Archive for the ‘Speech / Interviews’ Category

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.


Inflation statistics difficult to interpret during the current crisis

June 18, 2020

Riskbank Deputy Governor Henry Ohlsson in this speech talks on difficulting of computing and interpreting inflation data:

Under normal circumstances, monetary policy can be based on the analysis of along line of economic quantities. As monetary policy is conducted with an inflation target, the statistics on inflation outcomes become particularly important.

During the economic crisis an obvious problem with inflation statistics has been that there are no prices for the goods and services that cannot be consumed at present. This of course creates problems when calculating the consumer price index (CPI). Statistic Sweden (SCB) have clearly described their methods.

For products that have no prices, they use the price development on similar products that do have prices. For products that do not have “similar” products, such as various types of foreign air travel, the annual percentage change in total CPI is used. Replacing missing prices in this way is usually referred to as imputation. The total weight in the CPI for the products where prices are imputed in this way is not particularly large; it amounts to just under 3 per cent of the total weight of the CPI, see Figure 2.

What does this imply?

What do the many imputations abroad entail for the quality of the statistics? The conclusion in a current working report written by two world-leading researchers in this field is that the principles recommended by international organisations lead to underestimation of the rate of inflation and overestimation of the real increase in consumption.5 However, this is probably no major problem for Sweden, as the
percentage of prices imputed is relatively low. The problems could be much greater for other countries, and therefore for international comparisons.

Another problem with the inflation statistics at present is that the actual consumption pattern that has arisen during the crisis does not tally with the weights for different goods and services in the consumer price index. Or, put differently, Swedes have bought more toilet paper and fewer trips abroad than the weights in the consumer price index imply.

At present, we do not know whether the changes in consumption patterns are temporary or permanent. If they are temporary, the actual consumption pattern will gradually move towards the consumption pattern represented by the weights in the consumer price index.

If the changes in consumption patterns are permanent, it will be the weights inthe consumer price index that move towards the actual consumption pattern. In Sweden, the weights are revised once a year on the basis of the consumption pattern a year or so earlier.

What times…

From Great Lockdown to Great Transformation

June 10, 2020

Kristalina Georgieva of IMF in this speech:

It is wonderful to have the chance to talk to your global audience, because we know U.S. companies play a huge role all over the world.

The IMF and the U.S. Chamber of Commerce have been partners for decades, and we are united in our support for the simple concept that private sector-led growth improves opportunities for people everywhere.

At the Fund, our focus has been on the macroeconomic policies that underpin this. And we have stepped up several times during crises to help steer the recovery so countries can return to growth and create jobs.

As you may know, I spent a big chunk of my life living in a non-market economy—I was born and educated in Bulgaria during the time of communism.

I can tell you—there is no stronger advocate for markets than a person who has lived in the highly distorted environment of a non-market system. I learned firsthand the cost of bad policies, and the benefits of good policies. In fact, it was partly due to the IMF that Bulgaria turned a corner in the 1990s and was able to participate in both the European Union and the world economy.

What does it tell us that somebody who came from a Communist system now leads the IMF and is invited to address the U.S. Chamber of Commerce? Put simply, it tells us that change for the better is unstoppable.

So, let me concentrate my opening remarks on three points. First, what we have learned about this highly unusual crisis? Second, how do we envisage the pathway to recovery? And third, what is the role of the IMF in this crisis?

Starting with the crisis, let us look at some simple facts.

She highlights three opportunities:

Let me turn to the opportunities we see, starting with the digital transformation—a big winner from this crisis.

Clearly, many organizations are not going back to the old ways of working we knew before the pandemic.

We have seen that we can telecommute effectively. We know that we can organize work more flexibly and accommodate our staff’s conditions and preferences. So, we are going to see a rapid modernization in how we operate.

And we will also see a tremendous expansion of e-commerce, e-learning, e-transfers, e-payments, and e-governance. E-governance is particularly important, and at the IMF we would like to see more transparency and accountability in governance as well as in the way the economy functions.

So, it is critical to make sure that we avoid a great divide in which access to digital skills and infrastructure is limited for some and unlimited for others.

