Friday, September 6, 2013

A Chicago economist runs a central bank

Raghu Rajan celebrated his first day on the job running India's central bank. Coverage from Financial Times and Wall Street Journal.

Did he.. Find the coffee machine? Test the sofas in his office? Dust off his desk? Tour the printing press? Or...

Raghuram Rajan unveiled moves to liberalise banking and spread services across the nation of 1.3bn people... 

“There are so many low-hanging fruit in the economy that if we only pluck them we can accelerate growth substantially"...

The measures announced by Mr Rajan...are aimed at freeing India’s banks from the web of state controls that have stifled the sector since independence in 1947. ...

Indian banks will no longer have to receive RBI permission for each branch they want to open, though they will still be obliged to open branches in underserved rural areas in proportion to their expansion in the cities, Mr Rajan said....

He also suggested an easing of “priority sector lending requirements” that oblige banks to lend to farmers and small businesses, and said there was a need to reduce the requirement for banks to invest in government bonds so as to free credit for productive parts of the economy.
To say nothing of the wisdom of  forcing banks to buy shady sovereign debt, which turns sovereign troubles into banking crises, but he can't say that...
...foreign banks would be encouraged to operate in India as wholly owned subsidiaries that would enjoy “near national” treatment on a reciprocal basis.

“The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision-making,” he said.
Competition a good thing in the financial sector? Heresy!
Other planned measures included the easing of restrictions on overseas borrowing by banks and on position-taking in financial markets, the introduction of new interest rate futures contracts, and the establishment of new mobile payments systems and “mini-ATMs” run by non-bank financial companies.

Indians who have traditionally turned to gold imports as a hedge against inflation will from the end of November be able to buy government savings certificates linked to a consumer price index, Mr Rajan said.
What will he do on his second day on the job? FT says he "will make his first substantial statement on monetary policy in two weeks." I'm looking forward to it.

16 comments:

  1. "Indians who have traditionally turned to gold imports as a hedge against inflation will from the end of November be able to buy government savings certificates linked to a consumer price index, Mr Rajan said."

    If excess government spending causes inflation, then how does a government spending money on interest payments linked to inflation stop it?

    Sounds to me like a self-reinforcing loop - government tries to stop inflation by spending more money.

    Has anyone actually given this any serious thought?

    ReplyDelete
    Replies
    1. Despite the quotation's wording, I'm not sure if this is mostly an inflation fighting measure (at least from the viewpoint of the RBI).

      I suspect the idea is more restructuring the term structure of government debt in order to prevent runs whenever the government tries to roll over that debt.

      Cochrane definitely has some posts here that are coming to mind...

      Delete
  2. "Indians who have traditionally turned to gold imports as a hedge against inflation will from the end of November be able to buy government savings certificates linked to a consumer price index, Mr Rajan said."

    Why should Indians need a hedge against inflation if Mr. Rajan is doing his job properly?

    ReplyDelete
    Replies
    1. Because, Mr. Rajan does not define the domestic frm production input and the petroleum prices which are both a function of Govt policies.

      Hence, Mr Rajan has a thankless job.

      Delete
    2. Anonymous,

      It was a trick question. Central bankers deal with nominal variables (interest rates) not real ones.

      The second question is if domestic inflation in India comes about as a result of government policies designed to boost demand, how do interest payments that are positively correlated with those policies protect anyone?

      Delete
  3. ^
    ==>

    CONSOLIDATED. GOVERNMENT. BALANCE SHEET.

    ReplyDelete
  4. "Indian banks will no longer have to receive RBI permission for each branch they want to open, though they will still be obliged to open branches in underserved rural areas in proportion to their expansion in the cities"

    Which part of the Chicago curriculum teaches you to force banks to open branches in places they'd rather not?

    These CPI-linked securities sound a lot like TIPS. Given the current situation they might have to revalue them daily, perhaps hourly.

    I must say I don't envy him his job. Any idea where they might be holding his family hostage?

    ReplyDelete
  5. That's all very nice. I have a friend who was born in India and who owns farm land in rural Punjab. He says that if you withdraw a large sum of cash from an Indian bank, employees at the bank will alert confederates outside and you will be robbed when you leave the bank. The result is that money goes through trusted informal channels.

    ReplyDelete

  6. India clearly needs supply side reforms.
    Rajan will be good over there
    But the problems with America are all about demand
    http://www.themoneyillusion.com/?p=23450

    ReplyDelete
    Replies
    1. +1.

      Raghu Rajan may be right for India but he certainly wasn't any good on the subject of western economies...

      http://theredbanker.blogspot.com/2013/02/why-stimulus-has-failed-critique.html

      http://theredbanker.blogspot.com/2012/11/the-true-lessons-of-recession-really.html

      Delete
  7. Frank Restly,
    "If excess government spending causes inflation, then how does a government spending money on interest payments linked to inflation stop it?

    Sounds to me like a self-reinforcing loop - government tries to stop inflation by spending more money."

    Printing money and using that to pay people to SAVE their money, to hoard it in a risk free account or bond, will CONTRACT the economy, not expand it, because spending doesn't accelerate

    Its MV that matters not just M

    ReplyDelete
    Replies
    1. Edward,

      Step 1: Government sells bonds linked to inflation. Bonds make semiannual coupon interest payments based upon the prevailing inflation rate. People spend coupon interest payments like normal income.

      Step 2: Government concludes that aggregate demand is too low and so commences spending directly on goods.

      Step 3: Inflation rises courtesy of government intervention and coupon interest payments rise from inflation component of interest paying bonds.

      People spend more money because prices are rising and have more money to spend because of coupon interest payments tied to the inflation rate.

      The only way that government bonds limit private spending is when they are accrual bonds instead of coupon bonds. Meaning that by investing in them, a person's money is actually tied up - no interest payments, no return of principle until the bond reaches maturity.

      Think about it, at the extreme (100% or larger annual coupon interest), you really aren't saving at all.

      Delete
  8. "The only way that government bonds limit private spending is when they are accrual bonds instead of coupon bonds."

    Thats EXACTLY what I'm talking about. I also think IROR interest on reserves, what the Fed pays to banks to hold their excess reserves at the Fed, is paid on a yearly basis?

    But printing the interest on billion or so accrual bonds sold by a country's treasury, will contract the economy. so long as the bonds are zero coupon

    ReplyDelete
  9. What the hell are these two libtards talking about?

    Also, it's early goin', but:

    http://www.bloomberg.com/news/2013-09-13/rajan-hailed-as-swings-drop-amid-gundlach-warning-india-credit.html

    ReplyDelete
  10. Well, looks like Raghu is the new sensation for Indian media, apart from being one of the youngest RBI governors and a first rate financial economist! Here is an article from one of the celebrity women columnist on him.
    http://economictimes.indiatimes.com/opinion/guest-writer/economy-with-raghuram-rajan-will-be-sizzling-hot/articleshow/22533265.cms

    ReplyDelete
  11. Well, apart from being a first rate economist and the youngest RBI governors, Raghu is the new sensation for Indian media. Here is an article on him by one the celebrated Indian columnist.

    http://economictimes.indiatimes.com/opinion/guest-writer/economy-with-raghuram-rajan-will-be-sizzling-hot/articleshow/22533265.cms

    ReplyDelete

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