Archive for the ‘Speech / Interviews’ Category

What Happens when Big Brother Meets Big Tech

July 29, 2022

Lynn Parramore of INET interviews University of Tennessee law professor Maurice Stucke who has has been critical as tech firms have grown into giant “data-opolies” profiting from surveillance and manipulation. He warns that legislative inaction and wider government complicity in this surveillance are eroding fundamental rights to privacy along with the ability of federal agencies to regulate Big Tech.

Lynn Parramore: Concern over privacy is increasing right now, with people worrying about different aspects of the concept. Can you say a bit about what privacy means in a legal context? With the digital revolution, privacy obviously means something different than it did 50 years ago.

MS: Yes, privacy is not a single unitary concept. There are different strands. There’s bodily privacy and decisional privacy – the right to make important decisions about one’s life, like whether to have a child or not, without governmental interference. Within the bucket of decisional privacy would also be marriage, contraception, and things of that nature. There’s intellectual privacy (such as what one reads, watches, or thinks) and associational privacy (such as the freedom to choose with whom one associates). Informational privacy is another strand, where you can control your personal information, including the purpose for which it is used.

There used to be the idea that data protection and privacy are fundamental human rights.

Numerous supporters of privacy rights have argued that U.S. Constitution should protect an individual’s right to control his or her personal information. One of the earlier Supreme Court cases involving informational privacy tested that belief. New York passed a law requiring doctors to disclose to the government their patients’ name, age, and address when they were prescribed certain drugs. All of this information was collected in a database in New York. A group of patients and their prescribing doctors challenged the law, contending that it invaded their constitutionally-protected privacy interests. The case was decided in 1977 — before the Internet and cloud computing. The Supreme Court, however, did not perceive any threat to privacy implicit in the accumulation of vast amounts of personal information in computerized data banks or other massive government files. The Court instead noted how the mainframe computer storing the data was isolated, not connected to anything else. Today, the data are not collected and maintained on some isolated mainframe. A torrent of data is being collected about us that we may not even have thought about. When you go to purchase gas at the local station, for example, you may not think of the privacy implications of that transaction. But there are powerful entities that collect vast reservoirs of first-party data from customers, and also sources that are reselling it, like the data brokers.

Congress, unlike the Supreme Court, recognized in the 1970s that the privacy of an individual is directly affected by the government’s collection, use, and dissemination of personal information and that the government’s increasing use of computers and sophisticated information technology has greatly magnified the harm to individual privacy. The preamble of the Privacy Act of 1974, enacted by Congress, states that privacy is a fundamental right protected by the Constitution. It was a landmark law in seeking to provide individuals greater control over their personal data in government files.

But the Supreme Court, on two occasions when it had the opportunity, declined to hold that the Constitution protects informational privacy as a personal and fundamental right. A majority of the justices just punted. They said that even if one assumed that such a right existed, it did not prevent the government from collecting the information it sought in both cases. Justices Scalia and Thomas were blunter in their concurring opinion: they simply argued that there is no constitutional right to informational privacy.


The return of macroeconomic imbalances in Africa: adapting to life on the edge

July 25, 2022

IMF African Department Director Abebe Aemro Selassie in this speech discusses the outlook for Africa. The macro outlook is again on the edge.

First, imbalances are back and this creates a very difficult situation for policymakers in the region, with more uncertainty, more social tensions, and ever-decreasing policy space to respond.

Second, we have to rethink traditional policy prescriptions to meet the imbalances we are facing. And this is something we must not be afraid to do. Many economic targets and anchors of the past now seem unrealistic and obsolete. Thinking through these issues will help countries living on the edge to undertake much-needed reforms and eventually move away from it.

