What do Financial Markets say about the Exchange Rate?

May 17, 2024

Mikhail Chernov, Valentin Haddad & Oleg Itskhoki look at linkages between financial markets and exchange rate:

The transition to illiberal democracy: A new eBook

May 17, 2024

Assaf Razin in this voxeu research points to a new ebook on rise of illberal democracy:

In the wake of recent political shifts, democratic principles are being eroded, giving way to a consolidation of governmental power through autocratic means. The changes in government witnessed in Hungary, Poland, Israel and Turkey serve as blueprints illustrating how democratic values can be eroded due to electoral manipulative strategies and judicial overhauls.

While the manifestations of these patterns differ based on each country’s distinct political, social, and historical contexts, they invariably erode the rule of law and democratic institutions. The contributions in a new CEPR eBook (Razin 2024) shed new light on the alarming trend of regime changes from liberal democracy (Mukand and Rodrik 2015) towards illiberal democracy or autocracy.

 

Sixty years of global inflation: a post-GFC update

May 17, 2024

Raphael Auer, Mathieu Pedemonte and Raphael Schoenle in this BIS paper:

Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor.

The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period.

Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors.

Election Commission ushers India to its electoral nadir

May 16, 2024

It has been shocking to see how the once feared Election Commission of India has become so fearful. There are so many epithets and memes of the institution on the social media.

Palanivel Thiaga Rajan, Minister for Information Technology and Digital Services of Tamil Nadu, writes that EC has slumped to a nadir. He argues that the election system and the Commission was not in good health even before but the current conduct of ECI has led to a new low:

As a relatively recent entrant to electoral politics, and with my prior global career in consulting and large corporations, I have often remarked on the many failings in the functional implementation of the Constitution. These views have remained consistent whether I have been in the opposition or in government. Of the many aspects of democracy that need significant improvement, there is none more vital, or more broken, than the election model. In this article, I detail the many facets that were already of concern before these Election Commissioners took office, and then discuss why the working of this Commission marks the lowest point in India’s history as a democratic republic.

😦

One of my favorite books is Public Institutions in India, edited by Pratap Bhanu Mehta and Devesh Kapur. The book had interesting set of essays on India’s institutions. It has discussion on the Election Commission of India. The authores released a new volume ten years later titled Rethinking Public Institutions in India which also has a chapter on ECI.

It is just seven years but perhaps time has some to revisit not just ECI but all the public institutions. There is a lot of discussion on how India;s institutions have crumbled or about to crumble. Once we allow institutions to decay and fade away, really difficult to revive them back.

Central bank profit distribution and recapitalisation: Review of 70 central banks

May 15, 2024

Jamie Long and Paul FIsher analyse the profit distribution and recapitalisation across  70 central banks:

Central banks retain a portion of their net profits as reserves and distribute the remainder to their finance ministry, typically in the form of a dividend. Few central banks have a reciprocal arrangement in place for covering financial losses with a transfer of capital.

This paper reports the findings of a survey of central bank profit distribution and recapitalisation arrangements across 70 jurisdictions and examines the range of features present, such as revaluation accounts and requirements for capital injections.

The findings help establish the importance of a robust framework for managing central bank profit distribution and recapitalisation.

The presence of such a framework should allow central banks to retain more of profits and access external resources when capital is low, and to function as an income generating asset for the government when capital is high, therefore ensuring both an appropriate use of public funds and the presence of a credible and financially independent central bank that stands ready to act when needed. 

 

Elections and devaluations

May 15, 2024

Jeffrey Frankel writes that elections often lead to currency devaluation:

An unprecedented number of voters will go to the polls globally in 2024. It has long been noted that incumbents tend to engage in expansive fiscal (and where possible monetary) policy in the run up to elections in order to buoy the economy and therefore their electoral prospects. This column extends this concept to look at exchange rates and finds that currencies frequently depreciate following an election as the incumbent’s efforts to overvalue the currency in the run up to the election are unwound and the new government comes to terms with depleted reserves and current account woes.

The Club Of Clueless CEOs: Not just being silent on injustice but also giving prejudiced statements

May 14, 2024

Priya Ramani on India’s club of clueless CEOs:

We know that corporate India rarely speaks up against injustices, but recent examples confirm that the conservative, ‘traditional’ or, as I call it, prejudiced/hateful thinking comes straight from the top.