For example, currently only 50 percent of African businesses and citizens have access to the Internet. If this doesn’t change, we will miss a big opportunity and deepen inequality within countries and across countries, including here in the United States.

The second huge opportunity is going green.

I have been telling people that if you don’t like the pandemic, you’re not going to like the way climate change will hit us with increasing strength in the future.

The great thing about the green economy is that it can offer job opportunities. For example, in insulating buildings, in reforestation, or in planting mangroves. Low carbon energy and infrastructure can also be a big booster for jobs.

At the Fund, we are very interested in providing incentives for countries and companies to move faster in this direction, including by being clear around the risks to businesses during the transition to a low carbon economy.

The third opportunity is building fairer societies.

The good thing is that there are policies that are both good for growth and good for addressing inequality.

For example, combining social safety nets with social safety ropes that give people a chance to succeed and pull themselves up. And that applies particularly to small and medium-sized businesses.

The bad news is that inequality tends to go up after a pandemic. So, we must put this squarely on our radar screen and recognize the importance of global trade in contributing to lower costs, higher incomes and lower levels of poverty.

There would be a natural tendency after this pandemic for countries to turn inwards to build health security and build more independent operations. But we must guard against a dramatic retreat from globalization.


How City of Medellin transitioned from world’s most violent city to one of the most innovative, inclusive, and sustainable cities in the world.

June 5, 2020

In 1988, a Time Magazine article called Medellin, a city in Colombia as the most dangerous city in the world.

However, in the next few decades the city turned around its fortunes to become one of the most interesting cities in the world.

Federico Gutiérrez, the mayor of the city from 2016 to Jan-2020 in this IMF interview tells us about the transition.

F&D: What was the turning point for Medellín?

FG: In the 1980s and 1990s our society hit rock bottom with the tragedy of narcoterrorism. In 1991 we recorded a homicide rate of 381 murders per 100,000 inhabitants. Today the rate is approximately 20 per 100,000 inhabitants—a 95 percent decrease. Although the only acceptable figure is zero, we have achieved significant progress in curbing violence and ensuring respect for life.

As to whether there was a specific turning point, that is complicated and open to debate. Ever since businesspeople decided to stay in Medellín in the 1980s and 1990s—not giving in to the violence—we began to develop a vital strategy rooted in teamwork. The business fabric of our city is extremely solid, and this can be explained to a great extent by the difficulties that the private sector had to face in order to survive. In the midst of violence, staying was a great act of bravery.

There were no shortcuts, but there were practical solutions. One of the latter involved partnerships between the public sector, private sector, academia, and civil society. Teamwork as a society was a determining factor in the city’s social transformation. The mafia upended our values: it turned hard and honest work into easy money, sobriety into opulence and, worst of all, it took the value out of life and instead put a price on it. Though we still have a long way to go, we have started recovering such values as life, respect, and freedom.

In fewer than three decades, Medellín has become a benchmark for the world. It is a socially innovative city that is today an affiliate center for the Fourth Industrial Revolution for Latin America, in partnership with the World Economic Forum. Experiencing the worst things possible as a society has made us stronger and more resilient. Medellín is a city that acknowledges its past, takes pride in its present, and above all, views its future optimistically.

Lot more insights in the interview…

Pandemic central banking: the monetary stance, market stabilisation and liquidity

May 29, 2020

Philip Lane, chief economist and Board Member ECB in this speech reviews ECB’s policy during the crisis.

In my recent blog post, I described the range of scenarios that have been developed by ECB staff to support the analysis of the near-term and medium-term macroeconomic dynamics in the context of the coronavirus (COVID-19) crisis.[1],[2] I also explained the current monetary policy of the ECB and outlined our approach to setting the future course of monetary policy. My remarks today aim to reinforce these points by presenting some additional empirical evidence.

Lots of graphs and data in the speech. One could just use similar data for other countries to evaluate macro trends and policy responses.

Interview of Joshua Angrist: On charter schools, the elite illusion, and the “Stones Age” of econometrics

May 27, 2020

Nice interview of Prof Joshua Angrist of MIT:

As a teenager growing up in Pittsburgh, Joshua Angrist became fed up with high school and said his goodbyes to it after his junior year. Today, at the Massachusetts Institute of Technology, he’s a top researcher in labor economics and the economics of education — with work that includes a series of famed studies of policy choices for K-12 schooling.

