. However, in the medium to long term, capital account transactions could increase, which would positively affect FX trading.

Thinking ahead on post-COVID-19, receiving such capital flows would positively impact on revitalizing the Tokyo FX market, thereby developing Japan’s overall financial markets including capital markets.

Graph 1 in the article shows how Singapore overtook Japan in FX activity in 2008 and HK in 2013. The differences have been widening..

Why Hong Kong will remain an international financial centre, despite new security law

July 7, 2020

Fair bit of articles being written on the ongoing crisis in Hong Kong leading to the island city losing its premium status as an international fin centre.

Horace Yeung (University of Leicester) and Flora Huang (University of Derby) in this piece do not agree with this premise:

While we cannot underestimate some individuals’ fears that they may be arbitrarily detained under the new national security law, there is also evidence that the law will curb the social unrest that has been detrimental to business in Hong Kong. Crucially, our research supports the idea that Hong Kong’s legal system remains stronger than China’s for international business activity. This will ensure it has a competitive edge over China for the time being.

Under Article 8 of the Basic Law of Hong Kong, which serves as the city’s de facto constitution, Hong Kong has a common law system that it inherited from the UK. In this kind of legal system, judges have the ability to make laws in the form of case law, which is determined by rulings on legal precedents. This makes Hong Kong’s legal system much stronger than China’s civil law system, where vast numbers of laws have been written in recent decades but have not necessarily been tried, tested and applied yet.

The ability of judges to make new laws in a common law system means that any issues arising from rapidly evolving financial markets can be dealt with more efficiently. And there is also research showing that common law countries tend to be more responsive to investors’ interests. Hence, in Hong Kong’s new pitch book to the global financial industry, it emphasises the city’s “common law system familiar to international investors”.

Research shows that a robust legal system is of paramount importance to financial development. It makes investors feel more comfortable and thereby expands the size of financial markets.

In our research, we’ve found that Hong Kong’s economic success since the 1997 handover can be attributed to the “one country, two systems” principle. We argue this is due to its common law system and because Hong Kong has been able to maintain an independent set of company and financial laws from the ones in China.


Business in Time of Spanish Influenza: Economic activity declines with and without lockdowns

July 6, 2020

Howard Bodenhorn of Clemson Univ in this NBER paper:

Mandated shutdowns of nonessential businesses during the COVID-19 crisis brought into sharp relief the tradeoff between public health and a healthy economy. This paper documents the short-run effects of shutdowns during the Spanish flu pandemic of 1918, which provides a useful counterpoint to choices made in 2020.

The 1918 closures were shorter and less sweeping, in part because the US was at war and the Wilson administration was unwilling to let public safety jeopardize the war’s prosecution. The result was widespread sickness, which pushed some businesses to shutdown voluntarily; others operated shorthanded.

Using hand-coded, high-frequency data (mostly weekly) this study reports three principal results.

First, retail sales declined during the three waves of the pandemic; manufacturing activity slowed, but by less than retail.

Second, worker absenteeism due to either sickness or fear of contracting the flu reduced output in several key sectors and industries that were not ordered closed by as much as 10 to 20% in weeks of high excess mortality. Output declines were the result of labor-supply rather than demand shocks.

And, third, mandated closures are not associated with increases in the number or aggregate dollar value of business failures, but the number and aggregate dollar value of business failures increased modestly in weeks of high excess mortality.

The results highlight that the tradeoff between mandated closures and economic activity is not the only relevant tradeoff facing public health authorities. Economic activity also declines, sometimes sharply, during periods of unusually high influenza-related illness and excess mortality even absent mandated business closures.


Late Soviet America

July 3, 2020

Prof Harold James in this damning Proj Synd piece:

Like the Soviet Union in its final years, the United States is reeling from catastrophic failures of leadership and long-suppressed socioeconomic tensions that have finally boiled over. For the rest of the world, the most important development is that the hegemony of the US dollar may finally be coming to an end.


