In this oped in moneycontrol, I argue how quickly the recession worries have repalced inflation concerns.
Archive for January, 2023
Recession worries have replaced inflation concerns
January 19, 2023Macro Effects of Formal Adoption of Inflation Targeting
January 19, 2023Surjit Bhalla, Karan Bhasin and Prakash Loungani in the new IMF paper:
We examine the impact of formal adoption of inflation targeting (IT) on inflation, growth and anchoring of inflation expectations in advanced economies and emerging markets and developing economies (EMDEs).
Our paper reports several findings relevant to assessing the success of IT regimes. We find that while the early adopters of IT (pre-2000) all saw declines in inflation rates following adoption, IT adopters since then have enjoyed such success in only about half the cases. Since there is not much difference, on average, between IT and non-IT countries in mean inflation, inflation volatility and the extent of inflation anchoring, it is not easy to sort out what role IT has played in ensuring good outcomes; in particular, we cannot rule out the possibility that the success of IT may be due to ‘regression to the mean’.
Our country-level analysis—using the Synthetic Control Method (SCM) to compare outcomes in IT countries to a synthetic cohort—shows that IT adoption delivers significant inflation gains in about a third of the cases. At the same time, we also find limited support for the concern that adoption of IT systematically leads to poorer growth outcomes. At a time when central banks are struggling to keep inflation in check, our results suggest that the belief that IT adoption will be sufficient to achieve this goal cannot be taken for granted.
Determinants of Financial Literacy and Financial Inclusion in North-Eastern Region of India: A Case Study of Mizoram
January 19, 2023Bhartendu Singh, Raj Rajesh, Ramesh Golait and K. Samuel L in this RBI study discuss finacial inclusion in Mizoram:
The study evaluates the determinants of financial inclusion and financial literacy in the under-banked north-eastern region of India based on primary data collected through a survey in the State of Mizoram. A total of 523 respondents were selected from eight blocks covering four districts of Mizoram. The key findings of the study are as follows:
-
- The level of financial awareness in the region was limited – about 32 per cent of the respondents were not aware of any financial products other than the savings bank account.
- About 20 per cent of the respondents reported lack of knowledge about basic payment options, and about 43 per cent of the respondents reported lack of usage of available options despite awareness.
- About half of the respondents were found to be unaware of financial institutions other than banks, viz., non-banking financial companies, microfinance institutions and small finance banks.
- Use of life insurance cover was low among the respondents.
- The Financial Inclusion score and Financial Literacy score for the study region were generated using the OECD/INFE (Organisation for Economic Co-operation and Development/International Network on Financial Education) Toolkit. The estimated average financial literacy score was 14.37 on a scale of 0 to 21 (i.e., 68.43 per cent) and the average financial inclusion score was 3.35 on a scale of 0 to 7 (i.e., 47.86 per cent).
- Among the identified factors, the place of residence (block), employment type and nature of family (joint versus nuclear) of the respondents were seen to strongly influence their financial inclusion and financial literacy status.
By acting swiftly now we can prevent a Volcker shock
January 18, 2023Olli Rehn,
There have been voices declaring – especially in retrospect – that the ECB should have hiked its rates earlier, and that frontloading should have been more forceful. This column argues that while there may be some truth in this argument, medium- and longer-term inflation expectations are still relatively well anchored and the task now is to maintain this by making strong enough moves so that a highly restrictive monetary policy shock can be avoided in the future.
Explainer: The endless US debt ceiling crisis
January 18, 2023THe US debt ceiling has become a worry once again.
Janet Yellen, secretary of the US Treasury, wrote to the Congressional leadership last week to say that the government will reach the statutory debt limit of $31.381 trillion on January 19, 2023.
My moneycontrol explainer on the endless debt ceiling crisis.
Exorbitant Privilege? What explains the continued rise of the US Dollar?
January 17, 2023Prof Perry Mehrling usually explains monetary systems from a different lens. In this new paper, he discusses what explains the continued rise iof US Dollar in the global monetary system.
