Thursday, January 25, 2018

BNM Watch: On The Move

The OPR was hiked 25bps today to 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively.

The global economy has strengthened further, with growth becoming more entrenched and synchronised across regions…Global growth is projected to experience a faster expansion in 2018. In this environment, risks to the global growth outlook are more balanced, pointing towards continuity in the current phase of global economic expansion.

For the Malaysian economy, latest indicators reaffirm the strength in exports and domestic activity. Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy….

…However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, remains moderate….

…With the economy firmly on a steady growth path, the MPC decided to normalise the degree of monetary accommodation. At the same time, the MPC recognises the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time. At the current level of the OPR, the stance of monetary policy remains accommodative….

After the strong signal given at the last MPC meeting in November, BNM fulfilled market expectations with this move. Up to last week, I think the bond markets were still in two minds whether this would happen, having only half priced it in. Regardless, foreign investors were in no doubt, judging by the moves the Ringgit has made over the past couple of months.

Personally, I think this is the right move – the data certainly supports a tightening of monetary conditions, even if the appreciation of the Ringgit makes it appear unnecessary. The problem with playing the expectations game is that if you don’t follow through, the markets might reverse course and make it necessary again. For practical purposes, monetary conditions started tightening right after the release of the last statement, and not raising the OPR today would have undone that. Borrowers will have to start paying more on their loans from next month, but that would be the only difference. Granted, that’s maybe RM2 billion or more off the table in private consumption and investment, but that’s in the context of a faster growing economy.

Speculation will now shift to if and when there will be another hike. Nothing in the statement suggests one is on the cards for the moment, but the “pre-emptive” line at the end indicates BNM will be keeping an eye out for an acceleration of loan demand. I think the data would support a further move in the second half of the year, though that might be skewed by spending around the general election, which I think will probably come in March. Provisionally, I’m not expecting any consideration of further tightening until September at the earliest.

Negative Income Tax: Someone’s Finally Trying It

I came across this on Twitter last night – Mauritius is taking on the challenge of implementing a negative income tax (excerpt):

Negative Income Tax scheme: Beneficiaries receive first payment

GIS - 27 November, 2017: The first payment of Negative Income Tax (NIT) allowance to beneficiaries was effected on Friday 24 November 2017 at the seat of the Mauritius Revenue Authority (MRA) in Port Louis in the presence of the Prime Minister, Minister of Home Affairs, External Communications and National Development Unit, Minister of Finance and Economic Development, Mr Pravind Kumar Jugnauth.

Cheques were handed over symbolically to some thirteen beneficiaries under the NIT scheme which came into effect as from 1st July 2017. Out of the 21 800 applications received, 12 100 persons have already benefitted from an allocation. The NIT consists of a financial support from the Government to be effected by the MRA on a quarterly basis to employees whose basic salary is less than or equal to Rs 9 900 monthly.

Before anybody sneers at this, Mauritius has a GDP per capita roughly on par with Malaysia, and the scheme will benefit something like 25% of the workforce. The support isn't much – roughly USD30 per month for the lowest income category – but it's the principle that counts.

One obvious drawback is that only those in paid employment are eligible (full criteria here), which leaves out the informal sector and those out of work for other reasons (such as disability). I don't know Mauritius so well that I can say whether that's good or bad. Nevertheless, here's hoping someone's tracking the outcomes of this policy. That would be one piece of research worth waiting for.

Tuesday, January 23, 2018

Property Taxes: There’s a Right Way, and There’s a Wrong Way

Caught this yesterday (excerpt):

Selangor, Penang tax hike woes

ONE part of Pakatan Harapan's manifesto covers cost of living and taxes, and points fingers at federal government policy.

If they are serious about reducing the cost of living and taxes, they should first look at Selangor and Penang.

On Dec 26, the Selangor Mentri Besar's Office scrambled to respond to my assertion that property-related taxes are the main cause of increase in cost of living in Selangor.

Datuk Seri Azmin Ali refused to accept my assertion and blamed Putrajaya and the goods and services tax (GST) for the increase….

…There was a significant increase in cost of living between 2008 and 2011, years before the implementation of GST.

Moreover, the initiatives rolled out in 2016 by the state government were focused on rural residents. The MB's Office said several hundred thousand owners of kampung houses were given exemption on assessments.

But what about urban residents in the cities and towns where over 80% of Selangoreans reside?

The residents in apartments and urban dwellings have had to pay higher quit rent and assessment taxes since 2008?

This is where most of the increase in cost of living happens.

Most Selangor residents live in cities and towns and have been significantly affected by the rapid rise in property prices and rental because of the state government's policy.

