Typography

Prime Minister Narendra Modi's aggressive demonetization of the 500 and 1000 rupee note is causing plenty of chaos in India. A general shortage of money has emerged, massive lineups have formed at banks, and cash-based business has come to a standstill. All this would seem to indicate that the process has been ineptly carried out. But I'd argue that the problems listed above are exactly what one should expect of a well-designed aggressive demonetization. Chaos is a feature, not a bug. As I mentioned in my previous po st, a regular demonetization isn't meant to harm anyone. To ensure that no one is left behind, legacy note are gradually replaced with new ones, a process that often takes decades to carry out. See for instance the below pamphlet published by the Bangko Sentral ng Pilipinas (BSP), the Philippines central bank. It shows a slow and staged approach to replacing old peso notes with new ones. The goal of an aggressive demonetization like Modi's is exactly oppos...

Swiss National Bank share certificates Gavyn Davies blames the Swiss National Bank's corporate structure for the floating of the Swiss franc. Paul Krugman intimates the same, as does Cullen Roche . Here is Davies: But the SNB is 45 per cent owned by private shareholders, many of whom are individuals, who receive dividends from the SNB. The rest is owned by the cantons, which have been complaining recently about insufficient cash transfers from the SNB. Davies goes on to say that the influence of shareholders, combined with the peg, means that the SNB is particularly concerned about balance sheet losses. The idea seems to be that currency pegs often result in large balance sheet fluctuations, forcing a suspension of shareholder dividends. I disagree, as a quick peek at the details shows: 1) The dividend to which Davies attributes so much importance is minuscule. In aggregate it comes out to just CHF 1.5 million per year, or US$1.7 million . Private shareholders, who own just 40.3%...

There's been a steady hum of articles that either worry about the Fed's potential QE-related capital losses or entirely discount them. Are central bank losses irrelevant or important? In this post I'll make the case that we should not discount losses as meaningless. Let's say that year over year a central bank operates at a loss. It is unable to fund ongoing operations from cashflow, and to compound problems, the central bank is already operating with a bare bones staff and can't slim down. One way to plug the funding gap is to get a capital injection. Who would do the injecting? The government, of course. This answer comes easily, since economists tend to build models that assume the consolidation of the government and its central bank. By tying them together with a nice red bow, the math and logic are made much simpler. Thus a central bank can easily run at a loss since it is really just a department within a larger consolidated entity. Let's adopt the per...