The theory of average inflation targeting

July 13, 2021

In Aug-2020, Federal Reserve announced shifting to a new monetary policy regime of average inflation targeting. Under this policy, the central bank looks to target inflation averaging over a period. So say central bank targets 2% inflation rate, Actual inflation has been 1% for 12 months. Inflation becomes 2% in 13th month and is expected to rise.

In a normal IT, central banks will look to tighten policy. However in AIT, central bank will not hurry and instead look at average inflation over the two years to be 2%. So first year inflation was 1% and second year around 2.5%-3%, bringing average inflation in two years to 2%. The idea behind AIT is to tell markets that central bank will not start tightening policy as soon as inflation starts to go up.

President of NY Fed, John Williams in this speech explains the theory and research behind AIT:

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RBI issues guildelines for retail investors to open gilt accounts with the central bank

July 13, 2021

In Feb-21, RBI announced that retail investors will be allowed to open gilt (govt bond) account with the central bank. This wil be like a demat account where investors can buy and sell government bonds.

Yesterday (12 Jul 2021), the central bank  released guidelines on opening gilt retail account.


Where have all the Asian Tigers gone?

July 13, 2021

Prof Jayati Ghosh in Proj Syndicate:

Consider four emerging-market economies that were widely touted as examples of “Asian success” and had briefly become the darlings of global financial markets: India, Indonesia, Malaysia, and Thailand. GDP growth in each of these countries has decelerated significantly in recent years. In India, annual growth slowed from 8% in 2016 to 4% in 2019, and even these figures are widely considered to be overestimates because of changes in the calculation process. Thailand’s economy, which was expanding by more than 7% per year at the start of the last decade, grew by only 2.3% in 2019, while growth in Malaysia declined from 7.4% to 4.3% over the same period. Only in Indonesia, where growth slipped from 6.2% in 2010 to 5% in 2019, was the slowdown relatively minor.

One obvious cause of this deceleration was the decline in investment rates. In Malaysia, Indonesia, and Thailand, this reflected a medium-term trend triggered by the 1997-98 East Asian Crisis, after which investment rates collapsed by at least a quarter, from previous highs of close to 40% of GDP to around 30%. In Malaysia, investment fell further during the 2010s, to only 19% of GDP by 2019. Investment in India also declined sharply, from 40% of GDP in 2010 to 30% in 2019. And investment in all of these countries decreased again during the pandemic year of 2020.

COVID-19 aside, why have investment rates come down? After all, these economies were the beneficiaries not only of positive stimuli from China, but also of active interest from global finance. They attracted capital of all kinds: foreign direct investment, portfolio flows, bond financing, and other external commercial borrowing. Why didn’t all of this generate higher investment and growth?

It turns out that were actually the problem. Although inflows from non-residents were large and growing, so were residents’ outflows. As a consequence, net inflows were often small. Malaysia was in fact a net exporter of capital for much of the past decade, as was Thailand in some years. Even worse, the rates of return on these countries’ financial assets held abroad (whether by central banks or private investors) were significantly lower than those on financial assets inside the economy held by non-residents.

This differential led to significant annual seigniorage losses. In Thailand, for example, these losses amounted to as much as 5.2% of GDP each year in 2010-18 according to UNCTAD – far more than the net inflow of capital. And even where net capital inflows were positive, as in India and Indonesia, they did not translate into increased domestic investment or enable investment in desired sectors. Instead, central banks added to their foreign-exchange reserves in order to self-insure against possible capital flight and manage the exchange rate in the face of substantial capital movements.

 She says the emerging tigers could restart with capital account:

There is no magic bullet that can ensure “emerging” Asian economies actually emerge and live up to their huge promise. But a radical reconsideration of capital-account management in such countries would be a good place to start.

The intertwining of Nation State and Modern Sport

July 12, 2021

Mukul Kesavan writes an essay in TheIndiaForum:

National feeling is not something that has been injected into sport by swaggering players, corrupt politicians, and a scheming media looking to boost ratings; it is native to modern sport, something that is built into its historical evolution.

Playlisting Favorites: Measuring Platform Bias in the Music Industry

July 12, 2021

The impact of machine learning and big data on credit markets: Competition between banks and fintechs

July 9, 2021

Peter Eccles, Paul Grout, Paolo Siciliani and Anna (Ania) Zalewska in this Bank of England working paper:

There is evidence that machine learning (ML) can improve the screening of risky borrowers, but the empirical literature gives diverse answers as to the impact of ML on credit markets. We provide a model in which traditional banks compete with fintech (innovative) banks that screen borrowers using ML technology and show that the impact of the adoption of the ML technology on credit markets depends on the characteristics of the market (eg borrower mix, cost of innovation, the intensity of competition, precision of the innovative technology, etc.).