Much of his work has been based on ingenious “natural experiments,” that is, episodes in which two or more groups of people were randomly exposed to different policies or different experiences. Such occurrences are an opportunity for Angrist and his co-authors to use the tools of econometrics to assess the effects of those differences — whether that’s a large classroom versus a small classroom or education at a charter school versus education at a conventional public school.

Angrist’s first natural experiment looked at labor market outcomes for men who were drafted during the Vietnam War era compared with those of men who weren’t drafted. The idea came to him from his labor economics teacher and Ph.D. adviser at Princeton, Orley Ashenfelter, who mentioned in class one day that he had seen a news article about a study in the New England Journal of Medicine in which epidemiologists investigated the long-term health effects of being drafted.

“They had done this very clever thing where they used the fact that draft lottery numbers were randomly assigned,” Angrist remembers, “and they compared people who had high and low numbers to test the causal effects.”

Ashenfelter remarked to the class that this use of the draft lottery was a great idea and that somebody should use it to look at the effects of the draft on the men’s earnings. Angrist agreed; immediately after class, he went to the library to start the research that became his doctoral thesis.

Angrist found that in the early 1980s, well after the end of the war, veterans — whether they served in Vietnam or elsewhere — took an earnings hit of around 15 percent compared with non-veterans in the same period. (Angrist himself served as a paratrooper in the Israeli army before he went to grad school.)

In addition to his research and teaching responsibilities at MIT, Angrist is a co-founder and co-director of MIT’s School Effectiveness and Inequality Initiative. He is the author, with Jörn-Steffen Pischke, of the econometrics textbooks Mostly Harmless Econometrics: An Empiricist’s Companion (2009) and, for undergraduates, Mastering ‘Metrics: The Path from Cause to Effect (2015). He also teaches econometrics in a series of free videos offered through the nonprofit Marginal Revolution University.

How he came into economics? It is all about getting one good teacher!


Rakesh Mohan 2006 Speech on Avian Influenza Pandemic: Remains relevant to fighting the crisis today

May 26, 2020

Came across this 2006 speech by Rakesh Mohan, who was then Deputy Governor at RBI.

He outlined what to expect in case there is an outbreak of large scale pandemic :


Impact of AI and Machine Learning on Bank Supervision

April 27, 2020

Good to read something different from central bankers.

James Proudman of Bank of England in this speech discusses how AI and ML are changing bank supervision:

Technology is rapidly changing the world around us. As prudential regulators, we need to understand the impact of that technology. First and foremost, we need to understand its impact on the firms we supervise – and the financial system as a whole – if we are to understand properly risks to financial
stability, and safety and soundness – just as we have always done. There is nothing new in this.

But what is new is the need – and opportunity – to take advantage of the new technology in our own business processes to change the way supervision is done. Providing answers to the questions I have outlined in the preceding remarks will help us to know how far we might, in time, go in introducing technology into supervision, and provide a road map for the future of how prudential supervision could be done.

What is the opportunity for supervisors and supervised firms?

How might this transformation impact the ‘day job’ and skills of supervisors?

The aim is ‘human centred automation’: using technology to free up supervisors’ time to focus on where they can add the highest value – making supervisors’ jobs more productive, more insightful and more rewarding.

To do so is likely to require some change in skills – incorporating more quantitative and analytical skills – without altering the fundamental ability to apply judgement to assess key risks to firms’ safety and soundness and evaluate practical mitigants.

And how might changes like those I have described impact firms’ experience of being supervised? For the better, I believe. Smarter, quicker supervision should generate fewer costly ad hoc data requests from firms; and generate better-informed, more timely and more insightful supervision.


History and evolution of Money in England

March 11, 2020

Nice speech by Sir Jon Cunliffe of Bank of England.

the forms money takes in society is not fixed. Those forms change as the structure of economies changes, as the ways in which we transact with each other change, as technology makes new forms possible.

