It is balance sheets gaore. All central bankers are busy explaining how they used their balance sheets in this crisis. See Bank of England, Fed, Comparison between Fed, Bank of England and Bank of Japan and other posts on the topic here.
Now, Svante Öberg, Riksbank’s First Deputy Governor explains how Riksbank used its balance sheet to ease crisis situation. Broadly the picture is same, but there are diferences in operations and frameworks.
Paul De Gruawe has written a brilliant post in voxeu on exciting things to come in economics. The post is a summary of the paper he has written on the subject. Here is a presentation on the paper.
He says
The extraordinary assumptions of macroeconomic models have left the outside world perplexed about what economists have been doing during the last few decades. This column contrasts the incongruous rational expectations top-down model with a bottom-up model where no individual is capable of understanding the full complexity of a market system. The bottom-up model creates correlations in beliefs that generate waves of optimism and pessimism. The latter produce endogenous business cycles akin to the Keynesian “animal spirits”.
I had just pointed a while ago that Charlie King, Bank of England’s Deputy Governor is going around UK to explain quantitative easing and BoE role in the crisis.
I came across this Business Standard news story which says RBI top bosses (including Governor and 4 deputy Govs) are on a financial outreach tour across India:
RBI calls it a “financial outreach” programme, under which it will take stock of the financial condition of 200-odd villages in about eight months — a first-of-its-kind initiative from the central bank.
So far, the governor and his four deputies have visited eight villages (from Minicoy — the outermost island of Lakshadweep — to Khonoma, a picturesque village 20 km west of Kohima in Nagaland) and will visit 12 more.
The regional directors of RBI, however, will visit all the 200.
The article is about a village in Orissa, Jalanga where there are no bank branches and one has to walk 20 km to conduct a banking transaction. As people are very poor and cannot afford any transportation, walk is all they can do.
Jalanga or its neighbouring villages do not have a single bank branch. The nearest bank branch, that of UCO Bank, where Das has an account, is located at Bhadrak, around 20 km from the village. Even State Bank of India (SBI), the country’s largest networked bank and Kalinga Gramya Bank, which has 50 no-frills accounts at Jalanga, have their branches only at Bhadrak. “The villagers cannot afford to hire auto rickshaw to travel so far. So we have to depend on our legs,” Das says. UCO’s Bhadrak branch is yet to provide ATM cards to the account holders of the village even though the bank claims to have opened over 400 no-frills accounts at Jalanga. “The branch has only two people dealing with loans, which means we have to wait for months together to get our loans sanctioned, says Pratibha Jena, a member of the self-help group. Besides, for the residents of Jalanga, banking services are only restricted to maintaining accounts or, at best, getting loans for agriculture or the SHGs.
Other financial services like remittances or overdrafts are unheard of. The absence of the remittance facility at the nearest bank branch has been a handicap for migrants from Jalanga who are now engaged in the textile mills in Surat. These migrants send money to their kin either through money order or courier. The RBI governor heard out the villagers patiently and called for stepping up awareness on the whole gamut of financial services which banks offer. People need to be educated on the various financial services and they should start demanding these services from banks, he asserted.
Though the RBI move has both for and against voices:
Though Jalanga may see better days, there are many who feel RBI’s financial outreach programme is just a gimmick. RBI insiders say doing a reality check in just 200 out of 600,000 villages in the country will serve no purpose. “Of the 36,000 automated teller machines in the country, just about 2,000 are in the villages. A district may claim 80 per cent financial inclusion, but if we ask 25 families it is more likely that less than 24 families will have a bank account,” an RBI official said.
Others say it’s impractical to expect the RBI top brass to visit all villages. At least the experience in these 200 villages may reflect in the central bank’s policy-making, they say.
The idea is to make 200 model villages and then ask the banks to develop such models around the model village. “In this process, if at least 100 villages can be developed around the model villages, we will have 20,000 model villages,” another RBI official who is involved with the outreach programme said.The RBI regional offices have been asked to monitor the progress of the village on a regular basis and report the progress on a monthly basis. The central bank plans to cover all the 200 villages by March 2010.
