Archive for the ‘Speech / Interviews’ Category

Hong Kong as a risk management hub

September 20, 2019

Amidst all the developments in financial markets, the thing of international financial centres competing with each other remains on the sidelines but is an exciting area.

Mr Norman T L Chan of HKMA discusses how HK’s international financial centre is shaping as a risk management hub:



Differences between Euro and Libra: Good way to think about digital money..

September 20, 2019

Just a few days back, ECB member Yves Mersch criticised Libra vehemently asking Europeans to reject the treacherous sirens of Facebook’s Libra currency.

After a few days,. another ECB member Benoît Cœuré in another speech is more hopeful of benefits of Libra.

Price stability remains, and will remain, a precondition for a currency to gain widespread use, whether digital or not. For this reason, central banks worldwide have adopted price stability as their primary mandate. And this is why unstable crypto-assets, such as bitcoin, whose price in fiat currencies is highly volatile, will never be able to serve as a reliable means of payment. “Stablecoins”, if they meet their promise of stability, are the natural next step in the evolution of digital assets.

This was already understood nearly 50 years ago when Friedrich Hayek proposed abolishing the government monopoly on money issuance, arguing that competitive forces would exert disciplinary effects on issuers and incentivise them to provide stable money.[26] Ultimately, the currency with the lowest inflation rate would crowd out its competitors.

Next to stability, other factors are likely to play a growing role in the digital age. Convenience is a prime candidate.

Consider the euro area. Despite the creation of the single currency 20 years ago, cross-border e-commerce in the euro area has not taken off. Home bias remains strong. Only one-third of European e-shoppers make purchases from sellers in other EU countries.[27] And around 40% of European websites do not sell to consumers based in other member states, while almost 80% of online sales are domestic.[28]

Put differently, it is probably easier to connect a new currency to an existing network – the case of Libra – than to build a new network on an existing currency – the case of the euro. Few retailers have seen the introduction of the euro as an opportunity to build a pan-European network around it. With or without the euro, the single market for services remains incomplete.

Global “stablecoin” initiatives could work in reverse. They could turn the nature of payments on its head. WhatsApp, for example, is a messaging service. Adding a payment leg that enables direct transfers of money between registered users will not change the nature of its business. But it will provide a platform to turn a means of payment into a global currency. This is the exact opposite of what theoretical models of global currency use would predict. According to these models, payments lead and other uses follow.

Hmm. This bit is interesting. As per Cœuré, there were already existing currencies in Europe and Euro was a new network on these existing currencies. Libra on the other hand is a new currency on an existing network as it derives its values from a basket of existing currencies. Same for whatsapp as well which could use its existing network to create a new currency.

He then discusses privacy:

A second, and related, new driver of international currency use in the digital age relates to privacy.

Historically, privacy was not an issue. Anonymity is one of the salient features of paper money.[29] Private digital currencies that run through a distributed ledger have arguably restored anonymity in the virtual world, making them prone to being used to finance illegal activities, such as tax evasion or terrorism.[30]

To pass the test of faith, therefore, any “stablecoin” initiative will have to conform to international anti-money laundering and know-your-customer regulations.[31]

But assuming they do comply with the applicable regulations, “stablecoins” could differentiate themselves according to how much personal data they collect and process. Some could use or sell customer data, whereas others may give priority to protecting the privacy of their customers.

It is hard to tell just how much the privacy dimension will affect international currency use. But the effects could also work in reverse. There are significant differences across countries in terms of how much consumers value the privacy of their data. In Europe, individuals’ control over their personal data has been protected by an EU regulation – the General Data Protection Regulation, or GDPR – since May 2018.[32] Any private initiative operating in the EU will have to comply with this regulation.

Interesting to have such different viewpoints within ECB. This is how it should be…

Will the digital money be like the one-sided coin? History of one-sided and two-sided coins..

September 18, 2019

Superb speech by Johannes Beermann of Bundesbank.

She says the advent of digital money is like a toss with the coin still hanging in the air. Which way it will land we have to see.

She starts with how football matches are started with the toss of a coin and why two sided coins matter:

Welcome to the Seehaus right at the heart of the English Garden.

This park is a true landmark of the city of Munich, with a design inspired by British landscape architecture.

It probably comes as no surprise that football – another at least originally English pastime – is popular around here as well.

Of course, “kicking a ball” with friends in a park such as the English Garden is a more informal affair than the matches you might see in the professional football leagues, where the stakes are arguably much higher.

But the basic principles of football apply everywhere. The direction of play is the first decision to be made before any match can begin.

Depending on the position of the sun or the direction of the wind, the choice of which goal to defend first could make a difference to the game’s outcome.