We think of medieval England as a society using state issued metallic tokens – coins stamped with the monarch’s head – as its main form of money. But transferable debt obligations, recorded on notched sticks of wood, the ‘tally sticks’, also functioned as money, not for day-to-day use, but for large transactions. We think likewise of the gold standard period, following Sir Isaac Newton’s coinage reforms, as one in which  metallic money dominated. But again, although coins were the everyday means of exchange, transferable private sector claims, in the forms of banknotes and ‘bills of exchange’, were still significant in trade and commerce.

This is not just ancient history. We have seen a big change in my lifetime. When I was at school, admittedly a very long time ago, physical cash – banknotes and coins – played a far larger role in our lives. Far fewer people had bank accounts. In the mid-1960s, most workers were paid weekly in cash, and around 70% of the population did not have a bank account.3 Consequently, for every £100 of funds that people held to make payments, over a third would be held as cash. Nowadays, less than 5% is held as cash.

Today, around 98% of households have access to bank accounts. And credit and debit cards have made it much easier to use our bank accounts for everyday transactions – in other words the transfer of claims on the banks in which we hold our money.

That shift from physical cash to electronic transaction has not only been a shift from paper to electronic form. It has also been a shift from using a form of money issued as a direct claim on the state – the seemingly archaic but very real promise on our banknotes – to money created and issued by commercial banks as a claim on themselves.

This shift was not driven by any policy but as a consequence of technology providing more convenient ways for us to transact with each other. The shift as I recall has generated very little controversy or political attention. There has been a political response, but this has more about financial inclusion, about ensuring access to a bank account and to commercial bank money so that people were not left behind by the change. It has not been about the reliability and security of commercial bank money as it has become more dominant in the economy.

It is interesting to observe that in the eighteenth and nineteenth century there was a similar shift from statemoney, in the form of coins, to private money, in the form of banknotes, which in those days were bearer claims issued by private banks. That eventually generated a very different reaction, with the result that private banks in most countries were banned from issuing bank notes.


Three Ds of climate change risks for financial sector..

February 27, 2020

Christine Lagarde, President of ECB in this speech warns on climate change risks for the financial sector. She says there are 3 Ds of risks:

Climate change constitutes a major challenge, causing both threats and opportunities that will significantly affect the economy and the financial sector, depending on which carbon emission scenario eventually unfolds.

That is why central banks need to devote greater attention to understanding the impact of climate change, including its implications for inflation dynamics. At the ECB, the ongoing review of our monetary policy strategy creates an opportunity to reflect on how to address sustainability considerations within our monetary policy framework.

Today, however, I will focus my remarks on climate change-related risks for the financial sector. Broadly speaking, the main risks fall into three categories: risks stemming from disregard, from delay and from deficiency.


The transition to a carbon-neutral economy provides opportunities, not just risks. By shifting the horizon away from the short term and contributing to a more sustainable economic trajectory, the financial sector can become a powerful force acting in our collective best interest. The future path for carbon emissions and the climate is uncertain, but it remains within our power to influence it. As Lyndon B. Johnson said, “yesterday is not ours to recover, but tomorrow is ours to win or lose”.


History of Frankfurt Stock exchange and linkages to monetary system

February 19, 2020

Super speech as always by Jens Weidmann:

People looking to realise their full economic potential need a stable currency.

That is something merchants already knew back in the Middle Ages, when they flocked to Frankfurt’s trade fair to trade in goods. Indeed, they came equipped with a variety of different coins. But what rates were they supposed to exchange their coins at? This question led a group of merchants, in 1585, to ask the city to set the rates. And Frankfurt actually went further still. It established a bourse to review the exchange rates at regular intervals. This move marked the “birth” of the Frankfurt Stock Exchange.[1]

More than 400 years later – in 1999, to be precise – many European currencies were replaced by a single currency. The euro has simplified trade in the internal market further still. The euro’s central promise back then, though, just as it is today, was to be stable money for people in the euro area.

That is why price stability is the primary objective of monetary policy. Since 1999, the average inflation rate in Germany has actually been even lower than the rate observed in the D-Mark era. This has truly been a success story, even if the two periods are difficult to compare.