Hmmm. There is little doubt that financial inclusion isn’t just about opening bank accounts. RBI released a report saying districts that claimed 100% financial inclusion (FI) were anything but 100% financial inclusive.
I believe the program is useful as it gives RBI top brass some ideas on the immense problems we face as far as FI is concerned. It also educates the general public on the role of RBI and tells them that the central bank is very committed to FI. RBI also shows it is an organisation and makes policies for the Indian public which is the one of goals of the central bank as well. It isn’t just one technical organisation.
I was also just comparing the different challenges RBI faces vis-a-vis BoE (and other central banks). In this crisis, BoE has taken exceptional measures and does a tour to explain these actions to the public. Even RBI has taken exceptional measures but RBI’s tour is for completely different reasons. Just look at the challenges each central bank faces. Quantitative easing is such a complex issue which needs to be addressed and Financial inclusion is such a basic issue which also needs to be addressed.
I just hope RBI publishes a report of the villages covered, broad findings etc.
Kevin O’Rourke, Professor at Trinity College Dublin has posted a nice article on the global imbalances issue.
There is widespread agreement that one of the root causes of the Great Credit Crisis of 2008 was the interaction between global imbalances and under-regulated financial systems. The savings of surplus countries created a wave of money which washed into deficit countries, looking for high returns while simultaneously helping to keep interest rates low. Where financial industries were allowed sufficient latitude, the result was excessive leverage and risk-taking, and ultimately catastrophe.
Nicely put.
Alex Cukierman of Tel Aviv University has written an excellent paper comparing Old Keynes thinking with the New Keynesian thinking. The paper is mainly on differences and similarities between Great Depression and Great Financial Crisis.
He begins the paper reviewing developments in macroeconomics from Keynes to Friedman to New Keynesian. He then compares the GD with GFC which is pretty much known by now.
There is a nice discussion on the policy lessons from the two episodes. He divides it into two:
Adam Posen in his new speech says central banks should not use monetary policy to target asset price booms/bubbles. Instead we need more tools to target the bubbles.
Using monetary policy or interest rates for asset bubbles is like using a hammer to operate a shower. It will only worsen things. What is needed is right tools for a specific problem. He nicely says not everything is a monetary nail
In a speech at the MPR Monetary Policy and Markets Conference in London today, Adam Posen – an external member of the Bank’s Monetary Policy Committee – discusses how asset price booms might be addressed in the future. He rejects the notion that monetary policy should be used to tackle asset prices, and believes other tools are needed and better suited for the task. In addition to macroprudential policies – such as those outlined in a recent Bank of England discussion paper – Adam Posen suggests there is merit in considering tools that tackle asset prices directly. In particular, he discusses the idea of an automatic stabiliser for housing prices.
What is this auto stabilizer?
He suggests as a complementary policy, changes to real estate taxes and regulation, to provide a counter-cyclical element – automatic stabilisers – to structures already in place in many countries’ housing markets.
Adam Posen stresses that the proposal is “…something modest, without any large implications for tax revenue over the cycle…”. He says: “…it would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly. …a simple blunt instrument targeted to lean against the wind in real estate prices in an automatic fashion.”
This is a pretty novel idea. He says we need to look more closely at housing bubbles as they create more damage to the economy.
Final thoughts
The bottom-line for monetary policy coming out of the crisis is, if you have a financial problem, use financial policy tools to fix it. That applies to bubbles, which means monetary policy should not be targeting asset prices as well as inflation.” He says: “…the direct role of monetary conditions (and tightening thereof) in the creation of asset price booms is minimal… Financial problems come from something else. Where else? Changes in technology (for equity bubbles) and in financial regulation and supervision (for both equity bubbles and real estate bubbles) are the key drivers. That is the reason for my suggesting a new line of discussion for stabilization policy in addition to the necessary macroprudential proposals for the financial system.”
Excellent stuff as usual from Posen. Loads of food for thought. Full of references and graphs to prove his point.
India Development Blog pointed this website Devnetmatrimony.org.
Website for social workers, development professionals, innovators to search marriage partners
The website is developed by SynQues Consultancy, a Netherlands based firm which has India offices as well. The about us and other links are not working so we don’t have much idea on whether SynQues alone is responsible or others are as well.