And finally, despite the difficult path ahead—marked by constraints, imbalances, and growing challenges—I remain deeply optimistic about the region’s prospects. I returned to my country in 1992 as a would-be technocrat at a similarly difficult time for the region. And if anybody had said to me then that Accra, Kampala, and Addis would 30 years on look anything like what they do today, I would have thought they were under the influence of more than just a cup of strong Ethiopian coffee. And of course, the changes as I said go well beyond just the shiny new buildings that we see in these cities: there has been fundamental development progress that has shifted the opportunity set of a generation. I have no doubt that, from this stronger foundation, progress over the next 30 years will be more remarkable still. But only if, as the generation of policy makers from the 1990s did, we take the necessary bold decisions.

Deposit Insurance in India – Journey; Milestones; Challenges

July 20, 2022

Michael Patra, DG of RBI in this speech discusses the changes in deposit insurance in India. The speech features in RBI July-2022 Bulletin.

During the year 2021-22, the DICGC has achieved remarkable progress in the settlement of claims for deposit insurance. With the amendment to the Act coming into force from September 01, 2021 claims amounting to Rs 3,457 crore have been settled between December 2021 and March 2022 in the case of 22 UCBs under AID. As I mentioned earlier, this feat was commemorated by the Hon’ble Prime Minister in the Udyog Bhavan in Delhi. In the case of liquidated banks, claims settled amounted to Rs 1,268 crore. Turning to mergers, a major achievement of the Corporation was the financial assistance of Rs 3,791 crore it provided to Unity Small Finance Bank for making payments to depositors of the much-sensationalised Punjab and Maharashtra Cooperative Bank Ltd or PMC Bank.

Overall, the claims settled under these three channels amounted to `8,517 crore, which is a commendable achievement when seen in comparison with the total of claims of `5,763 crore settled since the establishment of the DICGC up to 2020-21.

On future of DICGC:

In closing, it is important to closely monitor the impact of financial innovations like e-money and digital products on the scope and coverage of deposits and constantly recalibrate definitions and parameters of deposit insurance cover. Public awareness about the actions of the DICGC need to be given sufficient coverage in the public domain through different channels of regular communication.

I have always wondered why an institution like the DICGC with strong fund positions still resides in RBI premises and does not have an office of its own. I am sure such an  independent office will boost morale and pride in the institution to which you belong.

Furthermore, why does the DICGC with so many achievements under its belt need to be staffed almost exclusively by the RBI? I would look for a healthy mix that includes lateral hires of domain experts.

There is also a pressing need to regularly upgrade knowledge and skill exposures through deputations to leading deposit insurers around the world, secondment programmes and technical agreements for knowledge sharing. Upgradation of IT infrastructure on a continuous basis for integrated solutions is a minimum in today’s fast changing technological environment.

Low-inflation regime vs high-inflation regime: a look under the hood

July 19, 2022

Claudio Borio of BIS in this insightful speech discusses how inflation differs in low inflation vs high inflation regimes.  He draws analogy from a car and points how the engine functions by looking under the hood:

After so many years of struggling to lift inflation up to target, central banks are again facing the challenge of bringing it down. This year’s AER looks at inflation “under the hood” to examine more closely how its engine works. It examines how individual (sector-specific) price changes interact with the change in the aggregate price index – inflation proper – and how wage- and price-setting is influenced not only by cyclical factors – economic slack – but also by structural ones and, importantly, by the behaviour of inflation itself. As a result, we characterise the inflation process as two very different regimes – a low-inflation and a high-inflation regime – and self-reinforcing transitions across them. The analysis provides new insights into how to adapt policy to those regimes and to the transitions across them.

Climate change and finance: It’s the risk management, stupid

July 14, 2022

Bank of England recently published results of its Climate Biennial Exploratory Scenario (CBES). CBES explores the financial risks posed by climate change for the largest UK banks and insurers (participants).

Anil Kashyap, Member of Bank of England’s Financial Policy Committee summarises results of CBES.

