Deep Dive into China’s Intellectual Odyssey

Wang Hui has written this interesting looking book The Rise of Modern Chinese Thought. The edition is now available in English.

Lynn Paramore of INET interviews Hui:

Lynn Parramore: Your book traces the development of three concepts: “principle” (li), “things” (wu), and the “propensity of the times” (shi). What makes these crucial to understanding the progress of Chinese thought?

Wang Hui: Why these very specific concepts? I employed these concepts as clues to describe historical change, rather than employing social history, cultural history, economic history, or military history. I wanted to use these concepts to link different things together. Basically, I think that in all of Chinese studies — and not only Chinese studies, but historical studies, generally, especially in non-Western cultures — two prevalent misgivings have often left scholars feeling frustrated.

First, they struggle with whether or not they can effectively use existing theoretical categories or social scientific paradigms to describe and interpret historical phenomena. For example, if we talk about the traditional Chinese wellfield system [an agrarian plot division for equitable land distribution], people will often describe it as an economic system. But the wellfield system is not only an economic system, but also a social, political, and military system, and, after all, a racial system. So in that sense, once you reduce that phenomenon into the category of the economy, you’ve lost a lot of things. That’s one issue.

The second, of course, is that we are all studying Western social science — it’s a universal phenomenon – so the concepts and paradigms we deploy usually come from studies of Western history. Can they be usefully applied to non-Western historical phenomena? I have found that you always need to construct a dialogue between the different concepts.

In my book, I discuss principle (li), things (wu), and the propensity of times (shi) as philosophical ideas. These are three key categories, but at the same time, I use another set of three antithetical concepts in the more historical analysis. The first is the ancient rites and music culture and institutions. The second concerns political systems, enfeoffment [the feudal land grant system], and centralized administration. The last one was more of a response to what contemporary Western scholars are working on, and also something we’re working on in Chinese studies: the empire and the nation-state. I question these binaries and their application to Chinese studies

The Money Kings: The Jewish Immigrants Who Transformed Wall Street

Interesting essay in Financial History Magazine run by American Museum of Finance:

The founders of Goldman Sachs, Kuhn Loeb, J. & W. Seligman & Co. and Lehman Brothers—who formed close business and personal connections and whose firms, at various points, dominated American finance—were German-Jewish immigrants, mostly from Bavaria, who sought refuge in the United States in the mid-19th century. The kingdoms of pre-unification Germany had largely treated Jews as a permanent underclass, restricting them from most professions, barring them from property ownership, dictating where they could live and forcing them to pay extortionate “protection” money for the privilege of residing there. One Bavarian lawmaker, enraged by a bill that would have conferred equal rights to the region’s Jewish population, summed up the prevailing attitude when he argued that Jews would remain foreigners even if their German roots stretched back a millennium. 

…..

More than 100 years have passed since the time of the “money kings.” But their influence is inescapable, whether strolling through Manhattan, whose very landscape they helped to shape, or in the mechanics of the financial markets. The ongoing immigration wars, the debate over tech monopolies and income inequality, rising antisemitism—there are many eerie modern echoes from that era. Today, the world of over a century ago, the world of the “money kings,” seems closer than ever.

The article sums up both…Hatred and Hope…How hatred drives certain communities to migrate to more open regions and with hope recreate history.

It also sums up how humanity never learns lessons from history..

The Indian Economy is Doing Well, But Not Many Indians Are

TN Ninan (former editor of Business Standard) in TheIndiaForum:

The economy is growing rapidly and many economic indicators are flashing green. But the path that India has chosen, of promoting national business champions, has its limits. Economic distress is widespread, which cannot be handled forever with welfare handouts or religion as an opiate.

World Press Freedom Day: Governments failing to protect journalism

Today that is 3rd May marks as the World Press Freedom Day.

Reporters Without Borders which ranks Press Freedom across the world says freedom of press is under serious threat. From who? Governments of course:

Historical Disinflation Episodes: Which Falls First, Goods or Services?

Interesting article by  Charles S. Gascon and Joseph Martorana of St Louis Fed. They say disinflation is first in goods followed by services:

Annual inflation in the U.S. has slowed over the past year, decreasing by 2.9 percentage points from February 2023 to February 2024 and settling at 2.5%, as measured by the personal consumption expenditures (PCE) price index. Despite progress toward the Fed’s 2% target, FOMC participants in March 2024 projected only a 0.4-percentage-point drop in PCE inflation over the coming year.¹ Why is progress toward 2% inflation expected to slow? Historical experience—specifically, disinflationary episodes of the early and late 1980s—suggest that goods price inflation tends to fall quickly, while the last mile of disinflation is driven primarily by a lengthier disinflation of services.