He says academic theories and models are based on multiple currencies whereas the financial world is more inclined towards a universal currency or key currency as it helps in global payments. The academic world is clearly disconnected and ence surprised to see the continued rise of USD:
The global dollar system, though repeatedly reported to be on its last legs—most recently in the Global Financial Crisis of 2008, but most famously in the Nixon devaluation of 1971—has repeatedly instead consolidated and gone on to further geographical expansion (McCauley 2021).
The key currency approach to international monetary economics, first put forward by John H. Williams in the aftermath of the 1931 devaluation of sterling, suggests that such resilience arises from the actions of market practitioners who appreciate the convenience of a global means of payment.
So the question arises, why has the key currency approach remained a minority view, if not among practicing bankers then certainly among practicing academics? This paper proposes two main reasons—the discredit of monetary optimism during the depression, and the subsequent fateful adoption of Walrasian equilibrium as the frame for academic discussion after WWII.
Complexity, Policymaking, and The Austrian Denial of Macroeconomics
January 17, 2023Scott Scheall of Arizona State University in this paper discuss Austrian school denial of macroeconomics:
Economists associated with the Austrian School of Economics are known to deny the value of macroeconomics as descended from the work of John Maynard Keynes and, especially, his followers. Yet, Austrian economists regularly engage in a related scientific activity: theorizing about the causes and consequences of economic fluctuations, i.e., the business cycle. What explains the Austrians’ willingness to engage in theorizing about the business cycle while denying the scientific import of macroeconomics? The present paper argues that the methodological precepts of the School, which have remained largely in place since Carl Menger first pronounced them at the start of the Methodenstreit, justify the kind of business-cycle theorizing that Austrians do and imply the limited scientific value of macroeconomics as descended from Keynes.
Böhm-Bawerk Meets Krugman
January 16, 2023New NBER paper by Pol Antras:
This paper develops a framework to study the interplay between world trade and interest rates. The model incorporates an explicit notion of time and of production length, along the lines of the ‘Austrian’ tradition of Böhm-Bawerk (1889). Changes in the interest rate affect production lengths, labor productivity, and the financial costs of exporting. I decompose the response of the volume of world trade to changes in the interest rate into four components: (i) a labor productivity effect, (ii) a propensity to consume out of labor income effect, (iii) a temporal dimension of variable trade costs effect, and (iv) a selection into exporting effect.
Should graduate programs keep macro in the first-year sequence?
January 16, 2023Tyler Cowen on the MR blog:
I have heard that MIT is pushing macro out of their required first-year sequence, noting I am not sure what the ex post regime will look like. But in general I am macro-sympathetic, for the following reasons:
1. Many economics graduate students are from emerging (or retrogressing) economies, and macro issues are truly important for them.
2. Many graduate students are from “developed” economies (with apologies to Peter Thiel), and macro issues are truly important for them. In America we had a major financial crisis in 2008-2009 and rampant inflation more recently. It is hardly the case that all the problems have been solved.
3. Macro is the main vehicle for teaching people about economic growth, which is probably the most important topic in economics.
4. The Fed has a very good economics staff, and probably that tradition will be harder to continue if macro is taken out of first-year sequences.
5. You might argue that standards in macro are looser, by the nature of the field. I would suggest it is easier to advance a new idea in macro, perhaps for the same reason? Along related lines, macro still has more singly-authored papers, a sign that the field requires less conformity of ideas.
6. If you write down a short list of the candidates of “Greatest Economist ever,” did they not all do macro? Doesn’t that tell us something?
That all said, I would make macro sequences “more practical,” more about economic growth, more about economic history, and less about dynamic programming than is often currently the case.
emphasis is mine..
The political origin of financial market dislocations: How an amusement park developer’s illiquidity turned into a credit market crisis
January 13, 2023Burçin Kısacıkoğlu and Sang Seok Lee in this voxeu article narrate this interesting history from Korea:
On 28 September 2022, Gangwon province’s newly elected conservative governor, Kim Jin-tae, unexpectedly declared that he would not honour the local government’s guarantee on the A1-rated (the highest rating) asset-backed commercial paper (ABCP) of Gangwon Jungdo Development Corp (GJC), the developer of the Legoland Korea amusement park located in the same province. There was no indication prior to the announcement or since then that the local government was under financial pressure: the missed payment was not due to budgetary reasons. It is understood that the new governor refused to make the payment due to political/ideological considerations as Legoland Korea was associated with the previous liberal governor (Nam 2022, Park 2022). Indeed, the 205 billion won (around $144 million) that was owed by GJC was a minor item for the local government and it was not being asked to pay back the entire amount (Park 2022). GJC missed the payment on 29 September and the default was declared on its asset-backed commercial paper on 5 October.