A neutral mechanism needs to be put in place to decide who obtains this “first mover advantage”.

A coin toss is one such mechanism. The coin is considered “fair” if both events – the coin landing on heads or the coin landing on tails – have an equal probability of occurring.

In the history of minting, heads on the obverse and tails on the reverse have emerged as the two sides shown on coins which serve as legal tender. Although the details on each side differ at first sight, they are closely related.

To “coin” a well-known expression, heads and tails are literally two sides of the same coin. Together, they complete the coin, which also means both sides have to be taken into consideration.

In the world of payments, that is precisely what central banks do. On the one hand, we provide payment systems that function purely electronically while, on the other hand, we take part in the production and distribution of physical cash. In the prevailing set-up, one aspect of payments cannot work without the other.

Digital payments are in a state of flux. New competitors enter the market, at times trying to disrupt existing structures.

The direction of play remains unclear at this stage. It may be that the rise of one form of digital payment will lead to the fall of another. It is also possible that physical cash is used to a lesser and lesser extent until it effectively fades from existence, at least as far as transactions are concerned.

None of us have a crystal ball to tell us how the match will end. But we can look at existing evidence.  

In my brief remarks this evening, let us turn to the hypothetical question: how would the coin toss change, if one of the sides were to vanish?

She defends why we still need cash and it should coexist with the digi payments.

In the end, some history of one sided and two sided coins:

One-sided coins are not without historical precedent.

Some 800 years ago, a variety of pfennig coinage dominated monetary circulation in German-speaking areas. Known as bracteates, these coins were embossed on one side and often hollow on the other.

The relatively simple technique employed to make them was also reflected in their limited function as a store of value. In fact, these one-sided coins were infamous for their frequent and sharp devaluations.

As a result, stable coinages were introduced in the 14th century. Those were, of course, two-sided and have become a true symbol of monetary stability that has endured to this day.

Central bank money is the most recognisable means of payment. It is the local unit of account and the only legal tender. Ensuring its adequate supply is a key task for central banks, which we need to fulfil at all times.  

As technologies advance and digital forms of money increasingly enter the field, policymakers will not be able to remain “on the sidelines”.

There are two sides to every coin, after all.

On that note, I would like to wish you all a very pleasant and interesting evening. You still have to decide between an excellent red and an equally excellent white wine. The choice is yours. Perhaps a coin toss will help.


Lesson from history of Rothschilds and US free banking

September 17, 2019

Lars Rhode, Governor of Denmark Central bank in this speech speaks on trust in financial services (what else to talk!).

My topic is trust and transparency in the financial system.

In recent years, the topic has surfaced again following a number of unfortunate issues that have accumulated since the financial crisis. For a long time we may have thought that this was primarily a problem that existed outside Denmark’s borders. But then cases emerged in Denmark too. There have been money laundering cases, there have been deliveries of very large banknotes to bureaux de change, and incorrect advice has been provided in connection with investment  products. The financial sector has been involved in transactions that have drained the government  coffers of many billions of kroner in dividend tax. And I am sure we could find more examples.

What these examples have in common is that they contributed to undermining trust in the financial system. Trust is low at the global level. That  has been documented by the Edelman Trust Barometer. In fact, one of the key messages in the Edelman analysis is that the financial sector is the sector that people trust the least. Danish surveys also point to low trust in the financial sector.

He picks examples from Rothschild and US free banking:

How can we learn more about the present and about how to shape the future? One way is to look back and learn from history. So I would like to start with two examples from the past.

I will begin in the 18th century. More specifically with the Rothschild family dynasty. It was founded by Mayer Amschel Rothschild. He was the head
of a poor family comprising his wife and 10 children. The family lived in Frankfurt in the late 18th century. Good ideas combined with unusual
willpower gave Mayer Rothschild a point of departure for forging business relationships with powerful men in the area. He also dispersed his
sons across Europe. The sons established their separate trading firms and were successful. Especially the son in London was doing well. He
soon became so rich that he could lend money to the Duke of Wellington. In 1814, this son became the British government’s secret banker for funding the Napoleonic wars.

My other retrospective example relates to a period of around 30 years in mid-19th century USA. Before this period, every single bank in the USA
had to have a charter through special legislation for that specific bank.  However, this changed when many states began to introduce state charters describing the general requirements to be met by banks that wanted a licence to operate. This period has been called the “free banking” era .because anyone meeting the relevant state’s banking requirements could establish a bank. 


What can we learn from these two historical examples? Firstly, I note that the people involved also took on the risk – they all had something at  stake. It was their own money – or their close business partners’ money – that was lent. That gave them an incentive for sound risk management. They were focused on behaving in such a way that their good names and reputations and their wealth were not jeopardised. That is no longer the case.