It was pretty amusing at first but a much-needed solution to a big problem emerging in India. It is a useful market-making/market-design tool.
We have many websites catering to the various communities but people also want to marry people in their own fields. Quite a few these days don’t mind marrying outside their communities but want to ensure the person is from the same field.
The reason is that same field person understands the issues that come with the occupation- long hours, loads of travel etc. This was a common problem with doctors who mostly want to marry doctors only. You often see both husband and wife in one clinic, with husband offering some special doctor services and wife offering another. It could be same services as well.
Now you get to see the same issue moving to other professions as well. The issue is all the more for girls. They are worried that they may have to give up their profession after marriage if the in-laws family does not understand the work ethics with a profession.
Take the case of development sector. It involves a lot of travel to far remote areas for many a days. One could also be in areas where he cannot communicate about his location and well-being. Just imagine the situation for a married woman in this case. The salary may also not be as good compared to all the work one does. If the other half is understanding nothing like it. But if not, marriage to a non-development sector person, may turn out to be a bad one. But then marrying a dev sector person alone will not guarantee all will be well. It is just minimising risks that is it.
So, if you see the registration page, it asks for details like:
So a person could select on this basis.
Likewise, all other professions have their own whims and fancies. I keep coming across this issue with many a relatives. The parents are worried to fight a suitable match for their son or daughter. And most often they say my son/daughter refuses to marry saying the person will not understand my nature of work.
I am sure most others would relate to this problem as well. It may not be a bad idea to have more websites like these or have one website which helps you search across professions. So far, such match making usually happens offline – mostly at offices. Having an exclusive online option should help.
Market design is a very interesting field in economics, pioneered by Al Roth. Market design for marriages is a useful way to think about the issues involved.
Though most must have read this Krugman paper, those who have not should make it a priority. It is amazing the way Krugman writes on economics. It is just so many things in such a simple fashion.
This paper has been written for celebrating Alan Deardoff’s career. Alan Deardoff is an international trade professor at Univ of Michigan.
In this paper, Krugman tells you about the development of Trade Theory.
I like to begin classes on international trade by telling students that there are two basic explanations of international trade. The first is comparative advantage, which says that countries trade to take advantage of their differences – a concept that lay at the heart of Alan Deardorff’s beautiful, classic paper “The general validity of the law of comparative advantage” (1980). The second is increasing returns, which says that countries trade to take advantage of the inherent advantages of specialization, which allows large-scale production – which is what the “new trade theory” was all about.
I also like to illustrate these concepts from everyday experience. Everyday illustrations of comparative advantage are, of course, a staple of introductory textbooks – why sports stars shouldn’t mow their own lawns, etc. But it’s equally easy to illustrate the role of increasing returns. Even if two people are equally suited for the roles of rocket scientist and brain surgeon, it makes sense for one to specialize on surgery and the other on rockets, because mastering either skill takes years of study, and it would be wasteful for both people to master both disciplines.
The new trade theory is what Krugman helped develop.
He then says there are three eras of international trade. Era I before World War I was where you saw comparative adv work. Era II was after WWII where we saw increasing returns work. In Era III now, we again see a comeback for comparative adv.
But he now thinks both comparative adv and increasing returns are important
Over the past century world trade has gone through a great arc. At the beginning of the century trade was primarily between countries with very different resources exporting very different goods, so that it seemed to be a comparative advantage world. By the 1980s trade was largely between countries with similar resources exporting similar goods, so that economists turned to increasing-returns models to make sense of what they say. But today, with the rise of China and other low-wage economies, we seem once again to be in a comparative advantage world, in which countries with very different resources export very different goods.
What I’ve argued in this paper, however, is that even during comparative-advantage eras increasing returns in the form of localized external economies plays a significant role. In fact, the same eras in which comparative advantage seems to have ruled international trade are also the eras in which increasing returns has seemed to exert its strongest influence on intra-national economic geography. And this observation isn’t irrelevant even in the trade context: gains from localization arguably are a significant source of gains from trade, even if they don’t seem to affect the pattern of specialization.
Excellent stuff. Great insights into how trade theory ahs evolved and very interesting examples as well.