In fact, many aspects of America’s current annus horribilis recall the final years of the Soviet Union, starting with the intensification of social and political conflict. In the Soviet case, long-suppressed ethnic rivalries and competing national aspirations quickly bubbled to the surface, pushing the entire country toward violence, secession, and disintegration. In the US, Trump’s response to nationwide protests against racism, police brutality, and inequality has been to stoke further the country’s historic racial divide. And, like statues of Lenin during the collapse of the Soviet empire, statues of Confederate leaders are being toppled just about everywhere.

Another parallel concerns the economy. The Soviet Union had a large, complicated planning and resource-allocation apparatus that attracted the society’s best-educated people, only to consign them to unproductive and frequently destructive tasks. The US has Wall Street. To be sure, America’s vast financial-services sector is not the equivalent of Gosplan (the Soviet State Planning Commission), but it does frequently extract value rather than create it, and thus will inevitably be part of any debate about the allocation of resources.

Up until the moment the Soviet system collapsed, very few thought it could actually happen. In assessing the state of the American system, it is important to remember that economists are not very good at prediction. The entire discipline relies on extrapolating from contemporary conditions on the assumption that the underlying fundamentals of what is being analyzed will not change. Knowing full well that this is an unrealistic and absurd assumption, economists often emulate medieval theologians by dressing up their prognoses in arcane language and jargon. One doesn’t need to know Latin to invoke ceteris paribus (“other things being equal”) as the premise of one’s forecasts.

US Dollar hegemony is under question mark:

Given this standard practice, we should pay close attention to long-run counter-intuitive forecasts that actually are borne out. In the late 1960s, the economist Robert A. Mundell made three predictions: that the Soviet Union would disintegrate; that Europe would adopt a single currency; and that the dollar would retain its status as the dominant international currency. Considering that the par-value system (gold standard) collapsed soon thereafter, triggering a depreciation of the dollar, these looked like wild predictions. But Mundell turned out to be right on all three counts.

But the circumstances to which the dollar owes its longstanding hegemony are now changing. The COVID-19 pandemic is driving a more digitalized form of globalization. While the cross-border movement of people and goods plummets, information is flowing like never before, ushering in an increasingly weightless economy.

Moreover, for the past three and a half years, the Trump administration has been inviting an eventual backlash against its weaponization of the dollar for political ends. Financial and secondary sanctions were highly effective in their original form, when they were directed against small, isolated bad actors like North Korea. But their more extensive deployment against Iran, Russia, and Chinese companies has proved counterproductive. Not only Russia and China but also Europe have quickly taken steps to develop alternative mechanisms for international payments and settlement.

Non-state digital payments systems are also undergoing , particularly in places where the state is weak, distrusted, or otherwise lacking credibility. The payments revolution will likely occur fastest in poor countries, such as in Africa or some former Soviet republics. New digital technologies already offer these societies the means to move from poverty and institutional underdevelopment to institutional complexity and the chance of innovation and prosperity.


Pandemic adds fuel to the central bank digital currencies race

July 2, 2020

My new piece in Moneycontrol.

I argue how the ongoing pandemic has led to a few central banks surging in the race to issue central bank digital currencies.

What are tech clusters and how do they function?

June 29, 2020

William R. Kerr and Frédéric Robert-Nicoud in this NBER paper:

Tech clusters like Silicon Valley play a central role for modern innovation, business competitiveness, and economic performance. This paper reviews what constitutes a tech cluster, how they function internally, and the degree to which policy makers can purposefully foster them.

We describe the growing influence of advanced technologies for businesses outside of traditional tech fields, the strains and backlash that tech clusters are experiencing, and emerging research questions for theory and empirical work.


Designing a CBDC for universal access

June 29, 2020

Bank of Canada researchers – John Miedema, Cyrus Minwalla, Martine Warren, Dinesh Shah – in this staff note lay conditions for a universal access for CBDC.