Today’s banks are so large that no individual or small group of people can own and operate a big bank. This means that there is no longer a close link between those bearing the risk, the owners, and the day-to-day management. When shares are as widely dispersed as they are in most Danish banks, everyone is responsible, which ultimately means that no-one takes on the responsibility. Being owned by everyone is the same as being owned by no-one.

Secondly, I note that the market plays an important role. It is good if clients vote with their feet.

You might ask whether things had been different today if we had learnt more from history.

Banking clearly has swung from one extreme to another. In earlier days it was common for banks to fail with minimal protection and markets voting with their feet. Now even bad banks do not fail..


Liquidity and funding for banks under resolution

September 17, 2019

Should the central bank provide liquidity to banks under resolution? A bank needs both capital and liquidity to survive. A bank fails if it has either of the two.

Torbjørn Hægeland, Executive Director of Norges Bank Financial Stability, in this speech discusses the policy options:

resolved or not, a bank not only needs sufficient capital, but also needs sufficient liquidity. Payment intermediation is a vital core function of banks. Being a bank means participating in the settlement of payments, which means the bank must be liquid. How liquid is a bank that opens on a Monday morning after being resolved over the weekend? A newly resolved bank is not necessarily liquid for various reasons.

One reason is that prior to resolution, the bank will probably have depleted almost its entire stock of liquid assets, including securities eligible as collateral for Norges Bank’s standing liquidity facilities.

Moreover, immediately after resolution, other money market participants may have doubts about the bank’s viability, despite the recapitalisation that has taken place following the decision of the resolution authority. This may be the case particularly if a long time has passed since a bank has been resolved. The market will then be unfamiliar with the bank resolution process and the profile of a resolved bank. The result may be that the bank will have difficulty borrowing in the money market.

In this situation, the bank will need liquidity assistance and will turn to the central bank as an obvious source of support. Liquidity assistance to resolved banks is an issue under consideration by a number of central banks. The ECB is currently working on this issue, as we at Norges Bank are also doing. 

The question I will focus on here today is:

How should Norges Bank react when a bank under resolution applies for emergency liquidity assistance (ELA)?



Central Bank of Philippines ranked the most trusted agency in Philippines for 25 times in 32 years of Survey!

September 13, 2019

Central bankers talk a lot about independence, trust and so on. They justify their independence based on the value they bring to the society. The proof pf pudding lies in eating and what matters most is how public perceives the central bank.

Apparently Central bank of Philippines is doing great in this aspect. Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, their central bank) in this speech says central banking goes beyond numbers:

This brings me to my next point-that strong institutions are critical in nation-building and this is true for a central bank.  So for us here in BSP, our ability to deal with the risks and challenges of the economy is largely dependent on how well-prepared and pro-active the central bank is.

We have our radars. We see the risks, the threats, and even gaps and opportunities. We address all these-and we have our toolkits that we would willingly use as needed.

In the process, the numbers change and show good results:   inflation is tamed; Philippine banks remain robust, well-funded, and adequately capitalized; the credit-liquidity dynamics in the country are consistent with expanding economic activities; the external payments position is hefty; the exchange rate trends remain consistent with macro fundamentals; and I can continue on and on.

But more than the notable statistics, for us in the BSP, the bottom line always is the Filipino people. And for this reason, we are pro-growth. Remember the maxim: A rising tide lifts all boats.  An improved economy should benefit all, and so government economic policy should focus on broad economic efforts. 

Because of this, financial inclusion is on top of the BSP agenda because no one, really, must be left behind. We will go beyond convention and embark on goals outside the ambit of traditional central banking. At the same time, we will remain mindful not to go beyond what we are allowed to do under our charter. We will be decisive and forward-looking as we continue to be timely and data-dependent on our actions.  We will continue to communicate our intentions as clearly as possible. We will be transparent. 

As most of you know, the old norm is for central banks to be deliberately vague. But ultimately, this is bad for the market, the banks, and the public because it leads to speculative behavior, and we want to avoid that. 

We will INTENTIONALLY bring the BSP closer to the people.  A central bank cannot operate from an ivory tower.  It is important that BSP stakeholders understand what we are mandated to do. It is crucial that our stakeholders trust our integrity and our capability to carry out our mandate. 

Yesterday, we received news reports of the survey results conducted by the Makati Business Club (MBC). The survey results show that businessmen rank BSP first out of 69 government agencies covered in the poll. The respondents were asked if they were/are satisfied with the performance of these agencies.

I will not be modest about this-I am happy to say that this is the 25th time the central bank topped this survey since this was first conducted in 1987. 

This year, 97% of respondents said they are satisfied with BSP’s performance. This seal of confidence and expression of trust in BSP affirms the work that we do here. This recognition will only motivate us to work harder and better.  