It is something of an understatement to say that central banks have a lot on their plates these days. Globally this has led many prominent observers to question whether central banks are over-reaching in analyzing climate risk? I am going to explain why a proper analysis of climate risk is absolutely essential from a financial stability perspective. To make this tangible I will illustrate my argument by describing some of the findings from the climate change focused Exploratory Exercise, known as the “CBES”, that the Bank of England has recently completed with the major UK banks and insurers.footnote[1] The results were published in May, and I am going to try explain why I see them as one of the Bank’s most important publications of this year – perhaps I can even convince some of you to take a look.

I will divide my remarks up into three parts. I will begin with a brief overview of what we did in this exercise. Then I will describe some of the findings that I see as being most interesting and, in a few cases troubling. I will conclude by posing some open questions that I think senior management at firms ought to be asking.

My bottom line is that financial services firms and their customers have a long way to go if we are going to overcome some of the problems surfaced by the CBES. Unless we make significant progress in the near term, we will encounter serious problems for the financial system in the long-term.

In the end he rephrases Clinton:

When Bill Clinton was running for President of the United States in 1992 his campaign advisors famously had a sign in their headquarters to try to make sure they kept the big picture in mind. That sign said “It’s the economy stupid”. I fear that the CBES was so rich with numbers that it is easy to get lost in the details and lose the forest from the trees about what we learned already and what we need to do to move forward. That is why I titled the speech “It’s the risk management stupid”.

My big takeaway is that private sector firms have a big risk management problem regarding climate risk in front of them. It is the job of supervisors to assess the size of the problem and work with the industry to address it. To say this is over-reach is folly. Risks to financial stability can arise from many places, whether its climate change, cyber-attacks or the cryptoassets. If the supervisors were ignoring this problem, a decade on critics would be asking how could we have not seen problems coming and failed to act?

Superb speech. Lots of insights.

What did the monetarists ever do for us?

June 27, 2022

Huw Pill of Bank of England in this speech:

I am tempted to start my remarks with the phrase: ‘And now for something completely different …’.

In part, this is intended to signal a change of pace. After a series of outstanding presentations of very high quality research papers, I am afraid that I will lower the tone somewhat by bringing more of a policy orientation to the discussion.

But it is also a nod to the Pythonesque title assigned to my remarks.

I understand that Monty Python was (and is) very popular in Germany. But to avoid any mis-understanding, I thought I should clarify from the outset that the title is an allusion to a famous sketch from one of the Money Python films.

To incite rebellion against their Roman rulers during the time of empire, the rebel leader – played by John Cleese – asks the question: ‘What have the Romans ever done for us?’, only to be met by a long and impressive list of achievements and contributions made by the Romans to the quality of life.

In asking a similar question about monetarism – or perhaps, more precisely, a question about the role of monetary quantities in the design, conduct, transmission and presentation of monetary policy – I seek to explore whether a similar conclusion can be drawn.

While monetarism remains unfashionable in academic and central banking circles, perhaps it has contributed more to the past, present and potential future of monetary policy than we conventionally admit.


Profile of Melissa Dell: Pioneers new ways of unmasking legacies of the past

June 23, 2022

IMF’s Finance and Development Jun-2022 edition profiles Melissa Dell of Harvard University:

Scholars have long wondered why some places prosper, while others do not. How do societies climb the development ladder to greater prosperity? What is the secret sauce of economic success? Why is GDP per capita in South Korea so much higher today than it is in Cambodia, which had a similar standard of living in 1960?

Questions like that have inspired sweeping, almost epic books that span centuries and continents, like Guns, Germs, and Steel, by Jared Diamond, which looks at environmental factors, and Why Nations Fail, by Daron Acemoglu and James A. Robinson, which focuses on the role of institutions. 

These questions fascinated Dell, but she wanted to follow a different path. She took a microscope to the subject, looking not at the diverging fortunes of continents and nations but of neighboring towns and villages.

“To be able to really delve into things, it helps to have that kind of local perspective,” Dell says in an interview with F&D. “By focusing on the micro level, you can get a lot more detail and granularity about what’s going on.”