Central Banks have expanded their balance sheets in this crisis. This is also called as unconventional monetary policy. However, central banks have used different ways to expand their balance sheets depending on their nature of financial markets. so Fed has tried to help its capital markets, ECB its banks and Bank of Japan both with focus on banks.
Here is a nice paper by Shigenori Shiratsuka of IMES, Bank of Japan. He says the difference isnt as much. Central Bank balance sheet expansion means both size and composition of the balance sheet.
The distinct difference arises not because central banks have different objectives, but because they face different environments and restrictions, such as the types and origins of the shocks hitting the economy, the structure of the financial system, and institutional arrangements of the central bank. When viewing from a broad perspective, the responses of various central banks demonstrate more similarities than differences.
In theory, such unconventional monetary policy can be implemented by combining the two elements of the central bank balance sheet, size and composition. The size corresponds to expanding the balance sheet, while keeping its composition unchanged (narrowly-defined quantitative easing). The composition corresponds to changing the composition of the balance sheet, while keeping its size unchanged by replacing conventional assets with unconventional assets (narrowly-defined credit easing).
In a financial and economic crisis, both the asset and liability sides of the central bank balance sheet play an important role in countering the adverse effects stemming from the financial system. The asset side works as a substitute for private financial intermediation, for example, through the outright purchase of credit products. The liability side, especially expanded excess reserves, functions as a buffer for funding liquidity risk in the money markets. In addition, the two sides interact closely, since malfunctions in financial intermediation are closely tied to funding liquidity risk at financial institutions, resulting in the increased demand for excess reserves.
Simple way to think about central balance sheet issues.
RBI Deputy Gov, KC Chakrabarty gives a talk on Gennext banking in India.
He says:
Jurgen Stark, the chief economist of ECB (read his profile), has a nice speech on the topic. Most of it is well-known. But a useful summary of the issues.
Regarding the hot-topic whether central banks should intervene in asset markets or not, he says we need to look at it actively now. There is a need to look at ECB’s monetary pillar analysis more closely. The monetary and credit aspects of the economy ignored by other central banks, need to become a prominent tool for central bankers.
Foreign Policy has put up a list of Top 100 global thinkers. Quite a few economists feature in it. I have tried to categorise them:
Central Bank Governor/ Economists
1. Ben Bernanke – for staving off a new Great Depression
9. Zhou Xiaochuan – for reminding the world that we can’t take the dollar for granted.
Academia Economists
4. Nouriel Roubini – for accurately forecasting the global financial pandemic.
7. Cass Sunstein and Richard Thaler – for taking behavioralism from niche to necessary.
14. Larry Summers – for being the brains behind Obama’s economic policy
15. Martin Wolf – for being the dean of financial columnists.
22. Robert Shiller – for warning us — over and over — about dangerous bubbles
25. Joseph Stiglitz – for relentlessly questioning economic dogma.
29. Paul Krugman - for proving that a Nobel Prize winner can also be a prolific pundit and unerringly correct doomsayer.
35. Nicholas Stern- for figuring out the costs of climate change and the politics of a solution.
36. Paul Collier- for showing how the world’s bad guys are keeping the bottom billion down.
39. Jeffrey D. Sachs- for being the global poor’s most persistent advocate among the global elite.
39. William Easterly -for raising inconvenient truths about the foreign-aid business.
41. Esther Duflo – for adding quantitative rigor to assessments of foreign aid.
58. Amartya Sen- for showing how democracy prevents famine
91. Willem Buiter – for his maverick commentary on the financial crisis.
99. Emily Oster – for her creative research into what really helps the poor
Thinktank Economists
5. Rajendra Pachauri -for ending the debate over whether climate change matters.
33. Robert Zoellick and Dominique Strauss-Kahn – for using the crisis in service of a good cause: helping the world’s poor.