I’m not going to play politics here. Property related taxes have increased across most states, and in my opinion probably a bigger factor in the increased cost of living than anything else. We can all argue over who is at fault, but ultimately, nothing much will change unless fundamental reforms are carried out.

Public Transport Pass

I support this (excerpt):

Time to introduce a RM100 public transportation pass in the Klang Valley

In October 2017, I had written about the lack of an increase in the ridership of the LRT, MRT and KTM Komuter despite the billions of Ringgit of investment poured into new projects.[1] The recently released Quarter 3 2017 rail statistics[2] by the Ministry of Transportation confirmed my fears that the LRT and MRT ridership spike in July and August 2017 due to the half-price fares were only temporary....

...The drop in the daily ridership on the LRT and MRT clearly shows that passengers are price sensitive. This is why it is necessary to introduce an affordable monthly public transportation pass to allow passengers to have unlimited rides on the LRT, MRT, Monorail and Rapid KL buses as a way to increase public transportation usage. Rapid used to have an RM150 monthly travel pass for the LRT but this was eliminated as part of the LRT fare hike in Dec 2015.

Pakatan Harapan has proposed in our alternative budget to introduce a RM100 unlimited travel monthly public transportation pass. I am confident that with the introduction of this pass, public transportation usage especially on the LRT, MRT and Rapid buses will increase significantly, perhaps even beyond the daily ridership figures set in August 2017 when the LRT and MRT fares were reduced by 50%.

Public transport almost never makes money, but there are large positive externalies to increasing utilisation. From reduced congestion to lower environmental costs, not to mention spreading the large upfront cost of building transport networks across more users, there are good arguments for maximising the use of available capacity. There's also the incentive trade-off between using cars as opposed to public transport - because of the lower convenience, public transport has to be priced lower to compete effectively. Lower or flat prices might also increase revenue, depending on the shape of the demand curve. So this makes sense, and is at least worth some study.

Monday, January 22, 2018

Check Your Credit Report

BNM has opened up access to CCRIS (excerpt):

Bank Negara Malaysia Introduces eCCRIS

Bank Negara Malaysia wishes to announce the introduction of its new initiative – eCCRIS, a secure online platform for the public to access their own Central Credit Reference Information System (CCRIS) report, anywhere at their convenience. This service is provided for free and is available nationwide starting today.

The CCRIS report shows the financing and repayment history of a borrower with participating financial institutions over the past 12 months. It does not provide an assessment of a borrower’s credit standing. It is therefore a factual report and is not a blacklist....

CCRIS was previously only available in person. You still have to register physically at any BNM or AKPK office, but you’ll have online access thereafter. The website is here.

Wednesday, January 17, 2018

Development Thinking Summarised

Stefan Dercon takes the top 10 thinkers (I actually counted 11…hmm, Nigel Tufnel anyone?) in development economics, and condenses each of their beliefs into one or two sentences (excerpt):

10 top thinkers on Development, summarized in 700 words by Stefan Dercon

One of the treats of my role at LSE is luring in some great development thinkers to lecture on Friday afternoons, andStefan Dercon then sitting in to enjoy the show. Stefan Dercon came in just before the Christmas break and was typically brilliant, witty and waspish. Particularly enjoyable from an outgoing DFID chief economist (as well as Prof at the Blavatnik School of Government and Director of the Centre for the Study of African Economies).

Stefan gave us a tour of the ‘Big Ideals, Big Egos and Big Thinkers in development’. Here they are, points for recognizing them. For the answers, go to the bottom of this post and see their books – extra point if you have read them all. He celebrated the quality of the books, the way they have brought development ideas to a mass audience, the impact they have had on the ‘public conversation’ around the way the world works. And then came a wonderful ‘digested read’ summary:

It's a very concise summary, and probably doesn't capture all the nuances of each perspective, but as a shorthand beginners introduction to the topic, this is hard to beat.

Tuesday, January 16, 2018

Market Monetarism Goes Mainstream

David Beckworth summarises who’s bought the idea of NGDP targeting (excerpt):

Do Changes in Potential Output and Data Revisions Make NGDP Targeting Impractical?

Over the past few months there has been increasing chatter about the need for a new framework for U.S. monetary policy. The Peterson Institute for International Economics (PIIE), for example, recently had its Rethinking Macroeconomic Policy conference where, among other things, Ben Bernanke called for the Fed to adopt a temporary price-level target. PIIE also launched Angel Ubide's new book on reforming monetary policy. Similarly, at the AEA meetings there was a session titled Monetary Policy in 2018 and Beyond where Christina Romer again made the case for a NGDP level target. Likewise, the Brookings Institute held a recent conference on whether the Fed should abandon its 2 percent inflation target. There, Jeff Frankel shared the arguments for a NGDP level target and Larry Summers endorsed it. Others at the conference, like San Francisco Fed President John Williams called for a price level target.