Looking to the future and the willingness to modernise are important not only for monetary policy, they are also crucial for the financial markets. Back in the 18th century, Frankfurt evolved into a financial centre of international renown – thanks to the newly established trade in government bonds. However, Frankfurt bankers long wanted nothing to do with shares, which resulted in Frankfurt being eclipsed by Berlin in the 19th century.

Phew…Did not know this!

8th NCAER C.D. Deshmukh Memorial Lecture: David Lipton of IMF speaks on India in a Changing World

February 18, 2020

Apart from RBI, NCAER also organises CD Deshmukh Lecture Series as Deshmukh was the founder father of NCAER. The lecture series started in 2013.

In 2020, David Lipton of IMF gave the lecture:

Good afternoon. I am honored by your invitation to deliver the 8th C.D. Deshmukh Memorial Lecture.

The late Chintaman Deshmukh, a towering figure as RBI governor and later finance minister, helped guide India’s economy through the immense challenges of independence. Perhaps less well known, he also holds a place in the annals of the IMF as a senior member of India’s delegation to the 1944 Bretton Woods Conference, which laid the foundations of the post-war economic order.

There, C.D. Deshmukh had the foresight to insist that the IMF and World Bank address the development needs of the countries that would soon emerge from colonialism.

John Maynard Keynes, deeply impressed by his contributions, is reported to have recommended that he run the IMF. I hope that one day we will have an Indian managing director.

Last year, at this podium, Martin Wolf spoke of the “Challenges to India from Global Economic Upheavals.” Since then, we have seen the threat of two of those upheavals recede, if not fade—the U.S.-China trade conflict and a hard Brexit. But new uncertainties always arise, casting a cloud over the global economy. For example, we are only beginning to see the impact of the coronavirus epidemic, which has struck at the heart of global value chains.

But beyond these headline-grabbing problems, governments around the world are struggling to solve a complex policy problem: how to address the secular stagnation that is reflected in anemic productivity growth, falling inflation, and weakening global trade. This is in part the legacy of the global financial crisis. But it is also the new normal of a maturing, globalized world, reinforced by aging societies in Japan, Europe and the U.S., and posing the fiscal challenge of meeting the needs of their senior citizens.

For the most part, secular stagnation is an advanced economy issue, but one with spillovers that concern the rest of the world. Moreover, secular stagnation may be a preview of coming attractions for some rising and aging middle-income countries.

That said, many of you may be correct in thinking that all of this is a long way from India, which in recent years was the fastest-growing large economy in the world. Indeed, your country—with its young and growing population, and a reservoir of untapped demand—already has shown the potential to play an increasingly important role in the global economy.

That is surely the case, despite the recent slowdown. The latest IMF forecast for the global economy underlined the impact on global growth of India’s sharp slowdown in the second half of 2019, which was caused by weak domestic demand and falling credit growth, and problems in the financial system. Clearly, there are significant balance sheet challenges that must be addressed to return to the levels of growth that India has enjoyed in recent years.

If this happens, and India achieves a sustained takeoff, your country can play a unique role. India could be in a position to help invigorate global growth, transform global patterns of trade, and spur investment and innovation. With the right policies—and a supportive global environment—India could become a source of “secular dynamism,” if you will allow me to coin a phrase. If other countries can find their way as well, secular dynamism in the developing world would become the needed counterweight to the secular stagnation of the advanced economies.

\These are the topics that I would like to focus on today: an important part of the global economy struggling with secular stagnation; how, in this setting, India and other countries can achieve sustained dynamism; and the crucial role for multilateral cooperation in preserving the integration that will best promote both of these effort.


Narratives about the ECB’s monetary policy – reality or fiction?

February 17, 2020

New ECB Board member Isabel Schnabel questions the German criticism of ECB monetary policy. That she is German makes it even more interesting.

In recent years, Germany has experienced one of the longest economic upswings since the Second World War.[1] Since 2010 the German economy has grown at an average annual rate of 2%. Unemployment has fallen to its lowest level since German reunification.

The monetary policy of the ECB has contributed significantly to that expansion. By lowering interest rates and making use of new monetary policy instruments, the ECB has created financing conditions that support investment, growth and job creation across the euro area.