Nice to note this!

Hoping Europeans will not be tempted by “treacherous promises of Facebook’s siren call” of Libra..

September 2, 2019

One of the hardest hitting speeches on Libra by Yves Mersch of the European Central Bank.

He starts quoting Madison:

In 1787, during the debates on adopting the US Constitution, James Madison stated that “[t]he circulation of confidence is better than the circulation of money”. It’s telling that Madison chose to use public trust in money as the yardstick for trust in public institutions – money and trust are as inextricably intertwined as money and the state. Money is an “indispensable social convention” that can only work if the public trusts in its stability and acceptability and, no less importantly, if the public has confidence in the resolve of its issuing authorities to stand behind it, in bad times as well as in good.

Madison’s 18th century remark on the link between money and trust has lost none of its relevance in the 21st century. The issue of trust in money has resurfaced in the public debate on privately issued, stateless currencies, such as bitcoin, and their promise to serve as reliable substitutes for public money. Today’s conference is neither the place nor the time for me to repeat my past statements on the shortcomings of cryptocurrencies[1] and why they do not fulfil the basic tests of what constitutes “money”.

Instead, I will today talk about Libra, Facebook’s newly announced private currency. It is scheduled for release in the first half of 2020 by the very same people who had to explain themselves in front of legislators in the United States and the European Union on the threats to our democracies resulting from their handling of personal data on their social media platform.

He says there are 3 qs:

There are three key questions here. First, how does Libra differ from other private currencies and from public money? Second, what legal and regulatory challenges does it pose? And third, in the light of its mandate, what position should a central bank like the ECB take towards Libra?

The remainder of my speech will be dedicated to these three questions, not with a view to conclusively answering them, but merely to raise awareness of some of the risks of Libra, to question its main premises and, in the process, to highlight the perils of entrusting the smooth processing of payments, the savings of citizens and the stability of the global monetary and financial systems to unaccountable private entities with a questionable track record in matters of trust.

He thrashes Libra on all premises barring the innovations in brings towards payments. But that is something which ECB and other central banks can do without Libra:

In the context of the smooth operation of payment systems, the ECB takes a close interest in market innovations that seek to replace the euro with alternative settlement currencies or create new and autonomous payment channels. Although some of Libra’s aims are legitimate, reductions in cross-border fund transfer costs and other efficiency gains can also be obtained through established instant payment solutions. The Eurosystem recently launched the TARGET Instant Payment Settlement service, or TIPS – a pan-European, 24/7 settlement service for instant payments. By operating in central bank money, and by being embedded in TARGET2, TIPS provides a high-performance payment solution that is safer and more economical than questionable, market-based retail payment innovations.

At the end, he says money and state sovereignty are linked to each other. He obviously ignores the history of free banking where stateless money did exist and ran successfully too in places like Canada. He calls Facebook’s promises as treacherous which is a very strong criticism:

In the field of money, history bears testament to two basic truths. The first is that, because money is a public good, money and state sovereignty are inexorably linked. So the notion of stateless money is an aberration with no solid foundation in human experience. The second truth is that money can only inspire trust and fulfil its key socioeconomic functions if it is backed by an independent but accountable public institution which itself enjoys public trust and is not faced with the inevitable conflicts of interest of private institutions.

Of the various forms that money has taken throughout history, those that have best fulfilled their purpose and proven the most credible have invariably benefited from strong institutional backing. This backing guarantees that they are reliably available, that their value is stable and that they are widely accepted. Only an independent central bank with a strong mandate can provide the institutional backing necessary to issue reliable forms of money and rigorously preserve public trust in them. So private currencies have little or no prospect of establishing themselves as viable alternatives to centrally issued money that is accepted as legal tender.

The stance of central banks towards modern forms of money is bound to evolve with time, and central bankers have embraced technological developments in the field of money and will continue to explore helpful new innovations. But the rise of cryptocurrencies and other forms of privately issued instruments that can only fulfil some, but not all, of the functions of money is unlikely to fundamentally upset the two truths I just described. If anything, it will serve as a useful reminder of central banks’ pivotal role as responsible stewards of public trust in money, and stress the need for vigilance towards phenomena capable of undermining public trust in the financial system.

I sincerely hope that the people of Europe will not be tempted to leave behind the safety and soundness of established payment solutions and channels in favour of the beguiling but treacherous promises of Facebook’s siren call.

Hmm..Central bankers hitting hard at cryptos not really reflecting on their own track record of money management…

Israel as a safe haven for emerging markets..

August 27, 2019

Bank of Israel Governor at Jackson Hole conference reviewed the Israel economy. He points how it had become a safe haven of sorts due to its stability.