I am glad this conversation is happening. It is not new--some of us have been having it since 2009--but I get the sense that it is gaining traction. The turnover at the Fed and the opportunity it creates for new thinking makes this conversation about new monetary policy frameworks incredibly important now.

As this conversation continues to grow, so will the interest in the options available including nominal GDP level targeting (NGDPLT). Obviously, I have much to say here, but for now I want to respond to two critiques often applied to NGDPLT: (1) changes in potential output and (2) data revisions make NGDPLT an impractical rule to implement. I think these concerns are misplaced as explained below.

I’ve liked the idea of market monetarism from the start – it’s intellectually appealing, simple in implementation, and really, just common sense. I do have some reservations, though not the ones David brings up.

My main concern is the choice of growth path, especially when viewed through the lense of a developing economy versus a developed economy, as well as how such a path might evolve for an economy across time. That might not seem like much, given that a central bank no longer has to target a lagged reported variable (inflation) and an unobservable one (the output gap). Inflation and real growth can vary under the limits of the central bank’s growth target. So far so good.

But what governs the choice of the NGDP growth path? NGDP growth of 4%-5% would more or less be compatible with developed economy growth like the US, but what about Indonesia or Vietnam, where nominal growth is typically in the region of 8%-9%?

Second, should that target change as economies converge to the global production possibility frontier, and potential growth rates drop? It’s one thing to have inflation averaging 2% over time, but quite another to have it average 6% or more.

Third, what about the impact of demographic change? As populations age, the dependency ratio rises, and both nominal and real income and consumption growth will naturally slow. How should a NGDP growth rule respond to this? I think for this last point, any such monetary rule should target NGDP per capita or NGDP per worker, rather than NGDP. But I don’t have much of  feel for the solutions to problems 1 and 2.

Nevertheless, we’re seeing real progress here.

Friday, January 12, 2018

Raising the Minimum Wage

I was going to keep this for Monday, but this is too timely (excerpt):

Be Careful When Raising Minimum Wages
By Noah Smith

Minimum wages are one of the most contentious topics in economic policy. Many states and cities are experimenting with big minimum wage increases, so that there is now a lot of variation across the country...

...To many in the news media and in the world of think tanks and activists, being pro- or anti-minimum wage is akin to a religious belief. But even in the world of economics research, there’s plenty of disagreement.

A slew of recent minimum-wage studies illustrate the point...

It’s important to remember that these studies are all very limited. Some of them, like the Leamer et al. and the Allegretto et al. studies, are preliminary and subject to change once the final analysis is concluded. The studies that use synthetic controls -- Jardim et al. and Allegretto et al. -- could be wrong if they’ve chosen the wrong controls, which is easy to do. The method used by Cengiz et al. requires its own set of assumptions, which could be wrong.

At this point, anyone following the research debate will be tempted to throw up their hands. What can we learn from a bunch of contradictory studies, each with its own potential weaknesses and flaws? Some extreme cynics even see the contradictory minimum wage results as reason to doubt the usefulness of empirical economics itself.

But this is the wrong response. The right reaction to the contradictory studies is caution. Policy makers and advisers should read the whole literature, including studies that yield conclusions they don’t like. They should try to get a picture of which research methods are considered the most reliable, and why. And then they should move forward cautiously with policy, taking steps to try to help the poor, but not making the steps so big and bold that they can’t be reversed if things go wrong.

In the case of minimum wages, a majority of the evidence seems to indicate that raising the wage floor by modest amounts isn't very dangerous. That means that experiments like the ones now underway in places like Seattle should continue. But the studies showing larger harm from minimum wages boosts should be a reason not to make the increases too large or abrupt, and not to implement big hikes at the federal level. To borrow a phrase from Chinese leader Deng Xiaoping, the right approach is to “cross the river by feeling the stones.”

I'm generally supportive of the notion that the minimum wage is a necessary tool for addressing labour market imperfections and wage inequality. But there's also such a thing as pushing something too far, too fast.

One key problem with the Malaysian labour market is that, unlike in developed countries, a significant portion of the labour force is in the informal sector, where the minimum wage won’t apply and can’t be enforced. In other words, it’s not a silver bullet for the problem of low incomes. A second issue is that, in my own delvings into the impact of the minimum wage in Malaysia, the disemployment impact was statistically significant i.e. it cost jobs, even if the overall welfare benefits outweighed those job losses. So there is a very real trade-off involved. Third, the most recent minimum wage revision showed no impact at all on wages in proximity to the minimum wage level, i.e. zero welfare gains.

So the fact that Malaysia has a minimum wage at all is a positive, but let’s not get too carried away that it’s any kind of total solution. It isn’t.

