Archive for May, 2023

« Older Entries
Newer Entries »

International Financial Centre Activity: shifting momentum towards Paris

May 19, 2023

François Villeroy de Galhau, Governor of the Bank of France in this speech talks about how financial activty is moving from London to Paris:

This first Bloomberg forum in Paris is more broadly a very timely and welcome initiative, which echoes financial players’ growing interest for the French capital. Paris has indeed kept asserting itself as a major financial centre over the last few years, and stands out as unique in the network of European financial centres.

I can only invite you to read the excellent Bloomberg article published on 18 April, which perfectly captures this multifaceted trend.1 Its title, Banks betting on Paris say there is life after London, should bring definitive reassurance to other banks, and encourage them to make the same winning bet. So should its content, for instance: “since early 2018, nine of the biggest international banks have increased the assets booked at their eurozone entities more than sixfold to almost €1.7 trillion”; “if any city can make claim to being the bloc’s new pre-eminent hub, it’s Paris”, “many executives who spoke to Bloomberg said they expect headcount to keep growing from local hiring [in Paris]”.

Indeed, Paris is the only financial center to offer such a wide range of financial activities, from global asset management to insurance and banking. Beyond the large number of subsidiaries established in or relocated to Paris since Brexit – at least thirty banks, twenty asset managers, several market platforms for instance –, we should also consider the activities performed through branches in Paris, especially trading rooms and desks, which are sometimes far more significant than the subsidiaries to which they are legally bound. Contrary to other cities, which have attracted one or two kinds of financial services, Paris is the only one to have benefited from relocations on all segments of the financial industry.

More importantly still, these moves were not one-off events: the momentum has lastingly shifted from London to continental Europe. We observe a steady shift, which shows no sign of losing steam. Combine this with the strength of some key sectors of our economy; the result is that Paris now stands as the first stock market capitalisation in Europe, ahead of London.2 And as the Bloomberg article points out, despite some political unrest earlier this year, Paris is true to its motto: fluctuat nec mergitur, it is rocked by the waves but does not sink.

Posted in Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance, Speech / Interviews | Leave a Comment »

Our Thousand-Year Struggle over Technology and Prosperity

May 19, 2023

Profs Simon Johnson And Daron Acemoglu have written a new book: Power and Progress.

RO Johnson of INET discusses the book with Simon Johnson:

Rob Johnson:

So, you have this book, extraordinary book, 500 pages plus all kinds of beautiful explorations as a doctor’s son, diagnosis, potential remedies, the yin and yang of each perspective scenario and remedy and possibilities. It doesn’t come across as dogmatic, it comes across as thoughtful, it comes across as deep. What inspired you to write this book? What did you see and what did Daron see that brought you to the focus on this effort?

Simon Johnson:

Well, Rob, as I think Daron and I have worked together a really long time, actually 25 years, pretty close. And we’ve been talking about when societies do better and when there are problems. But it was really the election of 2016 I think that catalyze us to think that maybe perhaps we needed to focus a bit more on the technology of today and the technology of tomorrow and understand why what many people in including me personally had thought was going to be the promise of the internet. The promise of digital technology, why that had not only failed to deliver but why that had actually created some problems that we had to now deal with.

And of course, as we started to write, it became clear that artificial intelligence and now what everyone’s calling generative AI or versions of chat GPT, this was going to become really very important for the discussion about economic policy as well as everything else. So, all these threads came together as we wrote the book, Rob.

 

Posted in Academic research & research papers, Economics - macro, micro etc, Growth and development, Speech / Interviews | Leave a Comment »

Has the Phillips Curve Become Steeper?

May 19, 2023
Anil Ari, Daniel Garcia-Macia, Shruti Mishra in this IMF paper look at the changes in Phillips Curve due to ongoing changes in economy:

This paper analyzes whether structural changes in the aftermath of the pandemic have steepened the Phillips curves in advanced economies, reversing the flattening observed in recent decades and reducing the sacrifice ratio associated with disinflation. Particularly, analysis of granular price quote data from the UK indicates that increased digitalization may have raised price flexibility, while de-globalization may have made inflation more responsive to domestic economic conditions again.

