A journal on history of economic thought..

April 18, 2014

Had a wow moment last night. Got an email informing me about this journal on history of economic thought (HET). There are couple of other interesting journals too like the famous real world economic review and so on. This RWER journal has shifted to this WEA platform..

The 2014 first edition of JHET has an article on the most burning issue- Should the History of Economic Thought be Included in Undergraduate Curricula? It is written by Alessandro Roncaglia.

Ofcourse it should be. HET should be part of all levels of economics programs (undergrad and grad). Given how much people quote the old economists it is really important that contexts are understood. Most of us just pick quotes/ideas randomly from the  past without reflecting on the context and history. Much of economics is about ideological battles which come from the past. Why this subject is not taught anymore beats me completely.

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How credit default swaps helped exacerbate the Eurozone crisis?

April 17, 2014

Anne-Laure Delatte, Julien Fouquau and Richard Portes in a voxeu piece revisit the role of a financial product which has been quiet for a while.

Credit default swaps was seen as one of the central reasons why AIG collapsed in Sep-2008. Now, the problem was not with CDS per se but the way they were used. As it happens with most financial products, CDS was not really used on intended lines. People figured out how to use CDS in all kinds of ways and created this huge risk. It was meant to address risk but helped in increasing it.

The authots say CDS spreads helped further the EZ crisis:

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QE in Euroarea has to deal with three kinds of interest rate differentiation..

April 17, 2014

A thoughtful speech from Benoît Cœuré, member of ECB.

He says when we say about QE in EZ, we have to look at interest rates across three spectrums:

Focusing specifically – and at the risk of over-simplifying the issue – on the interest rate channel of monetary transmission, monetary policy operates by raising or lowering the interest rate in the economy. A lower (real) interest rate lowers the cost of capital for firms, encourages investment spending and stimulates consumption. A higher real interest rate has the opposite effect.

But the point of course is that there is no such thing as one interest rate to which all economic agents respond. There are at least three ways in which interest rates are differentiated in the euro area. There is vertical differentiation – different economic agents are sensitive to interest rates with different maturities. There is spatial differentiation – different interest rate curves provide the reference rates in different jurisdictions. And there is horizontal differentiation – within jurisdictions, different markets determine firms’ and households’ cost of borrowing.

What this implies is that the levels of medium- and long-term real interest rates across jurisdictions and markets will always be relevant to the formulation of monetary policy. The difference between normal and abnormal times is therefore not what we are trying to achieve – it is how we strive to achieve it.

He further explains these three kinds of differentiation:

First, vertical differentiation – the relevant maturities at which asset purchases should take place. In practice, purchases would naturally be linked to the interest rate maturities that are most important for firms’ and households’ investment and consumption decisions. In the euro area, this tends to be the intermediate to longer part of the yield curve.

Second, spatial differentiation – the jurisdictions across which asset purchases should be spread. Here we would have to take into account the interest rates in different jurisdictions that provide the benchmarks for loan pricing. In the euro area, remember, there is no single yield curve that refers to a “commoditised” reference asset and that is equally relevant for loans to firms and households. Creating such an asset would ease the implementation of our monetary policy, but this cannot be a short term project.

Third, horizontal differentiation – the markets within jurisdictions that asset purchases should target. When financial markets are highly integrated with a high degree of substitutability between assets, purchases in one asset class, such as government bonds, are more likely to affect term premia across all asset classes. This is because the process of portfolio reallocation facilitates a relatively homogenous transmission. But given the segmentation of euro area financial markets, this effect cannot just be assumed. To achieve a homogenous reduction of term premia across relevant interest rates, segmentation would have to be taken into consideration in our strategy.

Pretty complicated as most things in EZ are. One has to decide on maturities, countries and then within countries..

He says unconv policies are not as unconv and there is a wonderful quote at the end:

Unconventional monetary policy tools are less unconventional than the word implies. They are unusual, because they respond to highly unusual circumstances. They imply risks that have to be carefully weighed and mitigated. But fundamentally, unconventional tools are only a means for central banks to continue doing what they have always done: managing aggregate demand, by influencing the level of real interest rates and other monetary transmission channels, to maintain price stability. To borrow from Giuseppe Tomasi di Lampedusa, in these unusual times “everything must change, so that everything stays the same”. It is this that will determine both the appropriateness of using targeted asset purchases in our monetary policy operations, and the design of any such purchases.



Will the modern economy resemble that of the eighteenth century?

April 17, 2014

A terrific article from Adair Turner connecting many dots..

He wonders why land prices continue to rise in this era of technology and facebooks?

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The irrelevance of ranking global financial centres…

April 17, 2014

Howard Davies, a professor at Sciences Po in Paris has this interesting article on ranking of financial centres. The formation of these financial centres is a great area of historical research started by late Prof. harles Kindleberger. But these days it is more about these fancy rankings than the functions it has served over the years..