One of Dell’s big contributions to the literature of development economics—and the advantage of her micro approach—has been to identify what she calls channels of persistence. 


Indian Business: Past, Present and Future

June 10, 2022

RBI Governor Shaktikanta Das in this speech talks about evolution of Indian Businesses over 4 centuries:

The topic I have chosen for my address today, namely, “Indian Businesses: Past, Present and Future” will resonate with the audience here. Businesses form the bedrock of an economy and on an occasion like this, it would be worthwhile to look at how Indian businesses have evolved over the years. The current context of transformative changes that are altering the business landscape in India and across the world is yet another reason for choosing this theme.

2. I have structured my talk in the following order. I shall start by recounting the historical evolution of Indian businesses to draw lessons for the future. I will then turn to the current scenario where I propose to highlight the tremendous opportunities that are available today for Indian businesses and the challenges that they would have to contend with. I also propose to highlight aspects of corporate governance and related issues that are indispensable for a sustained performance by any entity or business.

3. Historically, businesses have been the creators of wealth by bringing innovation in production and trading activities which facilitated higher productivity and better standard of living of the people. Apart from creating growth and employment opportunities, thriving businesses generate vital resources through tax payments for the government to undertake welfare measures. Thus, both from growth and welfare standpoints, businesses play a crucial role in overall economic development. In the words of Nobel Laureate in literature T. S. Eliot, “Only those who will risk going too far can possibly find out how far one can go.”1 The underlying theme of business is to explore opportunities and capitalise on them.

4. In India, business and entrepreneurship have always had a special place in our society. The history of Indian business is a fascinating story and one that is closely intertwined with the political and economic history of our country. Traditionally, Indian businesses were rooted in local knowledge and resources that were greatly admired all over the world. During the colonial period, however, many of our businesses were faced with existential challenges. Showing resilience and capacity to innovate and improvise, Indian business has over the years not only survived but is now well-positioned to take India’s growth story forward. Indeed, this could just be the moment of India’s arrival as a global growth driver.

Interesting to see RBI Governor talking about importance of Indian business history. Indian business history is indeed very exciting and should be taught to all possible students.  There is lot to learn and figure.

Inflation targeting in Sweden has been a “killer app” for 30 years – but updates need to be downloaded

June 9, 2022

Riksbank’s Governor Stefan Ingves reviews inflation experiences in Sweden from copper targeting to inflation targeting. He says inflation targeting has been a killer app as inflation has remained low and framework has worked well despite multiple crisis in last decade. However, just like any other killer app IT needs to download updates.

 For the inflation targeting policy to continue to manage the various crises that arise, it needs to be updated as the world around it changes. I have mentioned two updates that I consider to be particularly important: Some of the macroprudential policy tools should lie with the Riksbank and, in addition to price stability, financial stability should be given some weight in monetary policy decisions. With these updates, I would not be surprised if inflation targeting is also the ‘killer app’ for the next 30 years. 

Ingves referring to killer apps and downloads for explaining monetary policy is an interesting way to connect to today’s audience…

About 200 years ago, the world started getting rich. Why?

June 3, 2022

Dylan Matthews of interviewed Jared Rubin and Mark Koyama over the big question: Why the world started getting rich about 200 years ago:

The big question is what drove this transformation. Historians, economists, and anthropologists have proposed a long list of explanations for why human life suddenly changed starting in 18th-century England, from geographic effects to forms of government to intellectual property rules to fluctuations in average wages.

For a long time, there was no one book that could explain, compare, and evaluate these theories for non-experts. That’s changed: How the World Became Rich, by Chapman University’s Jared Rubin and George Mason University’s Mark Koyama, provides a comprehensive look at what, exactly, changed when sustained economic growth began, what factors help explain its beginning, and which theories do the best job of making sense of the new stage of life that humans have been experiencing for a couple brief centuries.

I interviewed Rubin and Koyama via email; a transcript, lightly edited for length and clarity, follows.