Explainer on Pakistan’s economic crisis
January 13, 2023I explain Pakistan’s economic crisis in moneycontrol. The economy has faced many such crises in the recent past but this one is much more intense and worrisome.
There was a time Pakistan was growing faster than India from 1960s to 1980s and has slipped ever since. Pakistan’s polity has ignored calls for economic reform for a long time. They have just lived off aid and financial assistance hoping for things to continue forever. The easy monye has stopped creating multifold problems.
World happiness, ranked
January 12, 2023David Blanchflower and Alex Bryson in this voxeu article:
Economists have shown increasing interest in using wellbeing metrics to refine public policies. This column combines data from a poll covering two million individuals in 164 countries and a survey of two and a half million Americans focusing on eight measures of wellbeing, both positive (life satisfaction, enjoyment, smiling, being well-rested) and negative (pain, sadness, anger, worry. The US does surprisingly well, with nine of the list’s top ten ‘happiest’ places, while the Nordic countries, which traditionally rank highly using life satisfaction measures, do not rank as highly with other measures.
University of Chicago Booth School’s 125th Anniversary
January 12, 2023Booth School celebrating its 125 anniversary in 2023
In celebration of the 125th anniversary of Booth’s founding in 1898, the Booth community celebrates our transformative approach to business education, the innovative ideas of our faculty, our culture of diverse perspectives and collaboration, and the global impact of our entire Booth community.
Beginning now, and throughout 2023, we are celebrating our 125th anniversary. From events across the globe to an oral history project for our alumni to activities on social media and retrospective features, join us as we showcase the impact of Booth over the past 125 years, celebrate this important milestone as a community, and present to you how Booth is poised to continue to impact the future.
Amartya Sen as a neoclassical economist
January 12, 2023Antonis Ragkousis of Kings College in this paper argues that Sen is a neoclassical economist in Veblenian sense:
Amartya Sen is often described as an insightful critic of mainstream economics, and in particular, his work in development economics, alongside the construction of the capabilities approach, has been associated with endeavors to revisit both the theory and practice of the discipline.
Despite his in-depth criticisms of certain aspects of mainstream economics, Sen’s extensive use of formal methods is suggestive of an ontological tension, one identified by Thorstein Veblen when commenting on some of his contemporaries and originally introducing the term “neoclassical”.
Veblen coined the term to highlight the ontological inconsistencies in the work of a particular group of economists, including Alfred Marshall and John Neville Keynes. Veblen argued that their work involved both an implicit recognition of a causal processual social ontology he associated with modern, thoroughly evolutionary, approaches and a commitment to a taxonomic conception of science – the latter relying on a set of methods that presupposed an associationist ontology of event regularities. For Veblen, the adherence to taxonomic methods was the classical feature of the work of the relevant group, and the commitment to an evolutionary viewpoint was the neo aspect.
This paper argues that the same tension runs through Sen’s contributions and that he is neoclassical in this specifically Veblenian sense. The assessment of the ontological inconsistencies in Sen’s work is shown to shed light on its reception within the economics academy.
Explainer: What is the Indian government’s green bonds programme?
January 11, 2023The Indian government released the framework for sovereign green bonds in November last year. The central bank followed in the New Year by announcing an issuance calendar for these bonds on January 6.
I explain in moneycontrol the green bonds framework and the issuance calendar.
Dr. Michael Debabrata Patra re-appointed as RBI Deputy Governor for one year
January 11, 2023Michael Patra was appointed as DG of RBI on Jan 15 2020 for a period of three years and has been reappointed for another year.
Despite many articles and posts, the government does not get the appointment rules. The rule to appointing people at key policy positions is to give them a tenure which is long (enough), non-renewable and non-dismissable (barring exceptional circumstances). But we do the opposite of short, renewable and easily dismissable.