And it was the ECB’s decisive action in 2012 that prevented a break-up of the euro area.

Despite these considerable successes, the public debate about monetary policy has become more heated in parts of the euro area, and especially in Germany.

The conversation is dominated by various narratives, such as the “expropriation” of German savers through “punishment rates”, the “flood of money” that will inevitably lead to massive inflation, and the creation of “zombie firms” as a result of expansionary monetary policy.

In my remarks today, I would like to take a closer look at some of these narratives and discuss them in the light of the facts.

I will demonstrate that the ECB’s current monetary policy stance is necessary in order to achieve sustained price stability in the euro area, and that the use of unconventional monetary policy tools, such as negative interest rates and asset purchases, is largely a consequence of structural changes in the economy that lie beyond the ECB’s control.

I will also discuss the potential side effects of these monetary policy measures and show that many of the fears that are frequently being expressed are based on half-truths and false narratives. The excessive criticism of the ECB is dangerous because it not only jeopardises trust in our single monetary policy, but also undermines European cohesion.

In her interview, she explains:

You want to clear up misunderstandings about the ECB. Would you say that you are now on a type of peacekeeping mission to mediate between the central bank and the German public?

No, that is not what this is about. I am not a mediator between two parties; I am now a member of the ECB’s Executive Board. But in my new role as a board member I am committed to seeking greater public understanding and clearing up misunderstandings. For people to constantly hear that the ECB’s policy is harmful to them is misleading and it undermines their trust. This worries me. 

 Which misunderstanding do you wish to clear up specifically?

The expropriation of savers is the main misconception. Even the term itself is legally incorrect. It would imply that the ECB is taking something away from people that rightfully belongs to them. But that is not the case. 

But rather?

The real interest rate – that is, the interest rate adjusted for inflation – emerges from the economy’s growth potential in the long run. Sweeping macroeconomic trends – such as demographic ageing and weak productivity growth – have caused a worldwide decline in real interest rates. The ECB cannot change these fundamental developments but can only steer its key interest rates around the trend. If it wishes to fulfil its mandate and stimulate the economy at a time when inflation is too low, it has to lower interest rates even further. If the policy rate then approaches zero, it becomes increasingly difficult to attain its objective with conventional tools. We see this constellation all over the world.

You’re suggesting that the ECB is a victim rather than a perpetrator in respect of negative interest rates. Are there any robust economic studies that back this up?

There are countless studies that estimate the equilibrium interest rate, using various methods and delivering different outcomes. But the trend is clear, it is pointing downward. I understand the frustration about low returns on savings, but that is not the whole picture. Borrowers and property owners have benefited, as have the government and employees. Analyses have been conducted on what would have happened without the ECB’s loose monetary policy. They found that economic growth would have been considerably slower, inflation would have been lower and unemployment higher. The one-sided, negative presentation of the consequences of the ECB’s policies is misleading. All in all, Germany has benefited from the ECB’s monetary policy.

You are saying that savers are not being expropriated at all. But the ECB’s negative interest rate policy effectively means that we can forget about traditional forms of investment such as savings accounts or life insurance policies. At the same time, people are being advised to provide for their retirement. How are they supposed to do that? 

If the ECB were to increase interest rates in the current environment, it would be harmful for everyone – not least for savers. I can’t give people any investment tips. But there’s no doubt that, in today’s interest rate environment, it is not especially advisable to put all your funds in savings or time deposit accounts. Politicians also have a duty to inform citizens about the alternatives to interest rate products.


Understanding macro policy using the Stone Soup story

February 11, 2020

Mary Daly, President of San Francisco Fed in this speech cites the stone soup story to help audience understand the challenges the policymakers face:


Vijay Kelkar Convocation Address at BHU: Three development paradigms of Indian economy

January 30, 2020

Vijay Kelkar gave the convocation address at BHU on 23 Dec 2019. The lecture is up on the NIPFP website:

Today I want to share with you my reflections on our country’s journey towards what our first Prime Minister Pandit Jawaharlal Nehru so eloquently expressed in his mid-night speech on 15th August 1947 as our “Tryst with Destiny.” To my mind, this “Tryst with Destiny” meant wiping out the curse of poverty from our land and make our nation a prosperous and liberal Republic and thus contribute handsomely our due share to the wellbeing of every nation and to the advancement of global peace.