They speak about the need to store CBDC in a dedicated universal access device (UAD):

  • A CBDC should be as accessible as cash. A CBDC is a digital product that can be designed to include many of the attributes of cash (e.g., ease of use, portability, offline function). Using a CBDC should be a positive and inclusive experience—from acquiring it, to using it in transactions, to being assisted by its support services.
  • Multiple formats for a CBDC can embody the design principles of universal access. The Bank is exploring multiple formats for a CBDC, including conventional online and mobile technologies, as well as custom devices and deviceless solutions. We will consult widely with stakeholders and users on these options.
  • A CBDC could be used through a dedicated universal access device (UAD). One potential concept the Bank is investigating is a custom device that is engineered for universal access while securely storing and transferring a CBDC. The device could incorporate attributes of cash and take advantage of specialized technologies. Such a device should be manufactured at a low cost and issued by the Bank to ensure maximum inclusion.
  • A UAD could be resilient in ways that a smartphone is not. A UAD could embed a local, secure store of value, be network-independent and operate for long periods on a local power source. If there is an infrastructure failure, a UAD may prevent the interruption of digital transactions.

UAD could resemble a pager kind of device. Central Banks could also be looking to set up a wireless company where these transactions could be facilitated.

Interesting to see how researchers are thinking through a merger of benefits of physical cash and today’s technologies while designing a CBDC.

Bank of Korea’s 70th anniversary

June 29, 2020

Bank of Korea was established on 12 June 1950.

The current Central Bank Governor Lee Juyol gave a speech on the anniversary He rightly says this is not the time to self-congratulate:

Today is the 70th anniversary of the Bank of Korea’s establishment. I wish to express my sincere gratitude to our predecessors who devoted themselves to the development of the Bank of Korea and our economy, and to the many people who have supported and encouraged the Bank. I would like to say in addition how much I appreciate the efforts of all members of our staff, who are unwaveringly fulfilling the duties entrusted to them in their positions at a time when our working environment has been dramatically altered by the unprecedented coronavirus pandemic.

Looking back, the Bank of Korea has faithfully carried out its role as a central bank since its foundation in 1950, while making all-out efforts to meet the demands of the times. In the initial stage of economic development, our Bank spared no support as Korea achieved high-speed industrialization-led growth that was the wonder of the world. After experiencing high rates of inflation due to two oil shocks, our Bank devoted its attention to establishing a foundation for price stability. Since the global financial crisis, we have actively carried out our financial stability mandate. All of these efforts have not only provided stepping stones for economic development and stability, but have also laid a foundation for our standing as a central bank to be firmly established.

Commemorating our anniversary today, I see no lack of achievements to celebrate from the past 70 years. But as our economy experiences severe hardship due to the COVID-19 pandemic, now is not the time to congratulate ourselves.


Riksbank giving opportunity to redeem banknotes which became invalid during changeover in 2015-17

June 26, 2020

Riksbank announced a changeover from old banknotes to new banknotes in the period 2015-17.

92% of the notes came back and 8% (worth SEK 5.5 billion) did not come back to the central bank. The central bank allows to convert old notes to new notes for a fee. This fee will be doubled from Oct-2020 onwards:

During the banknote changeover 2015–2017, banknotes worth a total of SEK 88 billion became invalid. 92 per cent of these have returned to the Riksbank, but there are still banknotes missing, amounting to a total value of SEK 5.5 billion. You could buy 10 tonnes of gold for this amount, around 830 bars of gold. If all of the banknotes were laid out in a row next to one another they would stretch as far as 175 marathon races, or 7,400 kilometres.

There is always a possibility to redeem invalid banknotes at the Riksbank. However, for invalid banknotes sent in after 1 October the administration fee will be raised from the current SEK 100 to SEK 200 per case. In recent years, the Riksbank has redeemed 99 per cent of the cases sent in. Further information on how to redeem invalid banknotes can be found on our website.

On 1 October the regulations for redeeming invalid banknotes will also be changed so that only the person who owned the banknotes when they became invalid, or estates of deceased persons, will have the right to redeem the notes. This change means that invalid banknotes that have been sold, gifted, or donated to charity can no longer be redeemed.