When did Argentina lose its mojo?

May 14, 2024

Sebastian Katz and Eduardo Levy Yeyati in this voxeu post point Argentina lost its mojo in the 1950s:

There are recurrent debates about the ongoing underperformance of Argentina’s economy. This column proposes a metric to characterise and date Argentina’s divergence from a benchmark group of countries with comparable initial incomes per capita. The authors find Argentina’s divergence to be longer than usually conjectured, with marked tranches in the first half of the 20th century and the post-WWII period. They identify specific dates for the inflection points, discuss the context in each case, offer an explanation for the enduring divergence, and describe Argentina’s volatile chapter since the 1990s.

“Modern banking business” – Silent movie from 1927

May 14, 2024

Historically people have worried about technology replacing jobs.

As early as 1928. a German bank showed a future bank with only machines working in the empty room:

For most people in the pre-industrial age, there was no distinction between where they worked and where they lived. Working from home was the norm. Offices came about later – as a counterpart to workshops and factories. And with the machines came the question: are they helping people do their work or taking it away from them, making people redundant? Are they ’friend or foe’? It was obviously a contentious issue as featured in the1927 science-fiction dystopian silent movie Metropolis.

As early as 1928, a major bank in Germany thought it had found the answer and printed the following quote in its staff magazine: “It is obvious that as machines are adopted in companies, it will soon be possible to distinguish between those who only use the machine and those who can make use of it.” And the advertising clip “Modern banking business” from the same period gave viewers an idea of this new reality. The film ends with a scene showing an empty room with only machines at work. It beggars the question: have they driven people away or given them more time for other work or even more leisure time?

 

150 years of BEST (Brihanmumbai Electricity Supply and Transport Undertaking)

May 14, 2024

The Bombay Tramways COmpany was established in 1873. The Government of Bombay enacted the Bombay Tramways Act in 1874. The Act enabled the Tramways company to run tram services in the city.

The first horse-drawn tram made its début in the city on 9 May 1874. The first route was Colaba–Pydhone via Crawford Market, and Bori Bunder to Pydhonie via Kalbadevi routes. The initial fare was three annas (15 paise) , and no tickets were issued.

In 1905, Bombay Electric Supply and Tramways Company or BEST was established and given monopoly for running tram services. BEST bought the Bombay Tramways Company and two years  later  electric trams made their debuts. BEST also started offering Bus Services leading to name change to Bombay Electric Supply and Transport. In 1964, BEST discontinued trams due to high costs.

When Bombay was renamed as Mumbai in 1995, BEST name was again changed to Brihanmumbai Electric Supply & Transport (BEST).

History of BEST is so many histories put together: urban development, transport, electricity supply. people, politics….

Demand-side and Supply-side Constraints in the Market for Financial Advice

May 14, 2024

Happy 125th Birthday FA Hayek: Debate between Hayek and Nehru (using AI)

May 9, 2024

FA Hayek was born on 8 May 1899. Yesterday marked his 125th birthday.

Adnan Abbasi, alumni of Ahmedabad University has started this AI driven lab named Thotica. He has created this fascinating conversation between Hayek and Nehru, in collaboration with Friedrich Naumann Foundation (FNF), a German public policy think tank. Through their cutting-edge technology, they have resurrected the voices and minds of F.A. Hayek and Jawaharlal Nehru, enabling them to engage in a profound dialogue on India’s mission to become a developed nation by 2047.

AI is helping recreate history in interesting ways!

 

The Economic Constitution of the United States

May 9, 2024

Cass Sunstein in Journal of Economic Perspectives says US has an economic constitution:

The said economic constititution is here.

South Africa introduces Deposit Insurance

May 8, 2024

Interesting to note that South Africa did not have Deposit insurance till date.

The central bank has floated a Corporation of Deposit Insurance. CODI provides cover of up to South African Rand 100,000 to each qualifying depositor per bank in the unlikely event of a bank’s collapse. This coverage limit fully protects 9 out of 10 qualifying depositors in the country.

Read the rest of this entry »

Will ZIG end hyperinflation in Zimbabwe?

May 8, 2024

Zimbabwe central bank recently announced a new currency named ZIG or Zimbabwe Gold.