An Obsession With Surpluses

No, I’m not addressing the government deficit. Rather this is about Malaysia’s (slowly) diminishing current account surplus. I wrote about it at length last year (link), but here’s another flavour of the same argument (abstract):

Current Account Deficits:The Australian Debate
Rochelle Belkar, Lynne Cockerell and Christopher Kent

This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place.

It's an old paper, but still relevant. I'll note in passing here two things:

  1. The underlying argument is similar to my own – whether the current account is in surplus or deficit (and the extent of that imbalance) is primarily driven by factors in the domestic economy, not the external sector or the exchange rate;
  2. Australia now has almost no FX reserves to speak of, despite being heavily exposed to trade and commodity prices, and a foreign presence in their bond market that exceeds ours. IIRC, they barely have one month cover of retained imports.

The implication is that all adjustments take place in prices instead of levels i.e. the AUD exchange rate adjusts, not their level of reserves. Despite this difference, the MYRAUD cross rate is one of the most stable I’ve ever seen outside of a pegged exchange rate. Or to put it more bluntly – despite not having accumulated “insurance” (FX reserves) against capital outflows, and thus deliberately exposing the exchange rate to greater volatility, the AUD does not appear to be any more volatile than the MYR is. There was an exception to this, running roughly from October 2008-May 2009, coinciding with the collapse of Lehman Brothers and running to the beginnings of the global recovery. But this was more the exception that proved the rule.


Rochelle Belkar, Lynne Cockerell and Christopher Kent, "Current Account Deficits:The Australian Debate", Reserve Bank of Australia Discussion Paper 2007-02, March 2007

Thursday, January 11, 2018

Rent Control Doesn’t Work Either

I’ve been falling behind in my blogging – work commitments, travelling, time with the family etc have really eaten into my writing. One of my new year resolutions is to become more active again. Nevertheless, blogging is still likely to take a little bit of a back seat, though I’ll try to keep up to at least once a week, if not more. Just don’t expect long rants.

First up, a paper on the effectiveness of rent controls on housing (abstract):

The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco
Rebecca Diamond, Tim McQuade, & Franklin Qian

In this paper, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants, landlords, and the rental market as a whole. Leveraging new micro data which tracks an individual’s migration over time, we find that rent control increased the probability a renter stayed at their address by close to 20 percent. At the same time, we find that landlords whose properties were exogenously covered by rent control reduced their supply of available rental housing by 15%, by either converting to condos/TICs, selling to owner occupied, or redeveloping buildings. This led to a city-wide rent increase of 7% and caused $5 billion of welfare losses to all renters. We develop a dynamic, structural model of neighborhood choice to evaluate the welfare impacts of our reduced form effects. We find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging between $2300 and $6600 per person each year, with aggregate benefits totaling over $390 million annually. The substantial welfare losses due to decreased housing supply could be mitigated if insurance against large rent increases was provided as a form of government social insurance, instead of a regulated mandate on landlords.

Frisco (I lived there for a few years, so feel entitled to use the short form) is an interesting case. Silicon Valley is next door, and the agglomeration of high tech companies in the area have both increased demand for housing (from internal and external immigrants) as well as boosted house prices substantially. Couple that with Californian zoning regulations, and Frisco has a housing market that is one of the most unaffordable in the world. Rent control is one solution, but the paper estimates that the costs far outweigh the benefits.

This isn’t to say that rent controls don’t work at all, but the specific circumstances in Malaysia are similar – inadequate supply, internal migration to economic centres of activity, increased compliance costs. So I’m comfortable extrapolating the results to our domestic housing problem. The solution is still to reduce barriers to contruction and increase supply in the right market segments.


Rebecca Diamond, Tim McQuade, & Franklin Qian , "The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco", paper presented at the NBER Conference on Public Economics, October 26-27 2017

Wednesday, January 10, 2018

Effective Exchange Rate Indexes: December 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.


December saw the Ringgit gaining for a fourth straight month across all the indexes. The NEER hit 4.1% yoy, while the REER rose 2.1%. On the month, gains accelerated, with the Ringgit gaining 1.7% in nominal terms, and 1.5% in real terms. Gains were across the board, with appreciation recorded against all 15 currencies in the indexes, the first time that has happened since April 2016.

The largest (m-o-m) gains were against the JPY (2.33%), IDR (2.30%), HKD (2.25%) and USD (2.16%). The smallest gains were against the KRW (0.71%) and GBP (0.86%).



  1. Indexes have been updated to December 2017
  2. CPI deflators and forecasts have been updated for November/December 2017
  3. Trade weights have been updated to 3Q2017. This caused revisions to the indexes from January 2017 onwards