We provide a series of scenarios. For example, we show that if implementing ML technology is relatively expensive and lower-risk borrowers are a significant proportion of all risky borrowers, then all risky borrowers will be worse off following the introduction of ML, even when the lower-risk borrowers can be separated perfectly from others.

At the other extreme, we show that if costs of implementing ML are low and there are few lower-risk borrowers, then lower-risk borrowers gain from the introduction of ML, at the expense of higher-risk and safe borrowers. Implications for policy, including the potential for tension between micro and macroprudential policies, are explored.


Divergence in bankruptcy law across advanced and developing economies

July 9, 2021

Simeon Djankov and Eva (Yiwen) Zhang in this piece:

Macron Commission on challenges facing French economy

July 9, 2021

French President Emmanuel Macron set up a commission under Jean Tirole and Olivier Blanchard to study economic challenges facing France. The Commission submitted its report:

Responding to the global challenges facing our societies requires new analytical frameworks and the emergence of new ideas, especially in the aftermath of the global health crisis. The President of the Republic asked Olivier Blanchard, Professor Emeritus at MIT, and Jean Tirole, Honorary President of the Toulouse School of Economics, to chair a commission of renowned international experts, supported by France Stratégie.

The committee focused on three long-term structural challenges: climate change, economic inequality and demographic change. Their work led to the production of a detailed report on these three challenges.

Climate change: time to act

The work of the IPCC has highlighted the role of human activities in climate change and the importance of acting now to limit the rise in temperatures to less than 2°C compared to the pre-industrial era. With this objective in mind, and following the signing of the Paris Agreement in 2015, France has set itself the objective of being carbon neutral by 2050. By committing today to ambitious policies and setting clear and credible milestones, France and Europe can play a leading role in international climate action. The commission, led by Mar Reguant, Associate Professor of Economics at Northwestern University, Illinois, and Christian Gollier, Professor and Director General of the Toulouse School of Economics (TSE), presented an analytical framework and proposals to accelerate the achievement of these goals.

Economic inequality and insecurity: measures for an inclusive economy

Equal opportunities, social protection, fair and efficient tax and social redistribution… Even if France is in a better position than most other countries, in order to ensure that economic opportunities benefit as many people as possible and are fairly distributed, France must act on several fronts and at different stages of people’s economic lives. The commission, led by Stefanie Stantcheva, Professor of Economics at Harvard University, and Dani Rodrik, Professor of Political Economy at the John F. Kennedy School of Government, Harvard University, makes the case and sets out a framework for good policy.

Facing demographic change: ageing, health and immigration

Ageing implies finding a fair and efficient balance between periods of employment and retirement. To achieve this, it is necessary to modernise the pension system, but also to support older people in their activities. This includes strengthening vocational training and the prevention and treatment of chronic diseases. Axel Börsch-Supan, Director of the Max Planck Institute for Social Law and Social Policy, Munich, Claudia Diehl, Professor at the Munk School of the University of Konstanz, and Carol Propper, Professor of Economics at the Imperial College Business School in London, have examined the facts and their perception before drawing up a series of recommendations.

Interview of the duo.

Dani Rodrik and Stefanie Stantcheva in this Proj Synd article:

Just as the pandemic was gathering pace in early 2020, French President Emmanuel Macron set up an international commission of economists to assess longer-term challenges and make policy proposals. While some of the recommendations are specific to France, many (if not most) are relevant to other advanced economies as well.


What is programmable money?

July 8, 2021

Alexander Lee of Federal Reserve in this research:

Discussions of financial technology have recently started to include the idea of “programmable money,” though the specific meaning of the term is often unclear. Different perspectives may presume a particular underlying technology or set of features to be a part of a programmable money system, and lack of agreement on these aspects may lead to confusion. To support clearer discussion of this concept in the central banking community and the financial industry more broadly, this research note offers an investigation into the nature of programmable money.

This note focuses on the importance of a mechanism guaranteeing the inseparable functionality of the technical components of a programmable money system rather than prescribing the specific nature of those components. This “coherence guarantee” is crucial regardless of specific technical choices and admits a wide range of potential designs for programmable money. The guarantee also facilitates the view of programmable money as a concrete product, which may provide users with greater certainty about its nature and capabilities than alternative service-oriented models that can automate interaction with particular digital value records.