Summarising recent research on International Finance and Macroeconomics

Mark Aguiar and Linda Tesar summarise recent research on International Finance and Macroeconomics in NBER Reporter:

Affiliates of the International Finance and Macroeconomics (IFM) Program study financial interactions among nations, including cross-border capital flows, exchange rates, responses to global financial crises, and the transmission of economic shocks. Rather than attempting to summarize the more than 1,000 working papers these researchers have distributed since the last program report in 2015, we focus here on three issues that have attracted substantial research attention from this group: impacts of the COVID-19 pandemic, global supply chain shocks, and the privileged position of the US dollar in global asset markets.

 

Electoral Bonds and Electricity Supply in Bhiwandi

Tanvi Deshpande of IndiaSpend has an interesting story that weaves Indian politics, economics and society:

Torrent Power supplies power to Bhiwandi near Mumbai, and powerloom owners and public representatives allege that power bills have doubled or tripled since the franchise was brought in, which has dealt a blow to the Rs 10,000-crore powerloom industry here

Democracy is good for the economy. Can business defend it?

Vanessa Williamson of Brookings in this paper asks businesses to preserve democracy. The businesses gain from democracy:

• Democracies thrive because they are better at ensuring the provision of public goods, including education, public health, and infrastructure; because they manage markets more effectively; and because they channel contestation into political compromise rather than political violence.
• Democratic decline is associated with a panoply of economic “bads,” including instability, brain drain, stagnation, and kleptocracy.
• There is a strong need for more robust nonpartisan business associations that are explicitly and actively committed to protecting democratic institutions, as well as greater engagement on the part of existing business associations to preserve electoral democracy.

Most of the time businesses either look the other way or even worse join forces to undermine democracies in respective countries.

 

The Pitfalls of Protectionism: Import Substitution vs. Export-Oriented Industrial Policy

Reda Cherif and Fuad Hasanov in this IMF paper:

Industrial policies pursued in many developing countries in the 1950s-1970s largely failed while the industrial policies of the Asian Miracles succeeded. We argue that a key factor of success is industrial policy with export orientation in contrast to import substitution.

Exporting encouraged competition, economies of scale, innovation, and local integration and provided market signals to policymakers. Even in a large market such as India, import substitution policies in the automotive industry failed because of micromanagement and misaligned incentives.

We also analyze the risk tradeoffs involved in various industrial policy strategies and their implications on the 21st century industrial policies. While state interventions may be needed to develop some new capabilities and industries, trade protectionism is neither a necessary nor a sufficient tool and will most likely be counterproductive.

Core economy textbook: Version 2.0

Core economy textbook is releasing a new version:

US Dollar versus Euro as International Reserve Currencies

Menzie D. Chinn, Jeffrey A. Frankel & Hiro Ito in this new NBER paper study the USD and Euro as reserve currencies: 

We begin by examining determinants of aggregate foreign exchange reserve holdings by central banks (size of issuing country’s economy and financial markets, ability of the currency to hold value, and inertia). But understanding the determination of reserve holdings probably requires going beyond the aggregate numbers, instead observing individual central bank behavior, including characteristics of the holding country (bilateral trade with the issuing country, bilateral currency peg, and proxies for bilateral exposure to sanctions), in addition to the characteristics of the reserve currency issuer.

On a currency-by-currency basis, US dollar holdings are somewhat well explained by several issuer characteristics; but the other currencies are less successfully explained. It may be that the results from currency-by-currency estimation are impaired by insufficient sample size. This consideration offers a motivation for pooling the data across the major currencies and imposing the constraints that reserve holdings are determined in the same way for each currency.

In this setting, most economic determinants enter with significance: economic size as measured by GDP, size of financial markets as measured by foreign exchange turnover, bilateral currency peg, and bilateral trade share. However, geopolitical variables (bilateral alliance, bilateral sanctions) usually do not enter with significance.

Nowcasting consumer price inflation using high-frequency scanner data: evidence from Germany

ECB economists (Günter W. Beck, Kai Carstensen, Jan-Oliver Menz, Richard Schnorrenberger and Elisabeth Wieland) in this paper construct a new inflation index based on high frequency data:

We study how millions of granular and weekly household scanner data combined with machine learning can help to improve the real-time nowcast of German inflation.

Our nowcasting exercise targets three hierarchy levels of inflation: individual products, product groups, and headline inflation. At the individual product level, we construct a large set of weekly scanner-based price indices that closely match their official counterparts, such as butter and coffee beans.