Black swans and grey rhinos – lessons of crises on macroprudential policy

May 11, 2022

Marja Nykänen Deputy Governor at Finland Central Bank in this speech says policymakers should pay attention to grey rhinos:

Dear audience, in late January I gave a speech in a seminar, whose topic was black swans in financial markets. As you well know, black swans are unforeseen events with extreme consequences. At the time of the seminar in January, the black swan everyone had in mind was of course the Covid-19 pandemic.

In my speech back then, I discussed how the Covid-19 and another black swan – the Global Financial Crisis that started less than 15 years ago – have shaped our thinking of financial regulation, crisis response and macroprudential policies. I also talked about another concept from the natural world, the grey rhinos. A grey rhino can be defined as a well-known and slow-moving risk that can cause or amplify financial or other crises, if it´s ignored long enough. For example, high household indebtedness and climate change can become grey rhinos if we don´t act decisively to slow them.

Since black swans are, by definition, unforeseeable, neither I nor other participants of the seminar could foresee that the next black swan was about to emerge only one month later. Russia´s brutal assault on Ukraine has shocked the world, caused immeasurable human suffering, and is changing the way we see geopolitical risks, cyber security, national security and transition to green energy, among other things.


Why is Swiss National Bank allowing Swiss Franc to appreciate?

April 29, 2022

Thomas Jordan Chairman of SNB in this speech discusses SNB’s approach to Russia-Ukraine war.

This bit on exchange rates is interesting:

At our most recent monetary policy assessment in March, we decided to leave our policy rate unchanged at −0.75%, and to maintain our willingness to intervene in the foreign exchange market as necessary. However, we had already stressed in December that we would allow the
Swiss franc to appreciate to a certain extent. So how do we put our current monetary policy in context?

We intervene in the foreign exchange market when strong upward pressure on the Swiss franc would lead to persistently negative inflation and weigh heavily on the economy. However, we do not react mechanically to every instance of upward pressure. If you have followed the
Swiss franc closely over the past months, you will know that it has gradually appreciated and has at times even fallen below parity to the euro.

We have quite deliberately allowed this to happen. The reason is that inflation abroad is significantly higher than in Switzerland. This means that our economy can withstand the franc being stronger in nominal terms. The higher prices abroad and the nominally stronger Swiss franc roughly balance one another out, and there has therefore been hardly any change in the real exchange rate over the past quarters. Without the nominal appreciation of recent months, our monetary policy would have become more expansionary.

Given the current development of inflation, that would not have been appropriate. Allowing the appreciation helped us to keep inflation comparatively low in Switzerland.

Real vs nominal..Each economy to its own..

The wild west of crypto finance: New subprime crisis in making?

April 28, 2022

Fabio Panetta of ECB in this speech compares crypto mania with the wild west and gold rush:

170 years ago Americans pushed westward across the frontier to seek their fortune in the gold rush. Greed and lawlessness turned this promised land into the Wild West, where the few exploited the dream of the many.

Fast-forward a century and a half and, amid the global financial crisis, growing distrust of banks, coupled with technological innovation, gave rise to a new dream – a digital gold rush beyond state control.

Satoshi Nakamoto – or rather the software developers using that pseudonym – created the source code of what they thought could be decentralised digital cash. Their 2008 white paper[1] shows a great fascination with technology, notably cryptography, but not necessarily an in-depth understanding of payment and money issues. They aspired to realise an anarchistic utopia of a stable currency free from public scrutiny.

Almost 15 years on, crypto-assets are what everyone’s talking about. Crypto enthusiasts marvel at the rise of the crypto market, with many feeling they should take their chances on the crypto gamble. An ecosystem has emerged, from miners to intermediaries, all seeking to expand into digital finance. Crypto evangelists promise heaven on earth, using an illusory narrative of ever-rising crypto-asset prices to maintain inflows and thus the momentum fuelling the crypto bubble.