Central bank digital currency: The battle for the soul of the financial system

July 8, 2021

Stephen Cecchetti and Kim Schoenholtz in this voxeu research say central banks should not design CBDC to solve financial system problems as they can be solved without CBDC. Moreover, intro of CBDC will create problems for financial system:

History of Bank economists in India

July 7, 2021

I came across an interesting paper by Murari N Ballal and B.S. Damodar  written in 1980. The paper is titled Economic Research in Banks and is available in a book edited by Dr NK Thingalaya: On bankers and economists.

The paper surveyed economics departments of banks in 1980 and figured their history. RBI was the first banking entity to start a research department in 1943-46 (exact year not clear). In 1955, Imperial Bank was nationalised and renamed State Bank of India. SBI became instrument of State policy with special responsibility of branch expansion and lending in rural areas. As bankers lacked this knowhow of developmental banking, economists were sought in banks. Accordingly in 1956, SBI became the first bank (who else) to have an economic research department headed by Mr DS Shanker.

Post-SBI, Dena Bank, Bank of Baroda, Bank of India and Syndicate Bank established their own ERDs.

In 1969, 14 banks were nationalised leading to all kinds of development targets pushed to nat banks. This led to some more banks establising ERDs and asking economists to assist bankers by giving them research inputs to meet targets.  The ERDs mainly dealt with planning & development work. Therefore, some banks even named their ERDs as Planning and Development Department. Even economists were given titles as Deputy General Manager – Planning.

As per the authors’ research, by 1980 14 nationalised banks had ERDs. Their is an interesting mention of first chief economists (banks had different job title for chief economist at that time) in the paper as well:

Bank Name Year of Establishment Chairperson First Chief Economist
State Bank of India 1956 Dr John Mathai Mr. D.S. Sanker
Dena Bank 1957 NA Mr Pravinchandra Gandhi
Bank of Baroda 1962 Mr. N.M. Choksi Dr A.C.Shah
Bank of India 1962 Mr A.D. Shroff Mr. VT Mathews
Syndicate Bank 1966 Mr. TA Pai Dr NK Thingalaya
Canara Bank 1969 Mr. KPJ Prabhu Dr GV Sathyamurthy
Union Bank of India 1970 Mr. PF Gutta Mr MA Deshpande
Bank of Maharashtra 1971 MR CV Joag Mr AT Akolkar
Central Bank of India 1971 Mr CH Bhabha Mr KR Doodha
Vijaya Bank 1974 Mr Sundar Ram Shetty NA
Corporation Bank 1976 NA NA
Oriental Bank of Commerce 1977 NA NA
Andhra Bank 1979 NA Dr S Vasudeva Shetty
Source: Ballal Murari N and Damodar B.S. (1980), Economic Research in Banks

The key responsibilities of ERD were as follows:

  • Collection and assembling of data on current economic developemnts in India and internationally
  • Corporate planning particularly credit planning.
  • Work related to Lead Bank Scheme. ERD did economic surveys of the districts helping in better allocation of credit and branch expansion.
  • Field Surveys on various facets of banks’ operations
  • Finalise annual reports, notes for regional bankers etc
  • Preparation of speeches and articles for senior execs
  • Pure research work related to banking developments in the country.

Another paper in the book by Mr L D’Mello of SBI mentions that SBI’s Economic & Statistical Research Department was reorganised in three departments:

  •  Chief Economic Adviser’s Secretariat: CEA is expected to be a common man assisting the corporate management of the bank in economic policy formulation.
  • Economic Research Department: Scanning of economic environment with a view to help the bank in decision making. Also helps in annual reports, monthly review and so on
  • Area Planning and Special Studies Department: Preparation of district credit plans under Lead Bank scheme and regional plans

I don’t know whether there has been any follow-up research on how roles of bank economists have changed since 1980. This is especially interesting when we compare 1980s ERDs with ERDs today. Most of ERDs are involved in treasury work : forecasting macro variables, interest rates, RBI policy, Union Budget and so on. There is hardly anyone doing credit/branch planning. Much of this obviously changed post 1991 reforms when interest rates/exchange rates were deregulated. Bank economists were once again drawn to the new challenges of post deregulation world.

Will be interesting to track this history..


Political economy in finance

July 7, 2021

Top 100 Economics Blogs & Websites To Follow in 2021

July 7, 2021

Feedspot has updated its list of top 100 economics blogs and websites for 2021.

Humbled to see Mostly Economics blog is on the list for 2021 as well. Thanks a lot to all the readers and well-wishers.