Within a mixed-frequency setup, these indices significantly improve inflation nowcasts already after the first seven days of a month. For nowcasting product groups such as processed and unprocessed food, we apply shrinkage estimators to exploit the large set of scanner-based price indices, resulting in substantial predictive gains over autoregressive time series models.

Finally, by adding high-frequency information on energy and travel services, we construct competitive nowcasting models for headline inflation that are on par with, or even outperform, survey-based inflation expectations.

Data details are interesting:

Our dataset comes from the household panel of the market research company GfK and contains daily purchases of fast-moving consumer goods, i.e. products that are bought regularly and consumed quickly, for the period from 2003 to 2022. The purchases covered are mainly food and non-durable goods such as shampoo or toothpaste, which are scanned by panel participants at home and therefore referred to as household scanner data.

On average, the GfK household panel for Germany comprises around 30,000 households, 200,000 products (measured at the barcode level) and 30 million observations per year. In addition, the dataset contains detailed product descriptions and has its own product classification system. These descriptions allow the data to be mapped to the most disaggregate level used in the German consumer price statistics, such as “butter”, “coffee beans” and “toothpaste”.

In total, we can map the household scanner data to more than 180 product groups of the German Harmonised Index of Consumer Prices (HICP), covering around 12% of the German consumer basket and typical outlet types such as supermarkets and discounters. From these, we derive price indices using common index methods often applied by statistical offices in the context of scanner data. We show that our scanner data-based price indices track their official counterparts very well.

How do Indian equity markets react to unexpected monetary policy decisions?

Mayank Gupta, Amit Pawar, Satyam Kumar, Abhinandan Borad and Subrat Kumar Seet of RBI in this paper study the question:

This paper studies the impact of monetary policy announcements on the returns and volatility in the BSE Sensex by decomposing changes in Overnight Indexed Swap (OIS) rates on policy announcement days into target and path factors. The target factor captures the surprise component in central bank policy rate action, while the path factor captures the impact of central bank communication on market expectations regarding the future path of monetary policy.

Findings? Monetary policy does impact equity prices:

The paper’s analysis suggests that equity markets are affected more by the changes in the market’s expectations of future monetary policy (path factor) than the policy rate surprise (target factor) which is in agreement with the conventional thinking that equity markets are forward-looking. We also find that volatility in equity markets is affected by both target and path factors, as markets digest the policy announcements and traders adjust their portfolios throughout the day. Using an alternative specification to examine the potential asymmetric impact, we find an increased negative sensitivity of equity returns with respect to the path factor when repo rate is altered vis-à-vis when the rate is left unaltered.

Dominant currency pricing in international trade of services

João Amador, Joana Garcia, Arnaud Mehl and Martin Schmitz in this ECB paper look at dominance of US Dollar in services trade:

We analyze, for the first time, how firms choose the currency in which they price transactions in international trade of services and investigate, using direct evidence, whether the US dollar (USD) plays a dominant role in services trade.

Drawing on a new granular dataset on extraEuropean Union exports of Portuguese firms broken down by currency, we show that currency choices in services trade are active firm-level decisions.

Firms that are larger and rely more on inputs priced in foreign currencies are less likely to use the domestic currency to export services. Importantly, we show that the USD has a dominant role as a vehicle currency in trade of services – but to a lesser extent than in trade of goods – and that this is not just due to differences in the geography of trade. An external validity test based on macro data available for Portugal and six other European countries confirms this finding.

In line with predictions from recent theoretical models, our results are consistent with the lower prevalence of USD in services trade arising from a lower openness of services markets and a stronger reliance of services on domestic inputs.

Tilting at Windmills: Bernanke and Blanchard’s Obsession with the Wage-Price Spiral

Prof Servaas Storm of Delft University of Technology in this INET working paper:

Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that “… we don’t think that the recent experience justifies throwing out existing models of wage-price dynamics.” This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.

India’s Foreign Exchange Reserves in High Volatility Episodes – An Empirical Assessment

Saurabh Nath, Dipak R. Chaudhari, Vikram Rajput and Gaurav Tiwari in this RBI Bulletin (Apr 24) article:

This article analyses the trend in India’s foreign exchange (FX) reserves during major high volatility episodes viz., Global Financial Crisis, Eurozone debt crisis/ Taper Tantrum, EME outflows/ US-China trade war and the recent Russia-Ukraine conflict / monetary policy tightening in the US. The article empirically examines major underlying factors impacting variation in FX reserves such as US Dollar Index (DXY), oil prices, foreign portfolio flows, US financial conditions and market volatility.