Israel is an interesting case study. We are a relatively strong small open economy that is obviously also influenced by external shocks. In Israel, for example, it was perceived during the nineties and early 2000’s that interest rates must be significantly higher than in the US, otherwise capital outflows would emerge followed by a depreciation and inflation. However, in this round, and in spite of having kept rates very low, Israel faced capital inflows following the US rate hikes, as it was perceived as an “emerging markets safe haven”, and appreciation pressures emerged—a marked change from past-patterns. This corresponds with the risk perspective that Sebnem Kalemli-Ozcan presented here earlier, as a spillover of the US monetary policy, and with Governor Carney’s speech emphasizing the importance of the sources of shocks to EMEs. This shift, which was only partially offset by a sustained accommodative monetary policy, reflects the structural change in the fundamentals of the Israeli economy, including the continuous expansion of employment; the current account surpluses; the decline in the debt-to-GDP ratio since the Fiscal Stabilization program in 2003.

The strong fundamentals of Israel’s economy manifest themselves in financial markets, and are intimately related to the perceived absolute and relative resilience of the economy. Figure 2 is taken from Du And Schreger’s (2016) paper on “Local Currency Sovereign Risk”, which introduces a new measure of emerging market sovereign credit risk, and compares the development of sovereign risk in a few emerging markets between 2005 and 2014. It shows that Israel’s sovereign credit risk is low, with exceptionally low variance compared to the other countries—emphasizing the “safe haven” status within emerging and even advanced economies.


Price stability or financial stability? Central Bank’s (and RBI’s) difficult balancing act

August 21, 2019

My new article in moneycontrol where I reflect on the recent speech by the Governor of RBI.

Price Stability and Financial Stability continue to pose challenges for central banks throughout their history…

Philippines economy: Weaving an unprecedented 20 year growth story (without much hype)

August 21, 2019

There is much hype around Indian economy and how high its growth has been all these years. There are some others who manage it without much hype.

Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (their central bank) in this speech highlights how Philippines economy has been growing for 20 years:

Let me begin with our growth story thus far in the Philippines. Our economy has experienced uninterrupted growth for over 20 years since 1999 despite challenges such as the 2004 fiscal crisis and the 2007 global financial crisis-that is 81 consecutive quarters of continuous growth, with annual growth averaging 6.4 percent in the past five years (2014-2018).

Growth in recent years has become more broad-based.

On the demand side,  private consumption remained robust in the first quarter of 2019, as in the previous quarters through the years. This is further supported by rising contribution from investments from 2010 up to present.

On the supply side, services remain the main driver of growth-but the industry sector has also stepped up in recent years.

Meanwhile, the government’s economic managers remain optimistic about achieving our GDP growth target of 6 to 7 percent this year despite the lower than expected 5.6 percent growth in the first quarter of this 2019.

Private consumption is expected to remain robust, aided by remittance inflows and sustained “cooling” inflation. Private capital formation, on the other hand, should likewise contribute more significantly to economic growth, with construction and investments in durable equipment expected to remain solid in light of the government’s projects and other infrastructure programs.

The International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) share these expectations. In fact, all three forecast that the Philippine economy will grow by about 6.2 to 6.5 percent this year.

This has been due to three measures:

The bold reforms and initiatives in the past three years have prompted the government to capitalize on and sustain these gains. It is because of this that we believe the Philippine growth momentum will be sustained moving forward.

First is the government’s ambitious infrastructure program-“Build, Build, Build” which aims to boost the economy’s mobility and connectivity, enabling equitable growth and development. At present, there are 75 high-impact national government infrastructure, with 46 projects (61 percent) already in the implementation stage. 

The government is expected to invest over PhP 4.6 trillion (or US$90 billion at PhP52:USD1) in public infrastructure from 2019 to 2022.

Second, is the recent passage of reforms aimed at strengthening our investment climate. The Ease of Doing Business and Efficient Government Service Delivery Act, the revised Corporation Code, and the Philippine Innovation Act support the government’s agenda of improving competitiveness and ease of doing business in the country, promoting transparency and cutting red tape in the government for a more conducive business environment.

At present, the Philippines’ current standing has improved based on different third-party assessors. For instance, the Philippines’ ranking rose from 68th to 56th place under the 2018 Global Competitiveness Report.

It also received an upgrade in its sovereign credit rating from Standard & Poor’s to “BBB+” from “BBB.” These favorable standings are also boosted by the improved business sentiment and the stable consumer outlook based on the BSP’s latest round of expectations surveys.  

