The Mundell-Fleming IS-LM approach has guided generations of economists over the past 60 years. But countries have experienced new problems, the international finance literature has advanced, and the composition of the global economy has changed, so the scene is set for an updated approach. We propose an Integrated Policy Framework (IPF) diagram to analyze the use of multiple policy tools as a function of shocks and country characteristics. The underlying model features dominant currency pricing, shallow foreign exchange (FX) markets, and occasionally-binding external and domestic borrowing constraints. Our diagram includes the use of monetary policy, FX intervention, capital controls, and domestic macroprudential measures. It has four panels to explore four key trade-offs related to import consumption, home goods consumption, the housing market, and monetary policy. Our extended diagram adds fiscal policy into the mix.
Archive for February, 2024
An Integrated Policy Framework (IPF) Diagram for International Economics
February 29, 2024Settlement of money and securities in central bank money reduces risk
February 29, 2024Lena Wiberg of Riksbank writes a useful primer on central bank money:
The traditional payments and securities markets are undergoing a structural transformation, driven by, among other things, increased competition through new technologies and new actors, as well as new legislation. As part of the structural transformation, current actors in the financial sector see an opportunity to improve efficiency and optimise costs. They are therefore reviewing their services offerings and exploring new innovative solutions to streamline transaction flows, especially across borders.
In times of change, it is important that the actors in the financial sector work to provide safe systems for the settlement of money and securities. One way to reduce settlement risk is to settle in central bank money. As a central bank cannot go bankrupt, this removes the credit risk for participants in a settlement system provided by a central bank.
However, it is not always possible to settle in central bank money, and in these cases so-called commercial bank money is instead used for settlement. Settlement in commercial bank money takes place in a commercial institution, such as a bank, which means that participants in the system may have a credit risk with regard to that institution.
Macro-financial policy analysis in bank-dependent economies: an operational manual
February 29, 2024Pierre-Richard Agénor and Luiz Awazu Pereira da Silva of BIS have written a nice detailed manual/book on macro-finance in bank dependent economies:
Since the global financial crisis of 2007-08, much academic and policy-oriented research has focused on the design, or redesign, of macroeconomic and financial policy frameworks. This literature has brought to the fore the role of banks and financial frictions in macroeconomic fluctuations. It has also explored how macroeconomic and regulatory policies should be combined to respond to domestic and external shocks, and how the institutional mandates of central banks and regulators should be formulated, or amended, when both price stability and financial stability matter for society.
In that context, interactions between monetary policy and macroprudential regulation – with its focus on systemic risk, and the stability of the financial system as a whole – have received particular scrutiny. In middle-income countries, where vulnerability to external shocks has been a perennial problem, much attention has also been devoted to the role of foreign exchange intervention and short-term capital controls in promoting stability.
The Failure of Silicon Valley Bank and the Panic of 2023
February 27, 2024Andrew Metrick has written a superb paper in Journal of Economic Perspectives on the SVB crisis:
Breaking down success: How emerging market central banks have outperformed the Fed and ECB in the post-Covid inflation surge
February 27, 2024Tatiana Evdokimova, Piroska Nagy-Mohacsi, Olga Ponomarenko and Elina Ribakova in this voxeu post:
Emerging market central banks, once laggards of the central banking policy scene, have made remarkable progress in improving their policy frameworks in the past two decades. This column analyses communication by 22 emerging market central banks over the last two decades and finds that they have markedly improved their transparency and the readability of their statements, proved more astute inflation forecasters, and used forward guidance more sparingly. These improvements have been put to good use in the post-pandemic period and may offer lessons to advanced economy central banks.
The post is based on this paper.
RBI’s Financial Literacy Ideathon Competition
February 26, 2024RBI is organising Financial Literacy Ideathon for Postgraduate students:
Reserve Bank of India (RBI) is observing the Financial Literacy Week (FLW) 2024 from February 26 to March 1, 2024 on the theme “Make a Right Start – Become Financially Smart”. FLW has been observed every year since 2016 with the aim of promoting financial literacy.
The theme for this year, is targeted towards young adults, mainly students. The objective is to increase awareness on the advantages of inculcating financial discipline from an early age with inputs on saving, budgeting, power of compounding, banking essentials and cyber hygiene.
As part of FLW campaign of 2024, RBI is pleased to announce a Financial Literacy Ideathon, which is aimed at soliciting innovative ideas from postgraduate students, on creative strategies to propagate financial literacy among the youth so as to empower them to engage in responsible financial behaviour and take informed financial decisions.