Highlights:

• • During the recent Russia-Ukraine conflict/ Federal Reserve tightening episode, exchange rate management and reserves faced strong headwinds from DXY, oil prices, foreign portfolio outflows and tight US financial conditions.
  • An autoregressive distributed lag (ARDL) model results show that the severity of these factors was the highest in the Russia-Ukraine conflict / Fed monetary policy tightening episode vis-à-vis the previous high volatility episodes.
  • The Reserve Bank, however, has managed to contain INR volatility and keep FX markets largely stable in all high volatility episodes. Importantly, INR’s implied volatility has remained one of the lowest amongst major EME peer as well as select AE currencies during Russia-Ukraine/Fed tightening episode, despite unprecedented headwinds witnessed during this period.

 

Trust in the European Central Bank – insights from the Consumer Expectations Survey

Ferdinand Dreher of ECB in this article looks at people’s trust in the central bank

On aggregate, according to the Eurobarometer, trust in the ECB held up relatively well during the pandemic and in the period of heightened inflation thereafter. Average trust across euro area countries declined significantly during the global financial crisis and the sovereign debt crisis, but slowly recovered afterwards (Chart 1). In the latest Eurobarometer survey, conducted in October and November 2023, 43% of euro area respondents expressed trust in the ECB, while 42% said they did not trust the institution and 15% answered that they did not know. Net trust in the ECB, defined as the percentage share of respondents that “tend to trust” the ECB minus the percentage share of respondents that “tend not to trust” the ECB, was thus marginally positive. After having increased from 2020 to mid-2021, it declined into negative territory in early 2022 and recovered to pre-pandemic levels thereafter.^[7] This relative stability has persisted despite high inflation being cited as a main concern by survey respondents since 2021, as well as unprecedented global tensions.

Gauging Linguistic Complexity of Regulatory Communication: A Case Study for India

Regulatory communications are complex, boring and difficult to understand.

Nishita Raje, Khaijamang Mate, Sayli Londhe and Sandhya Kuruganti of RBI study the Linguistic Complexity of Regulatory Communicationin India:

With increased scope and scale of regulation, there is growing awareness for adoption of simple or plain language in central bank’s regulations. This article attempts to measure the linguistic complexity of written regulatory communication in India. It analyses a set of circulars issued by the Department of Regulation (DoR), Reserve Bank of India. The focus is on the complexity of the language used in regulatory communication rather than complexity implicit in regulation by the very nature of the area/aspect that is being regulated. It aims to capture various dimensions of linguistic complexity and contributes towards developing a multifaceted understanding of the subject.

Highlights:

• • Text mining techniques have been leveraged to study different dimensions of linguistic complexity.
  • A sample of circulars of Department of Regulation, Reserve Bank of India, applicable for banks were subjected to commonly used readability indicators.
  • These readability indicators suggest that most circulars require at least graduate level education, which is generally the education level of commercial bank employees.
  • A composite score was developed to rank circulars based on linguistic complexity.
  • There is no visible change in readability scores across the years, though in 2020-21, regulations were smaller and scored better in readability.

Clearly there is a need to simplify the regulatory communications.

Struggles of getting a licence to open new banks in India

RBI recently rejected two applications that had applied for Small Finance Bank licences.

My piece in Deccan Herald on the struggles of getting bank licences.

Unlocking the power of ideas: The power of ideas across history

ECB President Christine Lagarde in this speech  poinst to the power of ideas and how ideas shape history.

By inspiring action, ideas can help us grow. This might be personal growth – a student’s learning, say, allowing them to make the right decisions throughout their future career. But it holds at the societal level too: ideas help push our economies forward.

In recent decades, we had few barriers globally to the flow of ideas. Advanced economies shared their technologies with emerging ones, and emerging economies shared their cheaper input costs with us – the process we knew as “globalisation”.

But in recent years, the global economic order as we know it has been changing.

We now see that previously emerging economies are taking leadership in some advanced technologies. And we are seeing globalisation go into reverse, threatening access to the resources on which advanced technologies depend.

So, how do we all prosper in this new world?

I will argue today that the key ingredient for our prosperity remains the same as ever: generating and sharing new ideas.

But history tells us that ideas can only drive growth if we first create the right conditions that allow them to reach their full potential – and if we are committed to breaking the bottlenecks that stand in their way.

This is the challenge we all face today to thrive in this new world. And today, I will focus on what this challenge means for our economies and, in particular, for Europe.