Finally, the continued demand for Philippine skills locally and abroad are evident in the growth of our BPO industry and strong remittance inflows. This further highlights the importance of our country’s most prized resource-our labor force. Based on our estimates, production efficiency has improved over the years with the incremental capital-output ratio (ICOR) declining steadily. As you know, the higher the ICOR, the less efficient the production process is.

Recognizing the skills of our workforce, the government has invested heavily in various social programs such as the Universal Health Care Act and the Access to Quality Tertiary Education Act (RA No. 10931).

You may not know this but 40% of our budget goes to social services.

He goes on to highlight the role central bank has played and is playing to maintain the momentum.

India and its policymakers make much noise about how growth rates have been higher during their tenure and getting into a lot of mud slinging. They make it look as if India is the only country growing and they are the sole reasons for this growth. Examples from smaller countries such as Philippines tells us none of this is needed really.

Central Bank independence vs Central bank accountability to society: Why Czechs have preferred low inflation?

August 20, 2019

Nice speech by Mojmír Hampl, former Vice Governor of Czech National Bank. He says central bank independence is more than just codifying it in law. The central bankers have to act independently and be accountable to society they serve.


Public Trust and Central Banking

August 12, 2019

Mario Marcel, Governor of the Central Bank of Chile in this speech talks about how central banks can restore public trust.

I underscore the importance of public trust as foundation of modern monetary policy and for the legitimacy of independent central banks in performing their broader mandates. This is ingrained in the agenda of our Annual Conference this year: new challenges to central bank independence, the management of central bank credibility, and the designing of the best communication strategies for an effective monetary policy.

There was a time when central banks spoke about discretion vs rules, macro models, inflation expectations and so on. Now it is all about trust, credibility. integrity etc etc..

Analysing capital flows: Push factors, pull factors and pipes

August 2, 2019

Missed pointing to this speech by Mark Carney, Governor Bank of England.

He gave the speech in June-2019 and says we need to lower volatility in capital flows:

Today, I want to examine what drives capital flow volatility and, in the process, sketch an agenda for sustainable capital flows in the new world order.

Specifically, what should be the priorities to increase sustainable cross border capital flows? How many are the responsibility of the receiving country? What about the advanced economies who set the tone for the global financial cycle? And to what extent does the structure of the international monetary financial system itself, including the global safety net, determine safe flows?

To begin to answer these questions, the Bank of England is developing a holistic “Capital Flows-at-Risk” framework that assesses the relative contribution of the three drivers of Capital Flows-at-Risk:
 ‘Pull factors’ – domestic conditions and institutions that affect the relative attractiveness of investing in an individual country.
 ‘Push factors’ – that determine global risk appetite and financial conditions, particularly the level and prospects for US monetary policy and financial stability.
 ‘The Pipes’ – the structure of the global financial system itself, particularly the degree to which it dampens or amplifies shocks.

How these three Ps drive capital flows and their volatility plays a crucial role in macro and financial markets stability.

How Market Design Emerged from Game Theory: A Mutual Interview

August 2, 2019

Fascinating mutual interview of Al Roth and Robert Wilson in the new edition of Journal of Eco Perspectives.

To jog our memories about the history and development of game theory and how it shaped and was reshaped by market design, we interviewed each other over coffee during Fall 2018. We also touched on what we think has been learned about markets and marketplaces by trying to design them.

What emerged from our discussion is that, when we learned game theory, games were modeled either in terms of the strategies available to the players (“noncooperative game theory”) or in terms of the outcomes that could be attained by coalitions of players (“cooperative game theory”), and these were viewed as models appropriate for different kinds of games. In either case, the particular model was viewed as a mathematical object that could be viewed in its entirety by the theorist.

Market design, however, has come to view these models as complementary approaches for examining different ways in which marketplaces operate within their economic environment. And, because that environment can be complex, there will be aspects of the game that are not entirely observable.

Mathematical models themselves play a less heroic, stand-alone role in market design than in the theoretical mechanism design literature. A lot of other kinds of investigation, communication, and persuasion play a role in crafting a workable design and in helping it to be adopted and implemented, and then maintained and adapted.

As good as it can get…

Would macroprudential policies have saved Japanese from their financial crisis of 1990s?

July 26, 2019

What if Japanese had implemented macroprudential policies earlier? Would it have saves them from 1990s financial crisis?

Eric Rosengren, head of Boston Fed in this speech says it would have alleviated fallout of the crisis:

  1. Takeaway: The Japanese financial crisis of the late 1990s had significant implications for both the Japanese and global economies.

    Excerpt: “…Japan’s domestic economy was severely impacted, with lasting effects. In addition, because of the global reach of the largest Japanese banks, the problems were essentially exported, as Japanese banks pulled back on foreign lending in order to bring assets better in line with their shrunken capital. Essentially, Japanese banks reduced their global footprint.”