The PG students are supposed to write an ideation paper, not exceeding 2000 words on the topic ‘Money Matters for Young Adults; Rethinking Outreach Strategies’. The entries can be submitted from February 26 – March 20, 2024.
More details here.
What would you do if you found a mountain of gold and silver? Exorbitant privilege then and now
February 26, 2024Nuno Palma and Andre C. Silva in this voxeu research piece trace history of exorbitant privilege:
China’s foreign reserves totalled more than $3.3 trillion in 2022. This column turns to an event in the distant past to help explain these large reserves. Two shocks hit the world during the 1500s: a technological shock and a monetary shock. The technological shock was the decrease in trading costs obtained with new sea routes between Europe and Asia. The monetary shock was the discovery of vast reserves of gold and silver in America. What followed was the intensification of trade, an increase in imports of Asian goods by Europe, and reserve accumulation in Asia. Trade deficits with Asia and reserve accumulation are not a novelty; confidence in the dollar and in Treasury bills is the new mountain of gold and silver.
New Household Consumption Survey: High time we release new CPI data
February 26, 2024The government released the highly awaited Household Consumption Expenditure Survey over the weekend.
My piece in moneycontrol on the findings and implications of the new survey.
A New Measure of Central Bank Independence
February 26, 2024This paper constructs a new index for measuring de jure central bank independence, the first entirely new index in three decades. The index draws on a comprehensive dataset from the IMF’s Central Bank Legislation Database (CBLD) and Monetary Operations and Instruments Database (MOID) and weightings derived from a survey of 87 respondents, mostly consisting of central bank governors and general counsels.
It improves upon existing indices including the Cukierman, Webb, and Neyapti (CWN) index, which has been the de facto standard for measuring central bank independence since 1992, as well as recent extensions by Garriga (2016) and Romelli (2022). For example, it includes areas absent from the CWN index, such as board composition, financial independence, and budgetary independence.
It treats dimensions such as the status of the chief executive as composite metrics to prevent overstating the independence of statutory schemes. It distills ten key metrics, simplifying current frameworks that now include upwards of forty distinct variables. And it replaces the subjective weighting systems relied on in the existing literature with an empirically grounded alternative.
This paper presents the key features of the new index; a companion, forthcoming paper will provide detailed findings by country/region, income level, and exchange rate regime.
A Teacher Writes to Students Series (15): Impotent-Potent Economics
February 23, 2024A Teacher Writes to Students Series (15):
Impotent-Potent Economics
By Annavajhula J. C. Bose, PhD
Department of Economics, SRCC, DU
Book to read: Employment in India (Oxford India Short Introductions)
February 23, 2024There is a lot of discussion on employment and unemployment trends in India.
The labor markets in India (perhaps applies to most developing economies) is unlike the developed world where if unemployment rates are declining, it is seen as a good sign (and vice-versa).
I came across this book by Ajit Kumar Ghose. It is a pretty good primer on figuring employment issues in India.
Podcast: The digital transformation of ‘The Hindu’ newspaper
February 22, 2024Ever since newspapers started as an idea, they have known only one way to deliver news: ensure the physical copy reaches doors in the morning.
With digitalisation, the newspapers have been pushed to a corner for being relevant.
In this podcast episode on TheIndiaForum Talkies, Ramanathan S & Jayant Sriram speak with LV Navaneeth, CEO of The Hindu Group.
Navaneeth discusses the process and challenges faced by a legacy newspaper in transforming itself into a thriving digital news publisher.
Retaining coastal legacy of ‘cradle of banking industry’: Undivided Dakshina Kannada
February 22, 2024Karnataka Bank celebrated its centenary celebrations on 18 Feb 2024. The bank established on 18 Feb 1924 has had a remarkable run in its 100 years. It has made profits in all the 99 years of ite existence (100th year annual results yet to come).
On the centenary celebration, Karnataka Deputy CM D.K. Shivakumar spoke to retain legacy of cradle of banking industry:
Karnataka Deputy Chief Minister D.K. Shivakumar on Sunday, February 18, urged Karnataka Bank to grow bigger by acquiring other banks so that the undivided Dakshina Kannada continues to remain the ‘cradle of banking industry.’
Speaking at the centenary celebrations of Karnataka Bank here, Mr. Shivakumar said for whatever reasons the banks founded in coastal Karnataka were merged with other banks, except the Canara Bank in the public sector and the Karnataka Bank in the private sector.