Central bank independence and inflation: Weak causality at best

July 6, 2021

Philipp F. M. Baumann, Enzo Rossi and Michael Schomaker in this voxeu research:

The Perils of Paradigm Economics

July 6, 2021

Prof Andres Velasco of LSE in this Proj Synd article:

“The era of big government is over,” then-US President Bill Clinton proclaimed in 1996. But President Joe Biden’s multi-trillion-dollar  are suggesting precisely the opposite. Behind the politicians stand the policy gurus, eager to put their names on – as the fashionable phrase goes – a new “policy paradigm.”
Paradigm-peddlers have not yet settled on a single label for the post-pandemic era, but frothy ideas abound. Countries should “build back better,” but only after a “great reset.” Economic growth used to be a pretty good thing on its own; these days, it is unmentionable in polite company unless it is “inclusive, equitable, and sustainable.” (I can see why, but must all three adjectives always be strung together?)
True, the pandemic revealed plenty of social and economic weaknesses that governments should have been busy fixing a long time ago. Weak state capacities, grossly insufficient health infrastructure, threadbare social safety nets, and malfunctioning labor markets – the list is long, and it applies to most developing economies and a surprising number of rich countries, too. There is nothing like a crisis to rouse slumbering policymakers and shove aside veto players who impede change.
So, change is in the air, and in many cases it will require a more muscular (though not always larger) state. But does this – and, more importantly, should it – add up to a new paradigm?

How India eradicated Polio?

July 6, 2021

Ayushi Kalyani in this Madras Courier article:

India’s battle against polio lasted over 66 years. The first research center to battle against polio was established in Mumbai in 1949. The vaccine was introduced in 1979. However, India faced unique challenges in eradicating polio.

In the mid-1980s, India reported two to four hundred thousand cases annually. Until the early 1990s, India was hyper-endemic for polio; an estimated 500 to 1000 children were paralysed every day from the disease. But India managed to eradicate polio completely. The last case was recorded in 2011.

How did India manage to eradicate polio? What lessons, if any, can we learn and apply in our fight against COVID-19?

Regulating oligopolistic stock exchanges

July 5, 2021

Giovanni Cespa and Xavier Vives in this voxeu article:

30 Years of India’s Economic Reforms: Taking stock of banking sector

July 5, 2021

2021 marks 30 years of India’s economic reforms.

My article in Moneycontrol taking stock of India’s banking sector in the last 30 years.

A brief economic history of Swadeshi

July 5, 2021

Nitin Pai in the recent edition of Indian Public Policy Review traces history of Indian swadeshi movement:

This paper traces the history of the swadeshi idea from its origins to the present day, identifies its political trajectory, assesses its impact on the Indian economy and outlines how it could be interpreted in the context of an independent, liberal democratic republic. It shows that swadeshi has always been a political project cast in economic terms and its empirical track record is far less impressive than its exalted place in the popular narrative. It concludes by arguing that India’s national interest is better served by acquiring capability than self-reliance and most importantly, by embracing an open economy. 

Distrust or speculation? the socioeconomic drivers of U.S. cryptocurrency investments

July 5, 2021

Raphael Auer and David Tercero-Lucas in this BIS paper analyse drivers for crypto investments:

Employing representative data from the U.S. Survey of Consumer Payment Choice, we disprove the hypothesis that cryptocurrency investors are motivatedby distrust in fiat currencies or regulated finance. Compared with the general population, investors show no differences in their level of security concerns with either cash or commercial banking services. We find that cryptocurrency investors tend to be educated, young and digital natives. In recent years, a gap in ownership of cryptocurrencies across genders has emerged. We examine how investor characteristics vary across cryptocurrencies and show that owners of cryptocurrencies increasingly tend to hold their investment for longer periods.


From a policy perspective, the overall takeaway of our analysis is that as the objectives of investors are the same as those for other asset classes, so should be the regulation. Cryptocurrencies are not sought as an alternative to fiat currencies or
regulated finance, but instead are a niche digital speculation object. A clarifying regulatory and supervisory framework for cryptocurrency markets may be beneficial for the industry. In fact, regulatory announcements have had a strong impact on
cryptocurrency prices and transaction volumes (Auer and Claessens, 2019, 2020), and those pointing to the establishment of specific regulations tailored to cryptocurrencies and initial coin offerings are strongly correlated with relevant market gains.

Better regulation may also be beneficial – quintessential in fact – for the industry when it comes to the basic security model of many cryptocurrencies. This is so as the long-term viability of cryptocurrencies based on proof-of-work is questionable. Auer (2019a) shows that proof-of-work can only achieve payment security (i.e., finality) if the income of miners is high,43 and it is questionable whether transaction fees will always be high enough to generate an adequate level of income to guarantee save transactions and rule out majority attacks. In the particular for the case of Bitcoin, the security of payments will decrease each time the “block subsidy” declines (Auer,2020). Potential solutions often involve some degree of institutionalisation, which in the long-run may require regulation or supervision.


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