  2. Takeaway: Effective use of macroprudential tools – that is, banking regulations aimed at mitigating financial-system risk – could have lessened the crisis in Japan. Unfortunately, it wasn’t until the financial crisis of 2008 that countries began to work on improving macroprudential policies.

    Excerpt: “…my own view is that with effective implementation of macroprudential policies, many of the issues would have been substantially mitigated.”

  3. Takeaway: Bank stress tests and the use of a countercyclical capital buffer (or CCyB) are two macroprudential tools that emerged from the financial crisis which could have reduced the severity of the banking crisis in Japan.

    Excerpt: “Rigorous stress tests would have revealed emerging problems, required retention of more bank capital, and discouraged aggressive lending. A CCyB would similarly have brought about a larger capital cushion to absorb shocks, which would have reduced the need for such dramatic shrinkage of lending when asset prices declined.”

  4. Takeaway: The Japanese banking system is again being affected by adverse economic conditions. Like the U.S., Japan might benefit from considering an expanded set of macroprudential tools.

    Excerpt: “Despite the passage of time and adoption of better policies, one could argue that the Japanese banking system is now, once again, being threatened by adverse economic conditions. A shrinking population, aging demographics, and very low interest rates provide very little room for Japanese banks to operate profitably. This of course provides an incentive to reach for yield, potentially implying additional risk-taking. …All this raises questions about how resilient the banking system is, or could be, in the face of some future global downturn.”


I dont know but have a feeling that next source of crisis could be macropru policies. Each time policymakers become gungho about some policy/measure, it creates problems later…

Why and how geographic differences matter in economic well-being?

July 22, 2019

Superb interview of University of California, Berkeley economist Enrico Moretti.

He explains why despite the internet people continue to work in select concentrated locations:

EF: During perhaps the first decade or so of the World Wide Web, there were numerous predictions that geography would disappear or almost disappear as an issue in knowledge work. It seemed as if white-collar workers, if one believed the predictions, would be able to work from anywhere.

Moretti: Yes.

EF: What happened?


The Banco de España and its promotion of economic history research

July 18, 2019

Spain’s central bank has been actively promoting research in economic history.

Governor Pablo Hernández de Cos in a speech lists the steps take to promote history:

Firstly, the Banco de España regularly organises conferences focusing on the discussion of aspects relating to economic history. This year, for example, on the occasion of the sixtieth anniversary of the Stabilisation Plan, the Banco de España will, next October, be organising
a conference in Barcelona focusing on the analysis of the Plan. It will likewise pay tribute to the figure of Joan Sardà. I trust you will be able to join us at this conference.

Also, since 2015 the Bank has organised annually a top-level international economic history conference aimed at academia. In recent years, both our central bank researchers and external researchers financed by us have been selected to present their papers. In this year’s edition, the conference has been jointly organised with the CEPR’s Economic History section.

Secondly, since 2009, the Banco de España has had a biannual programme in place for economic history research grants. Under the programme, universities commit themselves, following an agreement signed with the Bank, to pursuing the research selected and to
presenting and publishing their findings. The possibility of collaboration between researchers from both institutions is also envisaged.

Since 1980, under the initial backing of Luis Ángel Rojo, the Bank has published a collection of monographs relating to monetary and financial history, Spanish and international alike, under the name “Economic History Studies” (more familiarly known as the “Red Series”). To
date, this collection had solely included papers prepared or financed by the Banco de España. Currently, however, with a view to extending and maintaining its continuity, we are assessing opening it up to other research not necessarily financed by the Bank.

Lastly, allow me to stress another of the grounds for a publication such as that we are presenting today. It is a question of transparency, understood as the possibility of sharing information with society as a whole. As I pointed out in one of my early public appearances
as governor of the Banco de España, I consider making high-quality statistical information available to researchers as absolutely crucial for sound analyses and research enabling better-founded economic policy decision-making. In this respect, we intend in the coming years to pursue various projects that allow these researchers to have access to our statistical information, thereby enabling different avenues of analysis and research of benefit to society as a whole.  

Should the Bank of Japan issue a Digital Currency?

July 12, 2019

Masayoshi Amamiya, Deputy Governor of the Bank of Japan, in this speech says BoJ has no such plans. However, it is studying these ideas for two reasons:

Today, I have had the pleasure of sharing with you my understanding on retail payments in the digital age, focusing on the relationship between central bank money and private money.

Now, I would like to give you my own answer to the question I posed at the beginning: “Why are many central banks, including the Bank of Japan, committed to researching and studying into CBDCs even though they have no plan to issue them in the near future?” I have two reasons. First, since technological innovation evolves rapidly, the retail payments market structure could suddenly change dramatically, pushing us toward a cashless society.

