Returning to the office will be hard

June 15, 2021

Nicholas Bloom, Paul Mizen and Shivani Taneja in this piece:

Education Loan NPAs in Tamil Nadu: Issues and Challenges

June 14, 2021

Shromona Ganguly and Deepa S. Raj in this RBI Occassional Paper series:

The study examines determinants of default in education loans in Tamil Nadu, a state with significant presence in education loan disbursal in the country. It uses account level data of over two lakh borrowers from two public sector banks and one private sector bank in an attempt to identify significant predictors of default. Empirical analysis suggests that loan accounts with higher interest rate and of lower duration have higher default probability while loans extended to accounts with Aadhar information, collateral backing or some subsidy element have lower risk of default.

Implications of El Salvador’s tryst with Bitcoin

June 14, 2021

My new article in Moneycontrol on a last week policy decision which shook the world of money.

Reflections on South Africa’s Lost Decade

June 14, 2021

So many economies are going through lost decade problem.

South Africa has been in the list. Former SA Finance Minister Trevor Manuel in this podcast speaks about how SA lost the plot:

When the apartheid regime ceded power following South Africa’s first democratic elections in 1994, the economy was in shambles. Debt service costs as a share of GDP were crippling. Trevor Manuel—a veteran of the anti-apartheid struggle and appointed minister of finance—revamped the budgeting process and set a stringent deficit reduction target. By 2006, the economy was growing at its fastest pace in more than two decades. In this podcast, Manuel looks back at what drove the country’s longest phase of economic growth and how he believes the ruling party he helped establish has lost its way

From Manuel:

You could bring people in because there was a project that people wanted to be part of. It was how we would deliver democracy. That doesn’t exist anymore. The ANC that we knew doesn’t exist.

How Indian National Congress and African National Congress lost the plots…

The Economic History Podcast

June 11, 2021

Seán Kenny, Postdoctoral fellow at und University Sweden has started a superb podcast on economic history.

The Economic History podcast is a platform for sharing knowledge, ideas and new research with a general interest audience. Each fortnight, we meet leading academics in the field and discuss a range of topics, including pandemics, long run economic growth, gender issues, financial crises, inequality, sustainable development and a number of weird and fun economic experiments in history. There is no time like the past to help us understand the present.

The podcast has featured 24 episodes so far and each one is a gem. It is amazing to grasp and understand economic history via this medium. The subject has many layers which papers, books etc. cannot cover and can be done much better in a conversation format. I think podcasts such as this one by Kenny could be used for teaching economic history.

Central Bankers and animal analogies: From hawks/doves to green swans

June 10, 2021

Danae Kyriakopoulou in this OMFIF piece:

Central bankers have long been associated with birds, traditionally divided between inflation-worried hawks or employment-leaning doves. More recently a third species, the ‘green swan’, has entered the conversation. Here, central bankers are increasingly united.

‘Green swan’ was coined by authors at the Bank for International Settlements in January 2020 to characterise the new type of systemic risks from climate change. The term is inspired by Nassim Nicholas Taleb’s concept of ‘black swan’ during the 2008 financial crisis to connote rare, catastrophic and unpredictable events. However, the main difference between the concepts is that a green swan will not be a rare event in the face of inaction, it will be a certainty.

In the central banks and climate change agenda, a year is a long time. Since the publication of the BIS paper, central bankers have made over 50 speeches where climate change has been the main focus. In the last two years, the Central Banks and Supervisors Network for Greening the Financial System have published 17 new reports. And there have been numerous conferences and roundtables, many organised by OMFIF’s Sustainable Policy Institute, established in September 2020.

These culminated in the Green Swan conference last week, with a total of 35 sessions over three days. Discussions ranged from the role of central banks in addressing climate change to biodiversity, the just transition and smart cities. The world’s leading central bankers took the stage, including the heads of the Federal Reserve, People’s Bank of China and European Central Bank. 