Using sectoral data from 24 advanced economies in Europe, higher digitalization and lower trade intensity are shown to be associated with steeper Phillips curves. Post-pandemic Phillips curve estimates indicate some steepening in the UK, Spain, Italy and the euro area as a whole, but at magnitudes that are too small to explain the entire surge in inflation in 2021–22, suggesting an important role for outward shifts in the Phillips curve.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

How the US film industry mitigates financial risk

May 18, 2023

Alexander Cuntz, Alessio Muscarnera, Prince C. Oguguo and Matthias Sahli in this voxeu research article:

Film production is a high-risk venture that requires large up-front investment. This column uses data from loan registers, copyright registration, and interviews with industry experts to explore the private-sector solutions to financial risk mitigation and the most common types of financial deals in the US film industry. Intellectual property rights are widely used as a collateral in lending deals, in a multi-billion dollar industry where tangible assets are particularly scarce. Co-production, loan syndication, risk indemnification, and insurance can help transfer and mitigate risk among stakeholders in US film finance.

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

US Senate Committee examining the failures of Silicon Valley Bank and Signature Bank

May 18, 2023

The US Senate Committee on Banking, Housing and Urban Affairs has been holding multiple hearings to examine the recent banking crisis in US.

These are useful references to understand the US banking crisis from multiple perspectives.

Mr. Gregory W. Becker, Former CEO of Silicon Valley Bank discusses his stock options in SVB crisis:

My expiring SVB stock options and compensation have been the subject of much speculation over the past few weeks. A large portion of my compensation, as well as other SVB executives’ compensation, was in the form of stock that vested over time, as is typical in the banking industry. I believed very strongly in SVB and was heavily invested in SVB’s stock. As a result, I held nearly five times the amount of shares required by the Board, and I planned to hold the vast majority of my SVB stock until after I retired.

During my tenure as CEO, I regularly sold the underlying shares of my stock options before they expired through 10b5-1 plans. I believed that using 10b5-1 plans to sell my stock options was the most ethical means to manage this part of my compensation, and I required the rest of our executive team to do the same.

My stock option exercise and sale in February 2023 followed a similar pattern. Once the trading window opened after SVB announced its financial results for the fourth quarter and fiscal year of 2022, I entered into a 10b5-1 trading plan on January 26, 2023, to exercise and sell options granted in 2016 that were set to expire on May 2, 2023. SVB’s legal team approved that plan on the basis that I was not in possession of any material non-public information at that time, which I also believed. The trade executed on February 27 pursuant to pre-determined stock price and date triggers—I did nothing to accelerate that trade and only learned that it had executed after the fact.

Similar to my stock sales, SVB’s incentive compensation was determined in the normal course of business. Bonuses for 2022 performance were paid to all U.S. bank eligible employees and were part of SVB’s regular, annual incentive compensation program. The payment date was set by our Human Resources department in advance and to my knowledge underwent the normal approval process. There was nothing irregular or accelerated about these payments, and at the time the payments were made I was focused on ensuring the survival of SVB.

 

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

The extraordinary generosity of central banks towards banks: Some reflections on its origin

May 16, 2023

Paul De Grauwe and Yuemei Ji in this voxeu research article point how central banks have transferred massive amount of their profits to banks:

One legacy of quantitative easing (QE) is that banks have accumulated huge amounts of bank reserves.  As a result, the bank reserves market is characterised by a large excess supply. This has kept the money market (interbank) rate stuck at the zero lower bound for many years, until the central banks felt compelled, from early 2022 on, to raise interest rates to fight inflation.  Given the excess supply of bank reserves central banks could only perform this feat by raising the rate of remuneration of bank reserves. As a result, this rate of remuneration became the new (not zero) lower bound in the money market (De Grauwe and Ji 2023a, 2023b).

This policy now has created a lot of ‘collateral damage’. Since the stock of bank reserves is extremely high, the central banks now pay out large amounts of interest rate remunerations to banks, which increase with every interest rate hike. We show this in Table 1. This presents the outstanding bank reserves in the euro area, the US, and the UK in May 2023. We also show the interest rates prevailing at that time (second column). The third column presents the total interest payments made by the respective central banks to their domestic banks. The last column expresses these as a percent of GDP.

These are substantial numbers. To give some perspective, these interest payments exceed the seigniorage gains (profits) of modern central banks. For the US, for example, it has been estimated that seigniorage gains are less than 0.5% of GDP (Barro 1982, Cutsinger and Luther 2022). 1 Thus, as a result of their anti-inflationary policies, central banks transfer more than the total seigniorage gains to private banks. An extraordinary outcome of the fight against inflation. This is all the more spectacular as the seigniorage gains of central banks find their origin in the monopoly power granted by governments to central bankers. One would expect that these monopoly profits would then be returned to the government. Instead, they are returned more than fully to private agents.  

