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Archive for October 19th, 2021

Peer effects and debt accumulation: Evidence from lottery winnings

October 19, 2021

Magnus A. H. Gulbrandsen of Norges Bank in this interesting paper track the impact of lottery wins on neighborhoods:

I estimate the effect of lottery winnings on peers’ debt accumulation using administrative data from Norway. I identify neighbors of lottery winners, and estimate an average debt response of 2.1 percent of the lottery prize among households that live up to ten houses from the winner. Analyzing heterogeneity, I find that neighborhood characteristics and shared characteristics with the winner matter for the debt response: there is a tendency for greater effects for those (1) residing closest to the winner, (2) residing in single-household dwellings, (3) with a longer tenure, and (4) with a household structure similar to that of the winner. Finally, estimates of the (imputed) expenditure response
among neighbors indicate that they accumulate debt to finance increased spending, consistent with a “keeping-up-with-the Joneses” type explanation, where neighbors react to each others expenditure.

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Should Financial Stability be a Monetary Policy Goal? Evidence from India

October 19, 2021

New paper in RBI Oc-21 bulletin by a team of RBI researchers ( Supriya Majumdar, Snehal S. Herwadkar, Jugnu Ansari, Arti Sinha, Radheshyam Verma, Jibin Jose, Sayantika Bhowmick, Arpita Agarwal and Sambhavi Dhingra).

The paper analyses whether RBI should have an explicit financial stability goal. Their paper says mix of monetary policy and macroprudential policy helps tide through both the goals of monetary and financial stability:

Empirical literature is divided on whether financial stability should be adopted by an inflation targeting central bank as an explicit policy objective. While arguments on both sides permeate, cross-country evidence suggests that there are only a few inflation-targeting central banks committing to such an explicit target, although all of them strive to achieve the financial stability goal.

In the Indian context, analysis using vector autoregression (VAR) framework suggests that while monetary policy has been most effective in containing inflation risks, macroprudential policies were efficaciously deployed to contain financial stability concerns. The present article argues that since their inception in early 2000s in India, macroprudential policies have generally complemented monetary policy and it is important to continue with the same approach.