I am pretty late on this. There is already a fair bit of criticism on the new Mishkin bubble article (see Eurointelligence, Caroline Baum, TT Ram Mohan etc etc).
He says there are 2 kinds of bubbles. One credit boom bubble and second irrational exuberance bubble. First causes damages and needs to be looked at and second one just ignore it.
NYT has a superb article on how Bernanke is getting political lessons. Ron Paul, Texas Republican wants to audit the Fed and take control of Fed. Bernanke has been opposing the move in his speeches/testimonies (see this previous post for the debate).
So the article explains how furious the politicians are and are asking Bernanke to explain the Fed moves in this crisis. How do they explain to the public that Fed gace USD 2 trillion to banks that led to the crisis at the first place. All these are politicians issues and Bernanke needs to explain and is finding it difficult. Reminds you of the excellent Blinder piece on the same.
However, this bit doesn’t sound good:
Voters had become suspicious and unnerved by the Fed because of its trillion-dollar efforts to bail out the financial system, Mr. Frank warned. If the Fed really wanted to survive the disgruntlement in both parties, he continued, Mr. Bernanke would have to step back and let him devise a compromise.
Reluctantly, the Fed chairman agreed to reduce his own visibility on the issue and let Mr. Frank take the lead.
It was just one example of how the Fed has been forced to scramble as its power comes under more fire than at any time in decades.
On Tuesday, a new threat opened up: Senator Christopher J. Dodd, chairman of the Senate Banking Committee, declared that the Fed had been an “abysmal failure” at regulation. He introduced a bill that would strip virtually all of its power to regulate banks, including financial institution considered too big to fail.
Read on the article for more details. Lots of senators asking questions on Fed and its role in the crisis.
Now we all take central bank independence as given and understand its role. But how do you explain that too a politician? The moment he learns that the central bank has been created by the government he is going to be all the more perplexed by the independence issue. I mean Treasury/Finance Ministry guys would understand but there are all kinds of other ministries as well. A central bank has mighty powers as well which makes the issue worse.
Bernanke is taking these lessons and I am sure doing well. The other central bankers could join in as well. Knowing monetary economics is surely the most important task, but knowing the political landscape is as important.
In September, SEC created a new division called Risk, Strategy, and Financial Innovation (HT : JRV Blog)
The new division combines the Office of Economic Analysis, the Office of Risk Assessment, and other functions to provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines. The division’s responsibilities cover three broad areas: risk and economic analysis; strategic research; and financial innovation.
“This new division will enhance our capabilities and help identify developing risks and trends in the financial markets,” said Chairman Schapiro. “By combining economic, financial, and legal analysis in a single group, this new unit will foster a fresh approach to exchanging ideas and upgrading agency expertise.”
Interesting stuff. A division to track financial innovation. But much needed as well.
Henry T. C. Hu of Texas Law School agreed to head the division.
Professor Hu said, “I am honored that Chairman Schapiro has asked me to be the director of this new division at this seminal time. The derivatives revolution, the rise of hedge funds and institutional investors, technological change, and other factors have transformed both capital markets and corporate governance. I look forward to working with the Commission and to using an interdisciplinary approach that is informed by law and modern finance and economics, as well as developments in real world products and practices on Wall Street and Main Street.”
Here is his research work. Looks like a nice combination of finance, economics and law,
JRV Blog has more details 0n Hu and more recruitments in the new division
As if Too Big to Fail was not enough to digest, IMF warns of a new risk- Too Complex to Fail. In its new paper, IMF adds the real problem is too complex to fail.
A snapshot of the paper findings is here.
According to the paper, factors that might be considered indicators of a firm’s vulnerability, and its increasing risk to the financial system overall, include:
• Leverage, which is borrowed capital used to increase a firm’s potential returns
• Illiquid assets, which may need to be sold in order for a firm to raise funds
• The complexity of a firm, coupled with the availability of reliable information about a firm’s investments in a particular security or industry
The paper also lays out a framework to identify which firms/markets are risky etc
It sets out the criteria and principles to help countries determine which firms and markets are systemically important. The paper outlined three main principles:
• The size of a financial firm or market, and the volume of financial services it provides
• The extent to which other parts of the financial system can provide the same services in the event of a firm or financial market’s failure
• The linkages between financial institutions, which might create repercussions in the event of a firm’s failure
I have always felt Too Complex to Fail is as big an issue. In times of crisis, most financial firms become too complex as information about their assets and liabilities becomes opaque. It is important to remember financial services as it is are farly hiogh on information asymmetry. This escalates in times of crisis and makes everything fairly complex to fail.
Smaghi of ECB explains:
if you buy a financial product you are, by definition, buying risk. If you only want to preserve the nominal value of your savings, you should just hold cash. The return on an investment compensates you for the inherent risk of the asset you acquire. In other words, the value of a financial instrument is uncertain because it is subject to risk. The greater the risk, the greater the return should be.
The second part of the answer is that it is not always easy to assess risk. Anyone who enters into a transaction should make his or her own assessment. That may vary not only because of the probability of a specific event, such as the default of the counterparty, but also because of the probability of other events, affecting for instance the other assets held in the portfolio of an investor. But, more importantly, the buyer and seller may value the risk of an asset differently because they might have different information about the asset itself, and its characteristics. In particular the seller – by which I mean the originator – of the asset tends to have more information than the buyer. If the former can hide some of the information, in particular about the risk of the asset, he can sell it at a higher price. In other words, the rate of return will not cover the intrinsic risk of the asset.
This is where the difference between financial products and other products is relevant, not only for individuals but also for society.