Solution?

We believed that a two-tier system of minimum reserves is a reasonable alternative to the present system that subsidises banks in an exorbitant and unsustainable manner.  We found out, however, that this is not generally considered to be reasonable. The resistance of central bankers and many economists (cheered on the sidelines by bankers) to the use of minimum reserve requirements is formidable.  2 This led us to ask the question of where this hostility comes from.

There are just so many threads on linkages between central bank policy and commercial banks.

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

Libor is dead. The question remains if any lessons have been learnt from its crisis

May 16, 2023

Last week, the RBI issued a press release  which informed that banks/FIs were expected to have developed the systems and processes to manage the complete transition away from Libor from July 1, 2023.

My piece on what led to this decision and what future has in store post Libor.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

Rest in Peace Prof Robert Lucas

May 16, 2023

Prof Robert Lucas of Univ of Chicago passed away.  He was one of the giants who shaped the subject of macroeconomics.

This story on his Nobel prize is quite something. His wife in her divorce settlement had said that if he does win the Nobel Prize she should get half the prize money.  Lucas did get the prize and the ex-wife half the money. One of those rare instances, when the wife had a high impression of husbabd’s abilities.

Rest in Peace Sir.

Posted in Economist, Medals and awards | Leave a Comment »

A Teacher Writes to Students: How Economics and Finance Can Be Studied

May 15, 2023

For the next few weeks, Mostlyeconomics blog will be featuring posts by Prof Annavajhula J C Bose of Sri Ram College of Commerce, Delhi University. Prof Bose reached out to this blog to share his oriented to inspire students to find and read on unconventional economics. Read his insightful interview on economics and state of teaching economics.

This is the first article of the series.

How Economics and Finance Can Be Studied
By Annavajhula J C Bose, PhD
Department of Economics, SRCC, DU

(more…)

Posted in Economics - macro, micro etc, Economist, Financial Markets/ Finance | Leave a Comment »

Judging Nudging: Understanding the Welfare Effects of Nudges Versus Taxes

May 15, 2023
John A. List, Matthias Rodemeier, Sutanuka Roy & Gregory K. Sun evaluate efficiency of using nudges in three different domains: smoking, vaccinations and energy consumtion:
While behavioral non-price interventions (“nudges”) have grown from academic curiosity to a bona fide policy tool, their relative economic efficiency remains under-researched. We develop a unified framework to estimate welfare effects of both nudges and taxes. We showcase our approach by creating a database of more than 300 carefully hand-coded point estimates of non-price and price interventions in the markets for cigarettes, influenza vaccinations, and household energy.
While nudges are effective in changing behavior in all three markets, they are not necessarily the most efficient policy. We find that nudges are more efficient in the market for cigarettes, while taxes are more efficient in the energy market. For influenza vaccinations, optimal subsidies likely outperform nudges. Importantly, two key factors govern the difference in results across markets: i) an elasticity-weighted standard deviation of the behavioral bias, and ii) the magnitude of the average externality. Nudges dominate taxes whenever i) exceeds ii). Combining nudges and taxes does not always provide quantitatively significant improvements to implementing one policy tool alone.

Posted in Academic research & research papers, Behavior Eco/Fin, Economics - macro, micro etc | Leave a Comment »

50 Years of Exchange-Traded Options

May 12, 2023

Howard Baker in Financial History magazine traces history of Exchange-Traded Options

Fifty years ago, on April 26, 1973, the Chicago Board Options Exchange (Cboe) opened its doors for business, offering investors, for the first time, standardized stock options contracts traded on a national securities exchange. These contracts, covering call options on 16 stocks, introduced the investment world to a number of innovations, including standardized terms and conditions, next-day settlement and an affiliated clearinghouse which issued and guaranteed the performance of all contracts traded.

Posted in Financial Markets/ Finance | Leave a Comment »

The Political Necessity of the Licence-Permit Raj

May 12, 2023

Prof Rashmi Venkatesan of National Law School of India University in this article at TheIndiaForum:

In contemporary popular imagination, the ‘license-permit-quota raj’ symbolises everything wrong with state regulation and intervention in ‘socialist’ India. Many, like Arvind Panagriya, an economist and former boss of the NITI Ayog, have linked it to the country’s “meagre progress for almost four decades” and dismiss it as as bad economics based on socialism.