In some cases, the need for CBDC issuance may suddenly increase. To be able to adapt to such a situation, central banks need to deepen their understanding on the latest developments in information technologies and their applicability to CBDC. Second, as I have discussed in the latter half of my speech, through research into CBDC — or through the CBDC lens — central banks examine more fundamental questions such as: “What are the required functions of money?”; “What ways do we have of improving the complementary relationship between central bank money and private money?”; or “What ways do we have of enhancing the functionality of private digital currency?” This process can offer clues for ways in which payment and settlement systems as a whole can be improved.

The Bank will continue to examine CBDC with these two aspects in mind. In this respect, allow me to introduce two of our recent initiatives. On the technological front, the Bank is continuing research into distributed ledger technology — DLT. Project Stella, a joint research project with the European Central Bank is part of these initiatives.5 This project has resulted in three reports so far, exploring, for example, the applicability of DLT to payments using central bank deposits — that is, wholesale CBDC.

On the legal front, the Bank’s Institute for Monetary and Economic Studies set up a study group on legal issues regarding CBDC in November 2018. It identifies potential legal issues that would arise if the Bank were to issue CBDC in response to rapid developments in technology and their possible interpretations. The report will be released in due course.

The Bank will continue to work to improve the efficiency and safety of payment and settlement systems. It will examine, from various perspectives, the desirable nature of these systems, including the issue of CBDC. And this brings me to the end of my speech.


England and NZ: trying to be best in ODI cricket and central banking

July 12, 2019

Reflecting on my recent piece in Business Standard where I argued how England is trying to revive fortunes in One Day International Cricket and Central banking.

I wrote the piece when England was struggling to make it to semi-finals having lost to Pakistan, Australia and Sri Lanka. Somehow, England figured a way out and won the next matches against India and NZ to qualify for Semifinals.They also beat their arch rivals Australia in semis, in a manner Australia will always remember. It was as if firtunes had reversed as Aussies gave that kind of treatment to Englisy be it Test matches or ODIs. England were tested and proved critics wrong and showed their reign to top was not a fluke but years of preparation.

It is interesting that they will be playing the final against NZ which somehow puffed into semis and beat favorites India to enter the final. It has to be seen whether NZ which were favorites to win in 1992 and 2015 but lost both, win the cup without being favorites at all. They will take lot of inspiration from India’s own win against WI in 1983 final against all odds.

In the BS piece, I also argued how Bank of England is trying to regain its top position as well. For long, it was seen as a role model for central banks but stopped being one. Now it is trying to pick the tempo by ushering in several policy changes and innovations.

What is interesting is that Bank of England is also competing with its counterpart in NZ for becoming this “role model for other central banks” title. RBNZ was the first to start inflation targeting in 1989 and has pioneered quite a few things since 1989. I wrote about RBNZ here.

RBNZ no intends to become the best central bank. Its Governor Adrian Orr in a speech highlighted this statement of intent:

Over the recent period we have committed to our vision to be ‘a great team and the best central bank’, and we have embedded our new Monetary Policy Committee and policy mandate. In addition, we have reorganised our operating structure, and have been investing in our people, our stakeholder relationships home and abroad, our supervision capability and activities, our digital capability, and our payment systems and the future of cash.

Change is now business as usual for the Reserve Bank and I sincerely thank my colleagues for managing through this period of renewal. There is of course more change to come.

Just over two weeks ago, the Prime Minister and the Minister of Finance made some important announcements about progress with the government’s review of our statutory framework for financial system regulation. They announced some in-principle decisions – including introducing a deposit insurance scheme – and set out further questions for a consultation, which is going on now.

So this is a good time discuss the future of the Reserve Bank, and how the changes under consideration might promote the prosperity and wellbeing of New Zealanders and contribute to a sustainable and productive economy. Those phrases, by the way, are not my own. They come from the Reserve Bank Act and express the overarching purpose of the Reserve Bank’s many functions.


Interesting how the competition between the two is in both the fields, cricket and central banking!

Sea change in global economic outlook

July 8, 2019

Mark Carney in this speech points how global economic outlook has gone through a sea change from optimistic to pessimistic.  He quotes from who other but Shakespeare:

A sea change is a profound transformation. The term was originally coined by Shakespeare in The Tempest,
of which there are five productions across Dorset this summer.These productions will mix tragedy and comedy in a play whose themes range from magic and creation to betrayal and revenge.

My focus is more limited and prosaic – but also more immediately relevant to your work. In recent months, there has been a sea change in financial markets driven by growing concerns over the global economic outlook. I will assess these global developments before turning to what they may mean for the UK’s economic prospects.

A good account of economic conditions…

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