My new piece in Deccan Herald on whether the new currency will end the longstanding hyperinflation problem in Zimbabwe.

How economists could help inform economic and budget analysis used by the US Congress

May 7, 2024

Staff of the Congressional Budget Office in the new edition of Journal of Economic Perspectves suggest how economists’ research could inform Congress:

Access to Credit Reduces the Value of Insurance

May 7, 2024
Sonia Jaffe, Anup Malani & Julian Reif in the new NBER paper say access to credit reduces community value of insurance:

Deep Dive into China’s Intellectual Odyssey

May 7, 2024

Wang Hui has written this interesting looking book The Rise of Modern Chinese Thought. The edition is now available in English.

Lynn Paramore of INET interviews Hui:

Lynn Parramore: Your book traces the development of three concepts: “principle” (li), “things” (wu), and the “propensity of the times” (shi). What makes these crucial to understanding the progress of Chinese thought?

Wang Hui: Why these very specific concepts? I employed these concepts as clues to describe historical change, rather than employing social history, cultural history, economic history, or military history. I wanted to use these concepts to link different things together. Basically, I think that in all of Chinese studies — and not only Chinese studies, but historical studies, generally, especially in non-Western cultures — two prevalent misgivings have often left scholars feeling frustrated.

First, they struggle with whether or not they can effectively use existing theoretical categories or social scientific paradigms to describe and interpret historical phenomena. For example, if we talk about the traditional Chinese wellfield system [an agrarian plot division for equitable land distribution], people will often describe it as an economic system. But the wellfield system is not only an economic system, but also a social, political, and military system, and, after all, a racial system. So in that sense, once you reduce that phenomenon into the category of the economy, you’ve lost a lot of things. That’s one issue.

The second, of course, is that we are all studying Western social science — it’s a universal phenomenon – so the concepts and paradigms we deploy usually come from studies of Western history. Can they be usefully applied to non-Western historical phenomena? I have found that you always need to construct a dialogue between the different concepts.

In my book, I discuss principle (li), things (wu), and the propensity of times (shi) as philosophical ideas. These are three key categories, but at the same time, I use another set of three antithetical concepts in the more historical analysis. The first is the ancient rites and music culture and institutions. The second concerns political systems, enfeoffment [the feudal land grant system], and centralized administration. The last one was more of a response to what contemporary Western scholars are working on, and also something we’re working on in Chinese studies: the empire and the nation-state. I question these binaries and their application to Chinese studies

The Money Kings: The Jewish Immigrants Who Transformed Wall Street

May 6, 2024

Interesting essay in Financial History Magazine run by American Museum of Finance:

The founders of Goldman Sachs, Kuhn Loeb, J. & W. Seligman & Co. and Lehman Brothers—who formed close business and personal connections and whose firms, at various points, dominated American finance—were German-Jewish immigrants, mostly from Bavaria, who sought refuge in the United States in the mid-19th century. The kingdoms of pre-unification Germany had largely treated Jews as a permanent underclass, restricting them from most professions, barring them from property ownership, dictating where they could live and forcing them to pay extortionate “protection” money for the privilege of residing there. One Bavarian lawmaker, enraged by a bill that would have conferred equal rights to the region’s Jewish population, summed up the prevailing attitude when he argued that Jews would remain foreigners even if their German roots stretched back a millennium. 

…..

More than 100 years have passed since the time of the “money kings.” But their influence is inescapable, whether strolling through Manhattan, whose very landscape they helped to shape, or in the mechanics of the financial markets. The ongoing immigration wars, the debate over tech monopolies and income inequality, rising antisemitism—there are many eerie modern echoes from that era. Today, the world of over a century ago, the world of the “money kings,” seems closer than ever.

The article sums up both…Hatred and Hope…How hatred drives certain communities to migrate to more open regions and with hope recreate history.

It also sums up how humanity never learns lessons from history..

The Indian Economy is Doing Well, But Not Many Indians Are

May 3, 2024

TN Ninan (former editor of Business Standard) in TheIndiaForum:

The economy is growing rapidly and many economic indicators are flashing green. But the path that India has chosen, of promoting national business champions, has its limits. Economic distress is widespread, which cannot be handled forever with welfare handouts or religion as an opiate.