But then one can take solace from the fact that reappointment was done before 4 days of the tenure term.
A template for a central bank leader
January 11, 2023Stefan Ingves recently retired as GOvernor of Seeden’s central bank. after servong for 16 years. The Sweden central bank organised a symposium in his honor.
Mr Agustín Carstens, General Manager of the BIS, spoke on the leadership lessons one can draw from Ingves’s career:
It is a great pleasure, to speak to you in this celebration to honour Stefan Ingves. He has been at the very core of his country’s central bank during remarkable times, and has been pivotal in at least two ways: strengthening an institution capable of meeting the obligations that come with independence; and anticipating the need to take the next step in the evolution of central bank money.
My remarks tonight will link three themes. First, the demands created by central bank independence; second, the need to ensure that central banks have the capacity to successfully meet these demands; and third, the role of leadership in all this. In Stefan, these themes intersect. He is someone who truly understands what it means when important responsibilities are delegated to the central bank, what that means for institutional capacity and what is required for effective leadership.
On leadership:
Stefan is not the Riksbank, but leadership makes a difference. Leaders are there to foster institutional capacity, deploying their strategic vision in the process. Strategic vision is about lifting one’s eyes beyond the immediate horizon, and working to develop an institution’s ability to respond to new challenges. Let me illustrate Stefan’s capabilities in this area with three examples.
-
- First, Stefan has long understood that setting the policy interest rate is not the be all and end all of a central bank’s monetary policy task. Helped by a career path that includes the oldest continuing central bank and the IMF, he has kept in mind the history of money and monetary systems and the global diversity of monetary control mechanisms. These have made him quicker than most to appreciate the range of instruments that can be useful and efficient in central banking. This appreciation rightly makes him nervous about limiting the instruments in the toolkit just to those suited to peaceful times. A Stefanism that we all agree with is: “at some point, a central bank will need to use the full extent of its balance sheet”.
- My second example concerns the Riksbank’s exemplary engagement in international forums, including forums that we at the BIS facilitate and in which Stefan himself has excelled – I’m speaking here of his chairing of the Basel Committee and the BIS’s own Banking and Risk Management Committee. The benefits for the Riksbank and for Sweden were by no means immediate or obvious for all to see. But, as Stefan maintains, without some incentive, nobody but the Swedes are going to look after Sweden. Sweden’s influence on the rest of the world, and thus on its own future, will not be very large if it rests just on Sweden’s economic weight. To punch above that weight, Sweden needs to be proactive and engaged. And this helps to explain Stefan’s insistence that the Riksbank “be perceived as a constructive participant in the international arena”.
- My third example concerns the future of central bank money. Stefan was way ahead of most of us in grasping the need to be flexible about the technology of central bank money. The waning use of paper money by Sweden’s public may have helped him towards that conclusion, to be sure. But Stefan’s early initiatives to evaluate e-money also demonstrates a flexibility of thinking, and a willingness to embrace change. In any event, I’m told that Stefan went to Cecilia Skingsley as early as 2014 to ask her to start thinking about a critical what if – what if the product we currently provide no longer fulfils our obligation to provide a reliable means of exchange? When central bank e-money became one of the possibilities to consider, Stefan met resistance, even from some of his colleagues. The Stefanism that comes to mind here is: “my job is to produce money that people want to use!” Many of us have come to appreciate the implications of that remark.
The War in Ukraine and the Revival of Military Keynesianism
January 10, 2023Prof Jan Toporowski of SOAS in this INET article:
Following the Russian invasion of Ukraine, Western governments are committed to increased defense expenditure. But their armaments industries, under conditions of peace-time economic efficiency, do not have the spare capacity to ramp up production. Many are already operating shifts around the clock to satisfy orders comings in. To increase production they need to invest in new capacity. However, this is only worthwhile if armaments companies can be assured of contracts into the future expected lifetime of any new productive equipment. Industrialists with interests in arms supplies are now complaining about the time it takes to get contracts signed. An additional worry for them is the prospect of peace breaking out, which may leave armaments manufacturers with costly, but unused productive capacity that may have to be scrapped with the next technological innovation. (Much the same dilemma is faced by oil and natural gas producers who are being urged to expand production to replace sanctioned Russian supplies).