How the Civil War Shapes the Future of Stablecoins

June 9, 2021

Franklin Noll in this coindesk piece:

In 1861, civil war broke out in the United States. Over the next four years of conflict, the politics of the U.S. were remade and so were its monetary affairs. A new monetary system was born during the war years that exists with us today and is shaping our stablecoin future.

Financial repression is making a comeback

June 9, 2021

My new piece in Moneycontrol:

It is interesting how financial repression has made a comeback against all odds. While the financial repression policies are being conducted differently compared to their earlier avatars, the broad idea is the same 

Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market: Case of Franklin Templeton India

June 9, 2021

The sudden melting of FT India debt Mutual Funds was more than just a meltdown.

SEBI recently released a order implicating one of its directors for selling off his and family’s investments in the said mutual fund schemes:

The issue that arises for consideration in the present matter is whether the redemption of units in some schemes of a mutual fund by a director of the Asset Management Company of the Mutual Fund, and his immediate family, at a time when the said schemes were facing significant redemption pressure (the schemes were later wound up) and the director was allegedly in possession of material non – public information relating to the same, would fall within the scope of ‘fraudulent’ or ‘unfair trade practice’ as defined under the SEBI(Prohibition of Fraudulent and Unfair Trade Practices)Regulations, 2003.

Do we have similar such Mutual Funds cases earlier as well?

El Salvador is one step closer to making bitcoin legal tender..

June 9, 2021

EL Salvador’s President Nayib Bukele has sent a law to Congress proposing to make bitcoin legal tender. Currently, the country has adopted US Dollar as its currency. So if the law goes through, the country will have both currencies:

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Money, technology and banking: what lessons can China teach the rest of the world?

June 8, 2021

Michael Chui in this BIS paper:

Technology companies entering the financial services industry have become a global phenomenon over the past decade. This trend is most remarkable in China where two large technology firms (BigTechs) have emerged as important market players, especially in payment services. This paper examines the factors driving this development and whether the Chinese experience could be applied elsewhere.

Several lessons emerge: first, like any company in a network industry, it is important to build and maintain a large user base and that is the key factor behind BigTechs’ expansion into the financial industry. On this basis, these BigTechs can be seen as “accidental financiers” rather than “aggressive invaders”.

Second, these firms are cautious in offering higher-risk financial services as investment losses could lead to an exodus of customers.

Third, Chinese authorities’ regulatory tolerance during the early stage has been a key supporting factor and helped fostering innovation benefits. But that was balanced by the implementation of capital and liquidity rules to keep BigTechs from “excessive” growth, mis-selling of financial products and posing systemic risks.

Fourth, initial conditions and government support matter. The rapid growth has benefitted from China’s large population, the availability of low-cost mobile handsets and heavy investment by the government on mobile communication infrastructure. These may not be easily be replicated elsewhere.

Last, BigTechs’ overseas expansion may require policy coordination between home and host authorities to keep track of emerging risks.

Draghi pivotal as Lagarde/ECB maintains easy monetary policy

June 8, 2021

Draghi is again central to Euroarea fortunes though in a different role as PM of Italy.

Mario Draghi, Italian prime minister, is emerging as Europe’s pivotal politician days ahead of a crucial European Central Bank meeting likely to extend the monetary legacy he laid down as its president in 2011-19.

European statistics compiled by OMFIF show evidence of sharply rising producer prices across the euro area, by as much as 8% year-on-year (Figure 1). Although there are only limited signs of this feeding into permanently higher costs for consumers, much increased energy and other input prices, exacerbated by bottlenecks (Figures 2-4), complicate the ECB’s monetary policy-setting at the 10 June meeting of its governing council.

Despite worries about a worldwide rise in inflation fuelled by the US recovery and President Joe Biden’s massive stimulus, the minority on the ECB council favouring a gradual shift to monetary normalisation shows little appetite for a showdown on Thursday.

Political uncertainty in Germany and France ahead of elections in September and April, coupled with the probability that Draghi will remain Italy’s prime minister until 2023, is highlighting the 73-year-old technocrat’s key position.