He points to three development paradigms:

It is hard to even comprehend the India of 100 years ago, where our leaders like Gandhiji, and Nehru got going on building the freedom movement. It was an India of incredible backwardness. To give you one illustration of how things were, here is an astonishing fact: literacy in India in 1920 was 8%. Today we’re at about 75%. We know how bad it is, that 25% of India is illiterate. But can you even imagine an India where 92% is illiterate? That was the starting point, where our founding fathers had the nerve to challenge the British, and also ambitions to envisioning what a free India would look like. They wanted India to
aspire to be a great and prosperous Democratic Republic. The founding fathers of our republic drew their inspiration from our syncretic civilizational heritage as well as from the French Revolution, American Resolution and the Revolutionary Magna Carta and most importantly from the robust good sense of the people of India.

The Second Paradigm was developed by thinkers from the mid 1960s onwards. Critical elements of this were built by the Ph.D. Thesis of Manmohan Singh and many other thinkers such as Arun Shourie, Abid Hussain, Jagdish Bhagwati and T. N. Srinivasan. These thinkers were acutely aware of India rapidly falling behind other dynamic economies of East Asia. These countries achieved great success in exploring export opportunities. For accelerating growth and removal of poverty, our reformers argued in favour of trade liberalization, scaling back the license-permit-raid raj, a flexible exchange rate, and a greater role for the private sector and linking actively with the global economy. These ideas were put into practice, slowly, from 1977 onwards, with Morarji Desai as PM
and changed course in Indian economic policy, gradually and carefully. Trend growth rose from 1979 onwards.

Third paradigm needs to be discussed:

In India today, we are veering towards “the administrative state”, which essentially means the rule by officials who possess arbitrary power, and who creep into legislative and judicial functions. We need to push back against this. Laws must be drafted through negotiation in the legislature, and not by the joint secretary. We need a much better functioning judiciary. And the arbitrary power of officials needs to be replaced by a rule of law system with elaborate checks and balances, which give protections to private persons.

These are the key ideas that need to go into the Third Paradigm that our thinkers need now to construct. These are the requirements of India at our present state of development, where a middle income economy has emerged, where weaknesses of the state have created fear in the minds of private persons who have retreated into low investment and consequently to deceleration of productivity growth and national income. Addressing these problems will put us on the path of growth over next few decades and thus will become an advanced and high income economy.

The essential features of the First and the Second Paradigms are principles, and a conceptual framework. Once the framework is understood, there is the practical process of looking at the short term situation and taking practical actions. In similar fashion, the third wave or policy paradigm is about ideas and principles. The First Paradigm was developed through a process of debate from 1920 to 1947. The Second Paradigm was developed through a process of debate from 1964 to 1977 and then all the way to 1991. In similar fashion, we must embark on a long journey of ideas, to debate the elements of the Third Paradigm, and flesh it out from high ideas into a practical program of action. This is our task in India today.

Nice way to summarise Indian economy in a mere 6 pages!

A monetary policy framework for all seasons?

January 13, 2020

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

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


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

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

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

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


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

Christine Lagarde interview: Owl, Green ECB, Taking ECB closer to people etc..

January 9, 2020

Interview of Christine Lagarde.

Given the obsession with ornithology of central bankers, she considers herself as an owl:

You have described yourself as neither a dove nor a hawk, but rather an owl. Why exactly this rather unusual type of bird?

Owls are traditionally seen as birds of wisdom that can see well in the dark and have a wide range of vision. However, what I really wanted to highlight was my wish to ensure that discussions within the Governing Council take place in an efficient, of course, but also composed manner.


Taking ECB closer to people:

Given the major challenge posed by populism, how can the ECB be brought closer to the citizens?

This is one of my priorities. Bringing the ECB closer to the people requires dialogue and explanations. We need to engage with our fellow citizens and enter into dialogue with them. We need to explain to them – also through you – what the ECB does and that we are committed to doing its work effectively. We should bear in mind that three-quarters of euro area citizens are in favour of the euro.