In short, weapons producers want governments to underwrite the profitability of their investments. This is precisely the alliance between industry and the state that formed the basis of the military Keynesianism that Michal Kalecki criticized during the 1950s. He showed how, at the height of the Cold War, Western governments subsidized private capital with arms contracts paid for by taxpayers. This arrangement lay at the heart of what has come to be described, somewhat misleadingly, as a ‘golden age’ by heterodox economists, who lament its replacement by “neoliberalism.” The real danger is not neo-liberalism but the takeover of the state by industrial interests which cannot be denied because of the external and internal threats to democracy.
The advent of military Keynesianism is a warning against complacency about the moral superiority of the West in defending Ukrainian democracy. The resurgence of what President Eisenhower once called the military-industrial complex brings our industrial magnates closer to centers of power. In this respect, our oligarchs are no better than Russian oligarchs, even if we defend existing democracy because it offers more scope for progressive politics than autocratic nationalism.
Military Keynesianism challenges democrats about the limits of the democracy that is being fought over in Ukraine. Is the future of that democracy assured by a state which underwrites industrial profits? Or does that future also require the extension of civil rights and welfare to all classes? If the struggle for democracy is just to save Ukraine for democracy, or to extend democracy in the Russian or Chinese spheres of influence, then that struggle will take the West down the path to the oligarchic capitalism of Russia.
I am not sure whether Military Keynesianism is the right word. Keynes wrote ‘Eonomic consequences of peace’ after the first world war, worried that stiff reparations will create diffirculties for Germany. He also actively led bretton woods agreement despite poor health and tried to build institutions to prevent future wars.
Economic Literacy: What Is It and Why Is It Important?
January 10, 2023Madeleine McCowage and Jacqui Dwyer of Reserve Bank of Australia in this article:
One of the core objectives of the Reserve Bank’s public education program is to improve economic literacy. While the social benefits of economic literacy are well established, defining what is meant by this term is not straightforward and has been the subject of debate over many decades. This article explores the meaning of ‘economic literacy’. To arrive at a working definition, it discusses the economic principles that should be understood for someone to be considered economically literate, along with the topics they should be familiar with and the ways of thinking that we would expect them to display. In doing so, it distinguishes between economic and financial literacy. The article concludes by posing questions for future research on how economic literacy in Australia might be measured and how it might be supported.
On eco literacy vs fin literacy:
Financial literacy is focused on the capability of someone to understand their own situation. Economic literacy is focused on the capability of someone to understand their own situation, its broader economic context and thereby the situation of others. For example, while a financially literate person would understand what an interest rate is and what it means for their personal finances, an economically literate person would also understand why an interest rate has been changed and how this change will affect the broader economy. Consequently, there is a sense in which financial literacy is nested within economic literacy
Future of Money and Its Implications for Society, Central Banks, and the International Monetary System
January 10, 2023Prof Eswar Prasad of Cornell University discusses future of money in this speech:
Economists are storytellers at heart. So I have for you today a story of remarkable technological innovation, some unfulfilled promises, and unintended consequences. The story, of course, revolves around money, which makes it especially appropriate that I’m giving this lecture here today. I am very privileged to be following in the footsteps of many distinguished people who have delivered the Homer Jones Memorial Lecture, which, after all, is to honor somebody who had a great deal to do with the development of monetary economics and thinking about how money affects us.
The story I have for you today is going to revolve around how money is going to be reshaped: in the way we think about it, the way we relate to it, and the way it helps us organize our economic activities. And it’s going to go through a lot of terrain. We’ll start by thinking a little bit about basic financial innovations, then delve into the world of cryptocurrencies (including Bitcoin and much more), and then talk about the possibility that we might have digital versions of the paper currency we are all used to. But then we’ll think about what all of this means for financial markets and institutions, for central banks such as the Fed, and, indeed, for the international monetary system. But it’s not just going to be about finance and economics. It’s ultimately going to have some implications for thinking about how we organize society and our day-to-day interactions.
Mostly Economics 