 

Profile of Rohini Pande

June 7, 2021

Profile of economist Rohini Pande:

Pande, 49 years old, is “one of the most influential development economists of her generation,” according to the American Economic Association, and has made groundbreaking contributions to political economy, international development, gender economics, anti-corruption, and efforts to combat climate change.

“Running through her work is an insistence not simply to ask what will work to improve the lives of the poor, but why it works, and what this teaches us about how institutions should be structured and how we should view the world,” says Charity Troyer Moore, Yale’s director for South Asia economics research.

In 2019, Pande was named the Henry J. Heinz II Professor of Economics at Yale University and director of the Economic Growth Center. She spent the previous 13 years as a senior professor at the Harvard Kennedy School. There she co-founded Evidence for Policy Design, which works with developing economy governments to address policy problems. Pande won the 2018 Carolyn Shaw Bell Award for furthering the status of women in economics.

The profile points Rohini is daugher of journalist Mrinal Pande. Google pointed she is also granddaughter of Hindi novelist Shivani. Phew that is some legacy.

Bureaucratic Indecision and Risk Aversion in India

June 7, 2021

Interesting paper by IDFC Institute researchers: Sneha P., Neha Sinha, Ashwin Varghese, Avanti Durani and Ayush Patel.

The Indian bureaucracy suffers from indecision and risk aversion, resulting in an inordinate focus on routine tasks, coordination failure, process overload, poor perception, motivational issues and a deterioration in the quality of service delivery. We argue that bureaucratic indecision, in a large part, is a form of rational self-preservation exercised by bureaucrats from the various legal and extra-legal risks to their person, careers and reputation. These risks originate from problems of organizational design, institutional norms and other political factors.

The research for this working paper included a review of interdisciplinary literature on bureaucracy and policy decisions, combined with semi-structured interviews. We interviewed current and ex-bureaucrats from India and other Asian and African countries, political scientists and other policy researchers. We also conducted a document analysis of historical and contemporary, administrative and legal documents including committee reports, acts and rules, annual reports and other government publications. We summarise the evidence on factors such as penal transfers, overload, inadequate training, process accountability, contradictory rules and political patronage. The paper concludes with a compilation of administrative and normative reform recommendations taking cues from history, state experiences and other country bureaucracies.

20 years of BRIC acronym: Is the emerging world still emerging?

June 7, 2021

It has been 20 years since Jim O’Neil coined the term BRIC – Brazil, Russia, India and China. In this IMF piece, He reflects on the acronym BRIC and way forward for emerging markets:

My primary goal in my first paper, “The World Needs Better Economic BRICs,” was to make a case for changing the framework for global economic governance, not necessarily the inevitable future growth of these countries.

In subsequent papers I laid out what the world could look like, in the highly unlikely event that the countries we studied reached their potential. We defined this potential using the standard methodology for macroeconomics, in which real economic growth is determined by two variables: the size of a nation’s workforce and the economy’s productivity. Because of their population size, the associated size of their workforce, and the scope for productivity catch-up, it was quite easy to show that the potential growth rates of BRICs were higher than those of most advanced economies. What our analysis was not meant to show was that all these countries would persistently grow at their potential. That frankly is not realistic, and not what we intended as our message. 

In this context, the second decade of this century has been quite a contrast to the first decade, which for all four countries turned out even better than in the scenarios I outlined in 2001. While India has notably disappointed in recent years, it is broadly developing along the path we envisioned. For both Brazil and Russia, however, 2010–20 economic performance was very disappointing, which has occasionally led me to joke that perhaps I should have called the “BRICs” the “ICs.” Brazil and Russia have both suffered from the well-known commodity curse and, as evidence suggests, are far too dependent on the world commodity cycle for their own sustainable development. Each of these countries has considerable differences, but they both need to diversify their economies away from commodities and grow the role of the private sector.

In contrast, the ongoing strength of the Chinese economy suggests that it is fully achieving its potential. China’s GDP, in excess of $14 trillion (as of 2019), is more than twice that of the other BRICs in aggregate. The sheer scale of China means that the BRIC economies combined are now larger than that of the European Union and are approaching the size of the United States.