But appearances are deceptive. Satoshi Nakamoto’s dream of creating trustworthy money remains just that – a dream.

Crypto-asset transfers can take hours to process. Their prices fluctuate wildly.[2] The supposedly anonymous transactions leave an immutable trail that can be traced.[3] A large majority of crypto holders rely on intermediaries, contrary to the avowed philosophy of decentralised finance. In El Salvador, for instance, which is the first country to adopt bitcoin as legal tender, payments are carried out via a conventional centrally managed wallet.

Crypto-assets are bringing about instability and insecurity – the exact opposite of what they promised. They are creating a new Wild West.[4] To quote Littlefinger from Game of Thrones, “chaos is a ladder”. The story does not end well for this character. However, it only takes a few to climb high on the ladder – even if their gains are only temporary – to convince many others that they are missing out.

Crypto investments has grown to sub-prime market volumes:

Indeed, the crypto market is now larger than the sub-prime mortgage market was when – worth USD 1.3 trillion – it triggered the global financial crisis.[5] And it shows strikingly similar dynamics. In the absence of adequate controls, crypto-assets are driving speculation by promising fast and high returns and exploiting regulatory loopholes that leave investors without protection. Limited understanding of risks, fear of missing out and intense lobbying of legislators drive up exposures while slowing down regulation.

We must not repeat the same mistakes by waiting for the bubble to burst, and only then realising how pervasive crypto risk has become in the financial system. And while some may hope to be smarter and get out in time, many will be trapped.

Now is the time to ensure that crypto-assets are only used within clear, regulated boundaries and for purposes that add value to society. And it is time for policymakers to respond to the people’s growing demand for digital assets and a digital currency by making sovereign money fit for the digital age.

Today I will argue that at present crypto-assets are not only speculative and high-risk investments, but they also raise public policy and financial stability concerns. I will then discuss some elements of the public policy response which is necessary in order to protect investors and preserve financial stability without suffocating innovation.

Crypto markets do not appear as interconnected as sub-prime housing markets. However, one just does not know in finance as interconnections come from nowhere. Sub-prime markets also looked remote till they brought the house down..

The return of inflation

April 18, 2022

BIS General Manager Agustín Carstens in this speech discusses how inflation has risen and is here to stay:

After more than a decade of struggling to bring inflation up to target, central banks now face the opposite problem. Inflation is back. The rise in inflation reflects the rapid and goods-intensive economic recovery from the Covid-19-induced recession – bolstered by highly accommodative fiscal and monetary policy – which supply has been unable to fully meet.

We should not expect inflationary pressures to ease soon as many of the forces behind high inflation remain in place and new ones are emerging. There are already signs of increased price spillovers across sectors and between prices and wages, as is common in a high-inflation environment.

Moreover, the structural factors keeping inflation low in recent decades may wane as globalisation retreats. The inflationary paradigm may be changing. Central banks need to adjust to this new environment, not least by raising policy rates to more appropriate levels. The world economy must learn to rely less on expansionary monetary policies.

This bit of data:

Inflation has surprisingly flared up in the past year. Developments in the United States, the euro area and other advanced economies (AEs) have attracted the most attention. And indeed, almost 60% of AEs currently have year-on-year inflation above 5% – more than 3 percentage points above typical inflation targets. This is the largest share since the late 1980s.

But the rise has not been limited to AEs. Inflation has risen in emerging market economies (EMEs) too. In more than half of EMEs inflation rates are above 7%. Aside from a short period around the Great Financial Crisis (GFC) reflecting very specific and short-lived factors, this is the largest share in over two decades.