Tracking impact of central banks policies on market fear as implied by options prices

June 26, 2020

Miguel Ampudia, Ursel Baumann and Fabio Fornari of ECB look at option prices to track impact of central bank policies on market fear . The policies have helped curb

An indicator of investor risk preferences or risk aversion can be derived by comparing the risk-neutral density with an estimate of the physical density of equity returns. The risk-neutral and the physical densities are related to each other through the pricing kernel, which embeds investors’ risk preferences. The physical density represents investors’ best judgement about probabilities of future price developments. Expectations of physical densities cannot be determined from market prices, as market prices also embed the risk preferences of investors. Researchers have turned to statistical methods to estimate such densities.[5] We use a daily multivariate generalised autoregressive conditional heteroscedasticity (GARCH) model to achieve this.[6]

The tail risk aversion indicator is constructed by comparing the left tails of the risk-neutral and physical distributions. Investors are risk-averse if they attach a higher risk-neutral probability to adverse events compared with the physical density. As tail risk-averse investors are willing to pay a premium to insure against the disutility associated with adverse outcomes, risk-neutral probabilities will overstate the corresponding physical probabilities for negative tail events. We look at the behaviour of the left tails of both the risk-neutral and the physical densities for equity returns over a three-month horizon. The index of aversion to negative tail risk of investors is calculated as the area to the left of the point on the risk-neutral density that corresponds to the lowest tenth percentile of the physical distribution of the returns (normalised by 0.1, i.e. the corresponding area on the physical density).[7] A tail risk aversion index above one indicates that investors fear the materialisation of negative tail events and are therefore willing to insure against such an occurrence by paying more than would be justified by its historical likelihood.[8] By contrast, an index value between zero and one could be considered as consistent with a situation in which appetite for risk is high.

Chart C

Euro Stoxx 50 tail risk aversion indicator and tail risk

For options with a horizon of 10 to 20 days ahead


Sources: Authors’ calculations and Refinitiv.
Notes: “APP” stands for asset purchase programme and “APP extension” refers to the ECB measures announced on 12 March 2020, “PEPP” stands for the pandemic emergency purchase programme announced on 18 March 2020, “QE” stands for quantitative easing and “VaR” stands for value at risk (tenth percentile). The latest observations are for 13 April 2020.

The estimated tail risk aversion increased measurably from the second half of February. In mid-March, coinciding with the introduction of policy measures on both sides of the Atlantic, it reversed its course and returned to early-February levels. Chart C depicts the estimated tail risk indicator, along with a measure of tail risk, defined as the (inverted) tenth percentile of the physical distribution of the Euro Stoxx 50 returns. Initially, as the coronavirus was largely contained to certain regions in China, markets appear to have been rather complacent in the sense that there was practically no increase in tail risk aversion. At the outbreak of the pandemic in Europe, however, investors’ willingness to take on risk declined measurably, as reflected in the increase in the tail risk aversion index as of 21 February – the start of the lockdown in some parts of the Italian region of Lombardy. Around mid-March, the price of left tail risk started to decline again, as a cascade of fiscal and monetary policy measures was announced on both sides of the Atlantic. By contrast, tail risk itself remained broadly stable until the beginning of March, started to rise significantly thereafter and remained elevated even after the introduction of policy stimulus. One interpretation of these developments is that the measures put into place by central banks and governments have been able to support investors’ risk appetite, thus curbing the initial rise in the price of risk and leading it back to the value prevailing around mid-February. This reduction in the price of risk took place despite the rise in the amount of risk and therefore contributed significantly to minimising the impact of the shock on financial markets.

How Europe is taking another page from US financial history..

June 25, 2020

Interesting piece from Jacob Funk Kirkegaard of PIIE.

He points how Europe is taking a leaf from US financial history in 1913. US government until relied on revenues from customs and other sources. In 1913 US started income tax which became a significant source of state financing. Europe is at similar juncture now and gradually looking to raise revenues from other sources:

Enter the US history books and the enactment of the 16th Amendment to the US Constitution in 1913, which enabled progressive personal income taxation to be levied at the federal government level for the first time.[2] The tax, which had previously been enacted and declared unconstitutional in the 1890s, enabled the federal government to finance its participation in world wars and the New Deal, establishing the modern federal government era in the United States. Prior to 1913 (apart from a brief period during and after the Civil War), the most important sources of US federal government revenues were not income or consumption taxes, but high tariffs on imports; “sin taxes” on spirits, tobacco, and wine; and a modest tax on corporations in the early 20th century.