Apparently Gibraltar has surged as a international financial centre in recent ranking. And Casablanca has joined the rankings too!!

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Indian petrochemical industry – basics and issues

April 16, 2014

A nice paper on a highly important but relatively unknown industry - petrochemicals..Wish we have more of such papers giving one insights on Indian industry. This paper too could have been simplified giving the whole logistic chain in a pictorial fashion and connecting the dots..

The paper is written by ICRIER trio Saon Ray, Amrita Goldar and Swati Saluja.

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Emergence of the Fed as a modern/independent central bank

April 16, 2014

Bernanke yesterday lectured at Mumbai saying the new government should ensure the autonomy of RBI continues. Owen Humpage of Cleveland Fed has this very useful paper on how Fed became a so-called modern independent central bank.

Humpage says one is not sure when Fed became a truly independent central bank. The concept of independence is a mutable and fragile one. The paper leans gives a political economy perspective of independence and show how US govt used Fed as an agency to fulfil the overall economic goals:

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History of virtual currency and whether these currencies will succeed?

April 16, 2014

Two articles. First by Financial Cryptography website. It says this bitcoin thing is nothing but a repitition of history. The second is by Daniel Thornton of St Louis Fed who discusses what makes these currencies tick. So first looks at history and second looks at the future..

First a bit of history:

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How Important Are Hedge Funds in a Crisis?

April 15, 2014

A nice research note from FRBSF econ - Reint Gropp. 

The author says hedge funds play a critical role in fueling the crisis:

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The benefits of not being so independent – a case of People’s Bank of China..

April 15, 2014

Much like anything Chinese, there is this whole mystery and aura around the way PBOC functions. There is little understanding on how it conducts monetary policy and goes around its job. The speeches from the central bank are few and frugal too making it even more difficult.

So in this rare intereview PBOC chief  Zhou Xiaochuan speaks on the independence of the central bank:

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From spillovers to spillbacks…

April 15, 2014

Just missed this over the long weekend.

IMF seems to have introduced another term called spillback.

Spillovers mean the positive/negative impact of a policy on other countries. Spillbacks is the impact of withdrawing/exiting from ultra-easy policies on other countries. I mean it is just another kind of spillover really..

The central bankers were not amused with another addition to the lexicon…

The impact of BOJ bond buying on Bond markets..

April 15, 2014

Interesting bit of news from Japan.

WSJ BLog points how the new 10 year JGB did not trade at all for a whole day:

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From a one handed economist to an economist with many hands like a Hindu god …

April 14, 2014

Came across this interesting and dated speech of Nemat Shafik, ex IMF DMD and now BoE’s Deputy Governor. The speech was given at a conference in Delhi organised by CAFRAL.

She says:

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Why do we still use paper money?

April 11, 2014

Richard Rahn of Cato looks at this interesting question.

And in typical Cato/Hayek  spirit blames the govt for ensuring this continues…

Why Do We Still Use Paper Money?

April 11, 2014

Richard Rahn of Cato Institute asks the question:

Paper currency is dirty and is a major transmitter of disease as it goes from unwashed  and to unwashed hand. It is easily lost and stolen, and can be easily destroyed by getting wet or burned.

It physically wears out in a short time and is costly and troublesome to replace. So why do we still use the filthy stuff in the electronic age?

He says interestingly, that govt also prefers electronic money which it can monitor:

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Why we’re in a new gilded age?

April 11, 2014

Krugman reviews the famous Piketty book. And what a title for the book - Capital in the Twenty-First Century. I have not read the book so far and am waiting to get my hands on it.

But Krugman does a good job of explaining the book. It seems it explains the  rise in inequality in Europe in 1920s etc. But does not do as great job for explaining the rise in US.

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What happens when the heart available for transplant is that of 75 year old central banker?

April 11, 2014

Usually brilliant and funny Richard Fisher if Dallas Fed has this interesting speech. He discusses QE, forward guidance, hype around central banks and so on..

He narrates a story told by Mario Draghi at a conference:

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How much do countries benefit from membership in the European Union?

April 10, 2014

For a moment I thought, could we still have research which looks at this question? But then I looked closer and realised it is European Union and not the monetary union.

Nauro Campos, Fabrizio Coricelli and Luigi Moretti look at this question for EU members. What if the current EU members chose not to join the union?

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Using science (sorry politics) to kill the mosquito menace..

April 10, 2014

Philosophy declining in universities but Philosophers top thinkers ranking…a paradox

April 10, 2014

Peter Singer Professor of Bioethics at Princeton University has this interesting article in Proj Synd.

He says that the intake in humanities has slipped sharply in recent years:

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