 

The Covid pandemic in the market: infected, immune and cured bonds

June 7, 2021

Andrea Zaghini in this ECB working paper looks at how the pandemic impacted different bond markets in Europe:

By focusing on the cost conditions at issuance, I find that not only the Covid-19 pandemic effects were different across bonds and firms at different stages, but also that the market composition was significantly affected, collapsing on investment-grade bonds, a segment in which the share of bonds eligible to the ECB corporate programmes strikingly increased from 15% to 40%. Contemporaneously, the high-yield segment shrunk to almost disappear at 4%. Another source of risk detected in the pricing mechanism is the weak resilience to pandemic: the premium requested is around 30 bp and started to be priced only after the early containment actions taken by the national authorities. On the contrary, I do not find evidence supporting an increased risk for corporations headquartered in countries with a reduced fiscal space, nor the existence of a premium in favour of green bonds, which should be the backbone of a possible “green recovery”.

 

Choosing Bank of England’s Chief Economist: Manager or Thought Leader?

June 7, 2021

Andy Haldane, Chief Economist of Bank of England resigned recently.

Andrew Sentance, former MPC member in this blogpost looks at the qualities the new chief economist should have:

The Bank of England is searching for a new Chief Economist, and the formal deadline for applications was Wednesday 2 June. But what is the Bank’s Chief Economist expected to do? And what skills and qualifications does he or she need? After all, the Bank has lots of economists. What special responsibilities does our central bank need a Chief Economist to carry out?

In the initial phase, BoE appointed academicians as Chief econs. This changed recently with appointment of people like Haldane:

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On the Green Interest Rate

June 7, 2021

Prof Nicholas Muller in this NBER research paper explains green interest rate:

Predicting Fiscal Crises: A Machine Learning Approach

June 4, 2021

Klaus-Peter Hellwig of IMF in this working paper:

In this paper I assess the ability of econometric and machine learning techniques to predict fiscal crises out of sample. I show that the econometric approaches used in many policy applications cannot outperform a simple heuristic rule of thumb. Machine learning techniques (elastic net, random forest, gradient boosted trees) deliver significant improvements in accuracy.

Performance of machine learning techniques improves further, particularly for developing countries, when I expand the set of potential predictors and make use of algorithmic selection techniques instead of relying on a small set of variables deemed important by the literature.

There is considerable agreement across learning algorithms in the set of selected predictors: Results confirm the importance of external sector stock and flow variables found in the literature but also point to demographics and the quality of governance as important predictors of fiscal crises. Fiscal variables appear to have less predictive value, and public debt matters only to the extent that it is owed to external creditors.

 

Central banking independence in times of shifting societal concerns

June 3, 2021

ECB’s Isabel Schabel in this speech discusses how high inflation in 1970s led to independent central banks. The challenges facing central banks today are different. How central banks respond to these challenges will be crucial to their existence and retaining independence:

The challenges central banks are facing today are fundamentally different from the ones that were relevant when they gained broad political independence. Inflation is less of a concern to many people, in large part reflecting the achievements of central banks over time.

As a result, expectations towards central banks have changed. Many call for central banks to have a more active role in tackling wider societal challenges, climate change in particular. Such shifts in preferences coincide with a broad distrust of far-reaching and complex monetary policy measures taken by central banks in recent years to protect the economy from a perilous spiral of falling prices and wages.

In this environment, the demands on central bank communication are enormous. Independent central banks have a duty to respond to the concerns of the public and to carefully evaluate whether and how they may be able, within their mandate, to respond to these concerns. Accountability is the quid pro quo of independence.

The ECB is doing this diligently as part of its ongoing monetary policy strategy review. We are analysing the effects and side effects of our unconventional monetary policy instruments in depth. And we are exploring if and how, within our mandate, we can contribute to the broader objectives of the Union, including by taking measures that will help accelerate the transition towards a more sustainable economy, while firmly adhering to our primary objective of price stability.

Of course the question is wide open whether central banks should work towards achieving these social goals.


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