Digital currencies and the soul of money

January 19, 2022

Agustín Carstens, General Manager of the BIS, in this speech says soul of money is trust and central banks are best placed to provide trust in digital age.

what is the soul of money? Today, technologists, innovators and futurists are offering new answers to this question. Some say that in the future, money and finance will be provided by just a few big tech corporations. Others dream of a decentralised system in which blockchains and algorithms replace people and institutions. And maybe, all of this will take place in the Metaverse.3

My main message today is simple: the soul of money belongs neither to a big tech nor to an anonymous ledger. The soul of money is trust. So the question becomes: which institution is best placed to generate trust? I will argue that central banks have been and continue to be the institutions best placed to provide trust in the digital age. This is also the best way to ensure an efficient and inclusive financial system to the benefit of all.


Financial inclusion empowers monetary policy

December 27, 2021

Michael Patra of RBI in this recent speech links financial inclusion to monetary policy.  This is interesting as usually we have not linked the two fields.

In my remarks today, I would like to contribute to this growing interest in the symbiosis between financial inclusion and monetary policy by (a) assimilating the received wisdom and empirical evidence that has been accumulated so far on the subject; and (b) drawing applicable lessons therefrom for India. This assumes relevance in the context of the pandemic during which the loss of life and livelihood impacted the financially disadvantaged and vulnerable households and businesses the most. Drawing upon its experience with financial inclusion, the RBI crafted a pandemic response that reached out in the form of unconventional measures to those afflicted sections of society, keeping finance flowing, and financial institutions and markets functional, especially when personal incomes were lost and the future was highly uncertain.

Monetary policy maximises human welfare by minimising the deviations of output from its potential and inflation from the target. Although it is empirically observed that there is a two-way relationship between monetary policy and financial inclusion, it is unambiguous that financial inclusion is able to dampen inflation and output volatility. This is achieved by smoothing consumption by enabling people to draw down financial savings in difficult times for everyday needs. In the process, it makes people interest-sensitive. Moreover, inflation targeting monetary policy ensures that even those at the fringe of financial inclusion are secured from adverse income shocks that hit them when prices rise unconscionably.

At the cost of being slightly technical, therefore, the rest of my remarks will address four issues that sit at the heart of this confluence: first, the choice of the appropriate price index as the population gets progressively included financially; second, the impact of financial inclusion on output and inflation variability and the trade-off between them – the dilemma that is central to the conduct of monetary policy; third, the transmission of monetary policy impulses through the economy; and fourth, the impact of financial awareness on expectations and hence on the credibility of monetary policy.

On choice of headline vs core inflation:


Is it time for a more active fiscal policy?

December 13, 2021

Swedish Governor Per Jansson in this new speech says we need to relook at role of fiscal policy in the economy –

In recent years, maintaining confidence in the inflation target has primarily been a matter of ensuring that monetary policy can continue to be used in the future to counteract recessions and increased unemployment – and thus provide support to fiscal policy in bad times. Put somewhat pointedly, the statement that monetary policy cannot be ‘the only game in town’ that has been heard quite often recently, perhaps particularly from central bank representatives, is basically about us not ending up in a situation where instead fiscal policy will be the only game in town for the foreseeable future. Both will certainly be needed.

However, there are also good reasons other than the development of inflation that suggest that fiscal policy may have to play a more active role in the future.

One is that we have major structural challenges ahead of us: the population is ageing and this means that healthcare will need more resources, the integration of different groups into Swedish society and the economy needs to be improved, and climate change will require major adjustments – to name but a few. Here, it may be worth recalling what I mentioned earlier about the original motives for using a surplus target to reduce public debt. This was not just a matter of restoring confidence in public finances, but also of creating room for both stabilisation policy and managing structural challenges.

Measures in these and other areas aim to make the Swedish economy and Swedish society function better in various respects. Many of them also aim to increase growth and production capacity in the long term – what are usually called supplyside policies. When aggregate supply and production capacity increase, conventional economic theory suggests this puts downward pressure on prices for a  given level of demand. However, these growth effects take quite a long time to occur. In the shorter term, the effect is very likely to be that demand and inflation
increase. But as I have noted, this may also be positive in the situation we are in today.


What have been Juno (money), Plutus (finance), and Mercury (internet) been up to lately?