The European Commission has proposed a new set of own resources similar to the revenue sources the US federal government had prior to 1913. It suggests raising an additional €10 billion from expanding the carbon emissions trading system (i.e. a 21st century climate “sin tax”), €5 billion to €14 billion from a new EU carbon border adjustment mechanism (i.e. a 21st century trade tariff), €10 billion from a new EU level corporate tax on multinational corporations operating across the EU internal market, and €1.3 billion in new revenue from a digital tax on large firms operating in Europe. These levies would, combined with the €20 billion already collected in traditional tariffs, increase European-wide resources to just over €50 billion,[3] or 0.4 percent of EU27 gross national income. Figure 1 compares the breakdown of these new EU traditional own resources with the financing of the pre-1913 US federal budget.

Proposed EU revenue sources resemble US federal government revenue streams prior to 1913

Tariffs and carbon border adjustment would thus comprise 60 percent of the EU’s new proposed traditional own resources, in line with how trade tariffs were the largest source of income for the US federal government pre-1913. About 20 percent of the EU’s new revenues would be “carbon sin taxes,” taking the total foreign import + sin tax revenues to 80 percent of the new traditional own resources total, not far off from the historical US pre-1913 level of roughly 90 percent of total federal government revenues from these two sources.[4] The rest of the EU’s new proposed traditional own resources would be variations of corporate taxes, also in line with this category being the third largest revenue source for the US federal budget in the early 20th century until the passage of the 16th Amendment.

Europe is thus following the example of the early US federal government prior to the 16th Amendment in raising its direct revenue from limited tax sources. Until that changes, member states will remain fiscally dominant in Europe, and the EU will not take over any additional redistributive tasks.


Thinking about Security issues while designing a Central Bank Digital Currency

June 25, 2020

Cyrus Minwalla of Bank of Canada writes on the need to look at several security issues while designing a CBDC.

This paper explores the security aspects involved in constructing and deploying a central bank digital currency (CBDC). Security is an essential quality of a CBDC system. In addition to securing the underlying storage and transfer of value, security involves aspects of privacy and resilience. Threats must be mitigated to protect the integrity of funds and the confidentiality of users. A secure CBDC system will retain public trust in the central bank.

See the references in the paper. So many on technology.

Podcast: The evolving role of Swift in global payment systems

June 25, 2020

Technology is becoming more and more integral to finance and payments. One cannot understand financial systems without understanding technology. Sample this from a OMFIF podcast on Swift payment system:

Swift plays a vital role moving money around, acting as a lifeline for trade and economic activity. Michael Moon, Swift’s managing director of payments and trade, joins Bhavin Patel, senior economist and head of fintech research at OMFIF, to discuss how Swift’s role in global payment systems is changing as payments become increasingly digitised and amid greater innovation in the financial infrastructure. Further topics include the introduction of Swift gpi and the ISO 20022 standards, and correspondent banking during a time of derisking.

ISO 20022 means:

It describes a common platform for the development of messages using:

  • a modelling methodology to capture in a syntax-independent way financial business areas, business transactions and associated message flows
  • a central dictionary of business items used in financial communications
  • a set of XML and ASN.1 design rules to convert the message models into XML or ASN.1 schemas, whenever the use of the ISO 20022 XML or ASN.1-based syntax is preferred

Swift GPI details here..

Central Bank of Belgium analyses Modern Monetary Theory (MMT)

June 24, 2020

M. Kasongo Kashama of Central Bank of Belgium (called as National Bank of Belgium) in this paper reviews MMT:

Modern monetary theory (MMT) is a so-called heterodox economic school of thought which argues that elected governments should raise funds by issuing money to the maximum extent to implement the policies they deem necessary. Over the last few years, it has been supported by political representatives, for whom MMT has provided a rationale for their calls for Green New Deals and other large public spending programmes. Most recently, it has also found an echo in calls for bold post-COVID-19 recovery plans. But it also came under increased scrutiny and fire from the mainstream economic world.

This article seeks to understand modern monetary theory (MMT) using six frequently asked questions.