Non-economists contributing to economics (Most of them have studied economics but don’t really work as an economist)
16. Mohamed El-Erian – for his unparalleled knowledge of global finance.
28. Elinor Ostrom- for showing us that the global commons isn’t such a tragic place after all.
38. George Soros – for showing us that billionaires can be thinkers, too
42. Jared Diamond- for helping us understand how societies not only grow, but die.
43. Richard Posner -for his wide-ranging intellectual contributions.
46. Muhammad Yunus- for proving that the poor are profitable.
56. Niall Ferguson – for his intelligent, incessant questioning of dogma
65. Francis Fukuyama – for creating a foreign-policy paradigm that has defined almost two decades of argument.
74. Gordon Brown – for his leadership during the financial crisis.
88. Sunita Narain – for giving voice to India’s environmental conscience
Phew..that is quite a list really. I may have missed a few as well.
It could easily be a list of top economics thinkers as well. It surely is a result of the ongoing financial crisis. It is a financial economics heavy and environmental economics heavy list.
Dr Subbarao in his recent speech provided refernce to a recent speech Dr Reddy gave in memory of S. Guhan.
I just searched and found the text of the speech here. He sets the agenda for the financial system right:
Currently, there are several responses to this question of what next for India’s financial sector? I will state a few of them and briefly comment on each of them.
First, some say that India has been saved from the financial crisis only because the policy was conservative and did not act to improve the efficiency of the system. Hence, the prescription is to act now.
This view is not right simply because India was active in policy interventions in both monetary and financial sector. RBI adopted active countercyclical policy; while many others failed to intervene. There is another problem with acting rapidly or comprehensively now for reform; because there is no agreement on right model for financial sector.
I just posted a while back on the importance of knowing law while understanding central banking. It isn’t just about economics alone as you need a proper legal framework under which central bank has to operate. The success of central banks as an institution isn’t about economics alone, is a success of law as well.
Masaaki Shirakawa, Governor of the Bank of Japan gives a super speech to Faculty of Law, Tokyo University on this issue. He says knowledge of law is as critical as knowledge of economics.
He discusses three aspects of law that influence central banking:
Very useful insights. He also adds a few points on life as a central banker.
In the end he says:
All of you have been studying law and might be hoping to utilize law to contribute to the world. There are many jobs such as the legal profession and legal departments where knowledge of the law can be utilized. While all of those jobs are no doubt important, it would be more than I can dream of if you also recognize the challenging and unique workplace that is a central bank.
Anna Lusardi in her post compares getting regular checkups of one’s health with doctors and of financial health with financial advisors. We do the first quite a bit and forget about the others.
Fatas-Mihov Blog post rarely but whenever they do, it is full of insights. The duo have written some super papers and make a mark in the blogposts as well.
In the recent post, they point that recoveries post-recessions in 1991 and 2001 were investmentless.
I was reading this recent speech by RBI Gov Dr Subbarao.
He says there are calls to make banks boring. He cites works of Krugman, Volcker, Mervyn King and Dr. Reddy who in their own way have advocated the call to make banks boring.
Menzie Chinn of Econbrowser points that in wone of the economics workshops held at Bank of Canada, Blogonomics (Economics of Blogs) was discussed. This is like wow. Earlier, there was a pointer that blogposts helped in research paper writing and bloggers were invited to US Treasury. And now a panel discussion at Bank of Canada on blogonomics.
Chinn says:
Some questions posed by the panel chair were:
Read Chinn’s views here. My answers:
What about the other bloggers?
Finance Ministry has floated a new committee to study foreign investment in India.
I don’t understand but there is no member from RBI. Why should this be? I think I already know the recommendations of the committee (don’t ask me why). There would be 2 scenarios:
Some people would ask, so what is different and what is new? This is the nature of all committee reports w.r.t. capital flows. Well, nothing is new. But this is how things usually are.
If the second version goes through, it is likely to be followed by dissent notes from a few members who would vote for the first version. The dissent notes are going to be highlighted by the media as somehow most people in media feel the first version is the only model.
So let’s see how it goes. It is going to be tabled in 4 months from now. I hope I am all wrong about this one. And we see some progress.
Well, there has been a lot of debate recently on the issue- whether microfinance helps or not?
Two studies, both by Poverty Action Lab researchers have been in heavy controversy since they have been published. First – The miracle of microfinance? Evidence from a randomized evaluation by Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan (May, 2009). Second by Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila by Dean Karlan (July, 2009). First based in India, second in Philipines. Both studies show limited impact of microfinance on people’s lives.