Responding positively to this, bank chairman P. Pradeep Kumar in his presidential address said Karnataka Bank could achieve this in about a decade and asked Managing Director and CEO H. Shrikrishnan and his team to work on the direction.
To understand how and why Undivided Dakshin Kannada become the cradel of banking, read my book!
Job Opportunity: Research Scholar for Charan Singh Archives
February 22, 2024India’s Former PM and Bharat Ratna Charan Singh has a dedicated Archive of his papers and works.
The Archives is looking for a Research Scholar. Interested candidates please apply.
US Dollar’s International Role
February 22, 2024Federal Reserve Governor Christopher J. Waller in this speech discusses whether USD’s international role is diminishing:
My subject is the U.S. dollar’s primacy in global finance and the global economy, which some feel is under threat as never before. One headline asserts: “Why the Dollar’s Reign Is Near an End.” Actually, it turns out this threat isn’t so new. That headline was from 2011.2 It is tempting to write off concerns about the dollar’s status that never seem to come to pass, but I don’t dismiss them. The role of the United States in the world economy is changing, finance is always changing, and I think it is important for policymakers to regularly consider if and why the dollar’s role might change as well. That’s what I aim to do in these remarks.
When people refer to the dollar and its reserve currency status, they typically mix together a variety of roles that it plays on the world stage. So I would like to start by clarifying these many roles. First, the term “dollar” often refers to physical U.S. currency and its use around the world. However, in certain contexts, it is used to describe financial assets, such as U.S. Treasury securities, that are denominated in and promise redemption in U.S. dollars. Finally, the word “dollar” is used to describe its use as the settlement unit of account in international transactions. I will use the word “dollar” throughout this speech to refer to these various concepts, and I hope it will be clear which one I am referring to as I speak.
For many decades, the U.S. dollar has had an outsized role in the global economy, supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and rule of law. The dollar’s international role has clear benefits for the United States, lowering transaction and borrowing costs for U.S. households, businesses, and government and widening the pool of creditors and investors. The widespread use of the dollar can help insulate the U.S. economy from shocks from abroad.
The rest of the world also benefits from the dollar’s international role. The dollar serves as a safe, stable, and dependable form of money around the world. It serves as a reliable common denominator for global trade and a dependable settlement instrument for cross-border payments. In doing so, it reduces costs of engaging in international transactions for households and businesses including those outside of the United States.
Recent commentary warning of a possible decline in the status of the U.S. dollar raises concerns about the effects of sanctions against Russia, U.S. political dysfunction, the rise of digital assets, and China’s efforts to bolster usage of the renminbi. Other commentary has warned of “geoeconomic fragmentation” and whether trade and financial flows could realign in ways that adversely affect the dollar’s outsized role. Against this backdrop, it’s useful to review whether there has been any change in how the dollar stacks up against the standard measures by which we assess a currency’s acceptance as an international currency.
Acceptance as an “international currency” is typically assessed along three dimensions: its use as a store of value, as a medium of exchange, and as a unit of account. Alarmist headlines notwithstanding, the dollar continues to dominate in all three of these measures, and generally by a large margin compared with any other currency.3
Riding the Tracks of Time: Indian Railways – An Unfinished Revolution
February 21, 2024Jaimini Bhagwati & Shalini Chauhan in this CSEP working paper reviews developments in railways pre and post 1947:
This paper examines the building of railway tracks in India prior to 1947 and, to a limited extent, the construction of railway lines in countries such as the US, Russia, Japan, the UK, and China. Prior to India’s independence and, particularly in the 19th century, the laying of railway lines involved high human costs and resulted in substantial profits for British financiers, intermediaries, and Indian producers of goods and agricultural products. This led to beneficial consequences for the Indian economy, although these were limited by design.
The gradual yet steady development of Indian railway networks from the mid-nineteenth century until Indian independence, almost a hundred years later, made it increasingly easier for British India to exercise greater administrative and military control over the entire Indian subcontinent. The development of India’s railway networks could have contributed more to the industrialisation of pre-independent India. This did not occur, and the paper discusses a few illustrative causal reasons driven by British colonial economic imperatives.
The last section of this paper moves from the post-Indian independence 1950s to the 2020s and compares the extent to which the current state of Indian Railways lags behind railway systems in developed countries and China.