What exactly is MMT all about? The MMT doctrine suggests shifting to a regime where the government finances its spending programmes by issuing base money, to achieve full employment. Should inflationary risks emerge, it is expected to raise taxes. The job of the central bank (if any) boils down to accommodating the needs of the government.

How do MMT’s theoretical foundations compare with the consensus approach? The MMT doctrine relies on an unconventional approach for its assignment of macroeconomic policies to the macroeconomic stabilisation targets: the government (through fiscal policy) must tackle the joint full employment price stability objective, while the central bank (through monetary policy) deals with debt sustainability. Under the consensus approach, it is the other way around: monetary dominance prevails. In theory and assuming both these policy‑makers deliver on their mandates by appropriately deploying their respective instruments, both approaches should put the macroeconomy on track to equilibrium.

Is MMT workable in practice? There is some indication that the MMT doctrine may face practical limitations. Elected governments are typically associated with commitment problems, because they have incentives to push the economy beyond its productive capacity/full employment. And as the government commitment to the joint objective of full employment and price stability can be perceived not to be credible, it is more likely that people’s inflation expectations are not well anchored.

Why has MMT been so popular in recent years? The low inflation context of the last few years might suggest that the inflationary risks induced by expansionary fiscal policies are limited. And the low interest rate environment points to contained servicing costs for the sovereign debt. But MMT’s appeal might rely too much on the persistence of such low inflation and low interest rates.

How does MMT compare with the Eurosystem’s asset purchase programmes (APP and PEPP)?

Asset purchase programmes and MMT both aim at stabilising the economy. But their approaches differ. While the asset purchase programmes seek to lower longer-term rates to ensure easy funding conditions for the whole economy until the economy takes off again, MMT concentrates solely on providing the government with ample and cheap financing on a permanent basis.

Is a temporary switch to MMT principles realistic in the euro area in the COVID-19 crisis context? The recent increased need for further fiscal support in the midst of the COVID-19 crisis justifies an in-depth reflection about the appropriate monetary-fiscal policy mix to support a fast and sound economic recovery. Doing so does not mean that monetary dominance should be abandoned, and MMT recipes taken on board. Avoiding being perceived as opening the MMT Pandora’s box is key: that will minimise the risk of having to make a painful choice between high inflation and severe fiscal consolidation in the (distant) future.

Interesting to see a central bank researcher trying to figure MMT.

Will digital payments enable Cambodians settle transactions in their home currency Riel?

June 24, 2020

Cambodia is largely a dollarised economy but they also have their home currency Riel in circulation.

In this OMFIF interview Serey Chea, director general of the National Bank of Cambodia speaks on digital payments in the country. Serey expects that digi payments might lead to people transacting in Riel over US Dollar:


Conversation with Prof M. Govinda Rao: COVID-19 Crisis and Response by the Indian Government

June 23, 2020

The conversation with Prof M. Govinda Rao is on June 26, 2020 at 5:00 pm. One can register here.

The unprecedented COVID-19 crisis has severely impacted the economy leading to losses in both lives and livelihoods. In order to counter the downturn, the Indian Government came up with a fiscal stimulus worth Rs 20 lakh crore (10% of GDP) to support agriculture, industry, MSME, labourers,etc.

However, the stimulus has raised more questions than answers. Some economists say that the actual scale of the stimulus is much smaller in magnitude and questioned its effectiveness to revive the Indian economy. Others have raised concerns over sources of financing the stimulus and add the burden lies with the already ailing banking system. The crisis has also raised questions over the relationships between Central and State Governments.

There cannot be a better person than Prof Govinda Rao to answer these questions given his wide experience in India’s policymaking and research. He has written on these topics extensively. The Conversation series invites all students of economics and those interested in economics to join us in what promises to be a fascinating discussion.

Why European Citizens’ trust the euro but not as much the ECB?

June 23, 2020

Stephanie Bergbauer, Nils Hernborg, Jean-François Jamet, Eric Persson and Hanni Schölermann in ECB’s Eco Bulletin analyse citizens trust in ECB and Euro. European trust Euro but not the ECB:


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