While the logic of market reforms is repeated often to justify the disbandment of licencing in the wake of the 1991 reforms, much of the commentary overlooks the rationale and history of licencing. Industrial licencing emerged out of the nationalist discourse on development, and was one of the key instruments in establishing and legitimising the sovereignty of the post-colonial Indian state. It was not initiated to give effect to any one coherent political ideology, but rather, to consolidate the eminent domain of the state in matters of industrial governance so that the state could pursue any political and economic goal it identified.

Fundamentally a political project, industrial licencing cannot be analysed only in economic terms. It must be contextualised in the wider political and legal imagination of a post-colonial India.

 

Posted in Academic research & research papers, Indian Economy/Financial Markets | Leave a Comment »

Social media Rumor Mills and Bank Runs

May 12, 2023

Federel Reserve Governor Bowman in this speech on Bank runs higlights role of social media and variious communication mediums available today:

The speed and size of deposit withdrawals were a feature, not a cause, of the recent U.S. bank failures. We live in a world where a wide array of communication tools—text messaging, group chats, and social media postings—have enabled expedited, if not always more accurate, dissemination of information.

The spread of information has always played an important role in bank confidence and bank runs. When information is more readily and quickly accessible and shared among shareholders, creditors, customers, and depositors, bank management needs to be attuned to how it communicates, especially when remediating identified weaknesses.

The failure of SVB illustrates this dynamic. Uninsured depositors were connected by a closely linked network of business relationships and contacts, and strong ties with venture capital fund investors. The flow of information among these depositors—and the mechanisms that pushed them to act collectively—seem apparent in retrospect, but the closely linked relationships among this group exacerbated the risks involved in SVB’s public communication of its remediation strategy.

But while the risk of uninsured depositors acting collectively was a significant vulnerability, communications from management caused this group to begin to withdraw their deposits on a massive scale and in a coordinated fashion. We know that there were many supervisory issues at SVB over several years. At the time the bank failed, it had been selling securities to improve liquidity and raising capital to address some of these fundamental weaknesses in its funding and liquidity. Simply the act of announcing that the bank’s management was taking steps to remediate these issues created panic—highlighting the risks they were confronting—and the panic spread quickly.

Social media has also played a role in fueling stock price volatility, which can lead to other risks to a bank. In October of last year, rumors circulated about Credit Suisse’s stock price conflating stock price with capital and liquidity strength. Despite Credit Suisse management’s efforts to intervene and calm markets, its stock experienced significant volatility, resulting in an increase in the spreads on the firm’s credit default swaps and a decrease in the value of its bonds. Credit Suisse had been dealing with significant issues for an extended period of time, but this incident highlighted how quickly investor sentiment can change in the age of social media.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance, Speech / Interviews | Leave a Comment »

India’s Regulatory Shift: An Examination of Five Agencies of the Post- Liberalisation Era

May 12, 2023

Arkaja Singh of CPR analyses design of regulatory agencies in India:

This paper explores the design of Indian regulatory agencies established post-liberalisation from an administrative perspective. Regulatory agencies were set up to replace state inefficiencies, and to discipline profligate state agencies, even as much as they were a response to state-market reorganisations and the challenge of privatization. Regulation provided an opportunity for upper levels of the Indian bureaucratic state to recast their power, with the idea that it would provide a framework for economic rationality, independence and technical specialization to take centre-stage.

In actual practice however, the design of each of the regulatory agencies is shaped largely by pre-existing legal frameworks and institutions, and the agencies have remained quite tied in with their counterpart departments and on retired bureaucrats.

However, in spite of these limitations, these agencies have some common features imbued by legislative mandate and organisational design which are unique in the context of the Indian state.

They have focus and stability, a degree of functional independence, and most importantly, a concentration of power, which enables them to think through and implement complex policy transitions from multi-year and context-specific perspectives. The paper builds on learnings from a series of conversations with regulatory agency chairpersons in order to identify what regulatory governance is, in terms of the powers and mandate of the regulatory agencies and what makes them distinctive from the rest of public administration.

The five agencies are:

  • the Central Electricity Regulatory Commission,
  • the Pension Funds Regulatory and Development Authority,
  • the Maharashtra Water Resources Regulatory Authority,
  • the Food Safety Standards Authority of India, and
  • the Real Estate Regulatory Authorities. 