Two significant reports on the functioning of the Indian Railways and recommendations for reforms were submitted by committees headed by Rakesh Mohan in 2001 and 2014. Subsequently, another central government-appointed committee headed by Bibek Debroy submitted its suggestions on reforms in 2015. It has been 22 years since the submission of the first report in 2001. Unfortunately, little forward movement has been achieved in implementing the systemic reforms which were recommended. For instance, Indian Railways could have become a corporation by now, as recommended by the aforementioned committees, and the construction of dedicated freight corridors could have progressed much further than what has been achieved. The lack of progress on several fronts is also attributed to Indian Railways not adding at least another 20,000 kilometres of broad-gauge railway tracks between 1947 and 2023. There are continuing economic and social welfare opportunity costs of not taking the required steps to get freight and passenger trains to run faster. It is also crucial to bring greater transparency and independence from government intervention in the financial statements of Indian Railways.
This paper highlights the: (a) high returns for financiers based in the UK and the administrative-control reasons for the development of Indian Railways by the British; (b) the remarkably long lengths of railway tracks laid between 1857 and 1947; (c) significant achievements post-Indian independence in building broad-gauge railway tracks, achieving high levels of electrification, and constructing dedicated freight corridors (DFCs); and (d) the unimplemented recommendations of Indian government-appointed committees.
Vice-President remarks: Economic Nationalism is quintessentially fundamental to our economic growth; import only what is unavoidably essential
February 21, 2024Not very often do we see India’s Vice President speak on economic policy.
Came across these recent remarks (excerpts here) by Jagdeep Dhankar, India’s Vice President at a MSME Summit in New Delhi:
Economic Nationalism is quintessentially fundamental to our economic growth. Mark my words carefully, nationalism is important, paramount we have to subscribe to it. Time for us to subscribe to economic nationalism as well. We need to be VOCAL FOR LOCAL. It is a facet of ATMANIRBHAR BHARAT. It reflects the essence of स्वदेशी आंदोलन, of our freedom struggle. We need to import only what is unavoidably essential.
We need to be alive to the ill effects of not subscribing to economic nationalism. Apart from avoidable drain of foreign exchange, this drain is astronomical, one evil effect is that there is drain of foreign exchange. The other is it cuts into our employment opportunities. Imagine the important items which can be made here. What are we doing? We are depriving hands in our country of work and giving work to hands outside. Third, it impedes the growth of entrepreneurship. I am sure nobody will disagree that we need to be extremely cognizant of the deeper impact of economic nationalism.
The 16th Finance Commission Chair Arvind Panagariya warns against pitfalls of import subsistitution.
Douglass North, New Institutional Economics, and Complexity Theory
February 21, 2024John Davis of University of Amsterdam in this paper review DOuglass North’s work on complexity theory:
Douglass North was central to the emergence of New Institutional Economics. Less well known are his later writings where he became interested in complexity theory. He attended the second economics complexity conference at the the Santa Fe Institute in 1996 on how the economy functions as a complex adaptive system, and in his 2005 Understanding the Process of Economic Change incorporated this thinking into his argument that market systems depend on how institutions evolve. North also emphasized in the 2005 book the role belief played in evolutionary processes, and drew on cognitive science, especially the famous ‘scaffolding’ idea of cognitive scientist Andy Clark – the idea that the brain and the world ‘collaborate’ to address our computational and informational needs. This chapter discusses how North’s thinking about institutions and change reflected these later investigations. It concludes with comments on his late thoughts about the problem of violence.
Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015–2050
February 20, 2024George A. Alessandria, Shafaat Y. Khan, Armen Khederlarian, Kim J. Ruhl & Joseph B. Steinberg in this NBER paper look at US China trade war during 2015-20:
We use the dynamics of U.S. imports across goods in the period around the U.S.-China trade war with a model of exporter dynamics to estimate the dynamic path of the probability of transiting between Normal Trade Relations and a trade war state. We find (i) there was no increase in the likelihood of a trade war before 2018; (ii) the trade war was initially expected to end quickly, but its expected duration grew substantially after 2020; and (iii) the trade war reduced the likelihood that China would face Non-Normal Trade Relations tariffs in the future.
Our findings imply that the expected mean future U.S. tariff on China rose more under President Biden than under President Trump. We also show that the trade response to the trade war is similar to the response to the 1980 liberalization that initially granted China access to U.S. markets at NTR terms and was expected to be quickly reversed.
Electoral bonds and RBI — a case study on autonomy of central banks
February 20, 2024The Supreme Court Judgement on electoral bonds opened a pandora’s box on issues related to RBI’s autonomy.
My new article in Deccan Herald.
Mostly Economics 