Your mandate is to ensure price stability. Is this the main issue today?

Doesn’t asking the question imply an assumption that price stability has been maintained? I would take that to be a compliment for the ECB. Indeed, since the introduction of the euro, annual inflation has averaged around 1.7% in the euro area. However, inflation currently stands at 1% and inflation projections are still low, at some distance from the level of below, but close to, 2% that we would like to reach over the medium-term.

Green ECB?

The President of the European Commission, Ursula von der Leyen, has presented her “Green Deal”. How will it interact with ECB policy? Are you going to transform the ECB into a green bank?

I commend the determination of my friend, Ursula von der Leyen, and her commitment to the environment. This battle is to our credit in Europe, with all of us acting within our remits. In this, I also include the European Investment Bank. We will play our part within the framework of our mandate of maintaining price stability and of banking supervision. What effects do climate-related risks have on our growth and inflation projections? What signals do we send through our bond purchases and what assets are held by the banks that we supervise? The stakes are high enough to arouse a keen interest in these questions, while pursuing our primary mission. As regards monetary policy, the review of our strategy will be the ideal time to address these questions.

The decade of 2020s will continue to be challenging for ECB..

45 years of Central Bank of Barbados: 1972-2017

December 23, 2019

Central Bank of Barbados has released a book on its website (freely available). The book is written by Harold Codrington, retired deputy governor of the Central Bank of Barbados where he worked for 37 years.

Both Sides of the Coin tells the history of the first forty-five years of the Central Bank of Barbados. It outlines the Bank’s role and function, explains its operations, and details how its employees helped to fashion a modern society and economy and build an institution of which all Barbadians can be proud. As Professor Andrew Downes commented “readers would be engrossed in the intricacies of economic policy making from a central bank perspective.”

CBB Governor Cleviston Haynes gives a speech on the occasion:


Earlier ECB resembled Bundesbank, now ECB resembles Fed?

December 20, 2019

Benoît Cœuré, member of ECB’s last day at the central bank is on 31 Dec 2019. ECB just organised a colloquium in his memory. This is a tradition which RBI should adopt as well  and organise conferences for the outgoing top management.

In this interview, he is asked to reflect on his tenure, ECB and so on. One question is changes in ECB design:

Since you started at the ECB in January 2012, the institution has undergone a fundamental transformation. It used to be much like the Bundesbank, but now it acts more like the US Federal Reserve.

The existential crises we went through, first with Spain and Italy in summer 2012 and then with Greece in summer 2015, and the actions of one man, Mario Draghi, who was President of the ECB until November this year, gave us the necessary maturity to make full use of the instruments granted to us by the treaties. Does this mean that we have become like the Federal Reserve? In a certain sense, yes, because we are equipped with a comprehensive toolbox to support the euro area economy at all times, using tools like quantitative easing inspired by the US model, and the capacity to intervene in the markets. But there are also significant differences. For a start, we don’t have the same mandate – the Federal Reserve has a dual mandate that gives equal weighting to price stability and full employment, while the ECB’s mandate prioritises price stability. And our financial markets are not the same – bond markets in the United States are very deep and liquid, which gives the Federal Reserve an almost unlimited capacity for intervention. In Europe, there is no capital markets union – bond markets are fragmented across 19 countries, which limits the capacity of monetary policy.

Interesting. Usually, European central bankers refuse any similarity to US ones.

Further on accomplishments and regrets:


Why Australian banks remain stable?

December 17, 2019

Apart from Canada, Australia also seems to be a country with fairly stable banking system.

In a speech, Jonathan Kearns, Head of Financial Stability at RBA points to this remarkable history:

Australian banks in particular serve critical functions in the Australian economy by providing credit intermediation and more generally facilitating economic activity. Australian banks are profitable and resilient and a strong banking sector has contributed to Australia’s extended run of economic growth. It’s hard to imagine a modern economy without a banking sector. The eight largest Australian banks can trace their history back, on average, over 140 years. 

140 years is quite good! Some of the bank names are here.

He also reviews developments in Australian banking sector which is really nicely done. The speech is a prototype of how central banks should tell the public about performance of banking sector.

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