Posted in Academic research & research papers, Indian Economy/Financial Markets | Leave a Comment »

ONDC has made a promising start. But, it could learn from ‘Market Design’

May 11, 2023

My new piece in moneycontrol on ONDC (Open Network Digital Commerce).

I draw lessons from market design on making the network more robust and sustainable.

Posted in Academic research & research papers, Economics - macro, micro etc, Indian Economy/Financial Markets, Policy | Leave a Comment »

Global monetary and financial spillovers: Evidence from a new measure of Bundesbank policy shocks

May 11, 2023

James Cloyne, Patrick Hürtgen and Alan Taylor in this voxeu research draw lessons on spillovers from Bundesbank policy during 1979-88:

There is a lively debate about the international transmission of monetary policy, the role of the exchange rate regime, and the role of different central banks for the global cycle. This column sheds new light on these issues, focusing on the European Monetary System between 1979 to 1998. It shows that Bundesbank policy spillovers were much stronger in major economies in the European Monetary System with Deutschmark pegs than in economies outside the system with floating exchange rates. Furthermore, compared to monetary spillovers from the US, German spillovers were comparable or even larger in magnitude for both pegs and floats.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc | Leave a Comment »

Why MMT is needed

May 10, 2023

Lars Syll on Real World Economics Review Blog:

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

But the truth is that public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others have to pay the taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt cancels itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren repay the national debt these payments will be made to our children and grandchildren.

To both John Maynard Keynes and Abba Lerner, it was evident that the state has the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that means that it has to take on debt and (more or less temporarily) underbalance its budget — so let it be! Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or run down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity, and balanced budgets mean increased unemployment and destabilizing prices, they have to be abandoned.

 

Posted in Blogs to Read, Economics - macro, micro etc | Leave a Comment »

What Is Driving the Differences in Inflation Across U.S. Regions?

May 10, 2023

Elainia Gupta  and Leslie McGranahan of Chicago Fed in this paper analyse the differences in inflation across US regions:

There has been considerable concern in the United States over the elevated inflation rate. With inflation higher than it’s been in decades, it is natural to ask whether inflation is higher in certain areas of the country than in others and why. When talking, teaching, or learning about inflation, we often focus solely on national inflation.1 However, there are often important differences between regional and national inflation. For the calculation of the Consumer Price Index (CPI), the national inflation rate is an aggregation of the inflation rates of the various urban areas surveyed by the U.S. Bureau of Labor Statistics (BLS). 

….

We find that price changes in the housing sector are the main driver of regional differences in inflation in the two time periods we investigate: January 2002–January 2023 and January 2019–January 2023. Although residents in different areas do have different purchasing patterns, we find that this plays only a small role in discrepancies in regional inflation. One exception to this is that lower transportation expenditure weights in the Northeast have contributed to lower inflation readings in the Northeast recently. While these differences are notable, we also observe that inflation across regions tends to move together and that in all four Census regions, inflation rates have been far higher in recent years than in previous periods. 

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc | Leave a Comment »

Reforming US Deposit Insurance System

May 9, 2023

FDIC has released a new report which presents an overview of US deposit insurance system and reforming it.

As part of its analysis, the FDIC outlines three options for deposit insurance reform:

    1. Limited Coverage: Maintaining the current deposit insurance framework, which provides insurance to depositors up to a specified limit (possibly higher than the current $250,000 limit) by ownership rights and capacities.
    2. Unlimited Coverage: Extending unlimited deposit insurance coverage to all depositors.
    3. Targeted Coverage: Offering different deposit insurance limits across account types, where business payment accounts receive significantly higher coverage than other accounts.

Of the three options outlined in this report, the FDIC believes targeted coverage best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs. These proposed options would require Congressional action, though some aspects of the report lie within the scope of the FDIC’s rulemaking authority.

Following the failures of Silicon Valley Bank and Signature Bank, FDIC Chairman Gruenberg directed the agency to conduct an analysis of the current deposit insurance framework and identify reform options for consideration, as well as additional tools that can be used to maximize the efficiency of the system.

 

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance | Leave a Comment »

Dampening global financial shocks: can macroprudential regulation help (more than capital controls)?

May 9, 2023
Katharina Bergant, Francesco Grigoli, Niels-Jakob Hansen and Damiano Sandri in this BIS paper:

We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the VIX. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. We do not find evidence that capital controls provide similar benefits.

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance, Policy | Leave a Comment »

« Older Entries
Newer Entries »
Design a site like this with WordPress.com
Get started