November 11, 2021

Interesting speech by Ravi Menon, Managing Director, Monetary Authority of Singapore. He refers to Roman Gods to understand ongoing changes in world of money, banking and internet:

Money as a medium of exchange and store of value has been around for millennia. It is named after the Roman goddess of money, Juno, who carried the title Moneta. Rome’s currency was first minted at her temple in the third century B.C.  Money has come a long way since: from bullion coins, to paper notes backed by the gold standard, to fiat currency backed by central banks, and now digital money.

Finance or the intermediation of savings and investments existed in many ancient civilisations. The Roman god of wealth, Plutus, comes closest to being the presiding deity for finance. Finance too has come a long way: foreign exchange markets and bills of exchange emerged in the Middle Ages, before modern finance took shape with fractional reserve banking, stock markets, mutual funds, and insurance.

The Internet is more recent. Its official birthday is 1 January 1983, though the concept itself – namely a computer network which enables information sharing among users – goes back to the US defence industry in the 1960s. Of course, the ancient Romans did not have a god for the Internet, but perhaps Mercury – the god of commerce and communications – comes closest.

The future of Juno, Plutus, and Mercury is increasingly becoming entwined, in large part due to technology. Let’s check out what Juno, Plutus, and Mercury have been up to lately.

He lists many ongoing developments in Singapore in the world of Juno, Plutus, and Mercury.

Lack of New Banks is a significant issue for the US Banking industry

October 28, 2021

Governor Michelle W. Bowman of Federal Reserve in this speech raises concerns over lack of new banks particularly de novo banks in US:

why have there been so few de novo bank formations over the last decade?

There have been only a handful of new bank charter applications over the past decade. In fact, only 44 de novo banks have been established, which include both state and national charters. A 2014 study by Federal Reserve Board economists noted that from 1990 to 2008, over 2,000 new banks were formed, which on average is more than 100 per year.6 In contrast, the study noted that only seven new banks were formed from 2009 to 2013. The 2014 Board study suggests that “low interest rates and depressed demand for banking services—both of which depress profit for banks, and particularly new banks—may also have discouraged entry.”7

The conclusions from a Federal Reserve Bank of Kansas City study completed this year align with observations from the 2014 Board study. In this more recent study, the authors noted that new bank formations tend to be cyclical, accelerating during periods of economic expansion and slowing during recessionbs.8 While regulatory burden has also contributed to depressed de novo formations, the authors pointed to the weak economy following the 2007-2009 financial crisis and low profitability for banking as overriding factors.

A recurring theme that has surfaced through my discussions with bankers and other industry stakeholders is the regulatory burden imposed upon de novo banks. In particular, community bankers noted the challenges in raising the capital required to establish a new bank. The 2014 Board study noted that the states’ statutory capital requirements for a new state-chartered bank could be as low as $10 million, but in practice could be as high as $30 million.9 Given the high initial capital requirement, a de novo bank has a small margin of error in implementing its business strategy and meeting profit projections.

Just like costs of doing Business, there is a need to figure costs of doing banking business.

How much should tomorrow’s central bank balance sheets do? And what central banks can learn from parenting

September 23, 2021

Andrew Hauser of Bank of England in this speech discusses role of central bank balance sheets in monetary policy in future:

Central banks can’t choose whether to take the actions necessary to deliver their monetary and financial stability mandates: they are obligated to do so. But they do have choices about how they go about it – and a key factor in those judgments is the role they want financial markets to play. In my remarks today, I want to do three things. First, to show just how dramatically the role of central bank balance sheets has changed in recent years, and the forces shaping the future. Second, to review the complex and shifting inter-relationships between central banks and financial markets over history. And, third, to suggest some possible principles for shaping central bank operations of the future in ways that harness the benefits of financial markets.

Hauser shows how central bank balance sheets have grown across most countries. He then goes back to the history of central bank balance sheets and its relation with financial markets. He connects the relationship to parenting:


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