Too complex to fail is a far bigger idea which needs to be understood. The smaller firms if complex can pose large problems as well. LTCM was one example.
The first discussion paper on India’s GST is here. I haven’t read it so far, so no comments.
I came to know y’day that first discussion paper on India’s GST is to be released. So have been looking at all possible govt websites- Finance Ministry, Taxation websites, Prime Minister’s Office, Planning Commission etc etc. But could not find it.
After a lot of google searching managed to locate the paper finally. Thanks a ton to etaxindia.org.
Andrew Haldane once again. I have been covering his works in the crisis and all have been excellent reading (here, here and here).
In his recent paper cum speech co-written with Piergiorgio Alessandri he tells you how banks have changed over the years:
Historically, the link between the state and the banking system has been umbilical.
Starting with the first Italian banking houses in the 13th century, banks were financiers of the sovereign. Sovereign need was often greatest following war. The Bank of England was established at the end of the 17th century for just this purpose, financing the war debts of William III. From the earliest times, the relationship between banks and the state was often rocky. Sovereign default on loans was an everyday hazard for the banks, especially among states vanquished in war. Indeed, through the ages sovereign default has been the single biggest cause of banking collapse.
For the past two centuries, the tables have progressively turned. The state has instead become the last-resort financier of the banks. As with the state, banks’ needs have typically been greatest at times of financial crisis. And like the state, last-resort financing has not always been repaid in full and on time. The Great Depression marked a regime-shift in state support to the banking system. The credit crisis of the past two years may well mark another.
Further,
Then, the biggest risk to the banks was from the sovereign. Today, perhaps the biggest risk to the sovereign comes from the banks. Causality has reversed.
This is quite true. A complete reversal of history.
He then explores the reason why banks have become so risky and highlights the role of time inconsistent policies that have allowed banks to increase leverage, have low capital and seek higher returns to justify the high risks.
Excellent as always.
What about Indian economy? It is a bit of both. Government still relies on banking system to help subscribe to former’s borrowing program (via investment in SLR). Banks on the other hand rely on government to support in times of crisis like this. The Indian government promised to support banking system if anything goes wrong in this crisis. Then large part of banking system is owned by government so the relationship is always going to be there.
Eurointelligence daily edition of 10 Nov 2009 has this interesting titbit:
EU finance ministers outraged about Greece
FT Deutschland has an article about the sheer sense of outrage felt, and expressed, by EU finance ministers about the situation in Greece, where the new government suddenly revised upwards the deficit projections from 6 to 12%, citing statistical discrepancies. The EU has lost confidence in Greek statistics, and is now demanding, as a first step, the independence of the country’s statistics bureau. The finance ministers have also commissioned a study on the quality of statistics in the country.
Nice to know India has company. And that too a developed economy at that. For a flavor of Indian statistical system, One should read RBI Governor’s speech.
I had posted a while back on India’s goods and service tax. In that post I had pointed to a primer and a speech from Dr Kelkar. In that speech Dr Kelkar had estimated the gains of GST for Indian economy based on similar gains made in Canada.
In his recent speech (not recent actually, given in October 2009) he adds:
The Finance Commission had appointed a Task Force on GST as well as commissioned a study by NCAER to assess its impact on growth in GDP and exports. The preliminary results of the NCAER study indicate that the growth in GDP can be between 2-2.5 per cent with the implementation of a well designed GST. This pioneering study explores the impact of GST on growth through direct cost reduction as well as cost reduction of capital inputs. The increase in exports can be between 10-14 percent. If we use 3 per cent as a discount rate, and lower estimate of the GDP increase of 2 per cent accruing year after year, the net present value of the GST reform exceeds half a trillion dollars.
This is pretty much the amount he had estimated using Canadian estimates as well. The report is still not out. Atleast I couldn’t find it.
He then addresses issues he has discussed in previous speeches as well. Those who did not read earlier speeches can do a quick read.
The economics of GST is fairly good but politics …well it is another story altogether.
In 2007, when Riksbank Committee awarded the Economics prize to Mechanism Design Theory, I realized there is something like this in economics.
Adam Smith’s classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources. But in practice conditions are usually not ideal; for example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits. Furthermore, many transactions do not take place in open markets but within firms, in bargaining between individuals or interest groups and under a host of other institutional arrangements. How well do different such institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?
And mechanism design helps in understanding these questions.
I came across this paper which analyses Banking using Mechanism Design. It is written by Fabrizio Mattesini, Cyril Monnet and Randall Wright.
The authors study banking using the tools of mechanism design, without a priori assumptions about what banks are, who they are, or what they do. Given preferences, technologies, and certain frictions – including limited commitment and imperfect monitoring – they describe the set of incentive feasible allocations and interpret the outcomes in terms of institutions that resemble banks. The bankers in the authors’ model endogenously accept deposits, and their liabilities help others in making payments. This activity is essential: if it were ruled out the set of feasible allocations would be inferior. The authors discuss how many and which agents play the role of bankers. For example, they show agents who are more connected to the market are better suited for this role since they have more to lose by reneging on obligations. The authors discuss some banking history and compare it with the predictions of their theory.
I couldn’t understand bulk of the paper as it is highly technical. But usage of mechanism design to study why banks exist sounded useful to me.
The paper says having a third agent take care of deposits makes it more credible that the parties will honor their transactions. This third agent resembles a bank.
An implication is that delegated storage may be useful: If you deposit your output with a third party who has less incentive or ability to liquidate it for strategic reasons, others are more willing to give you credit. Thus, claims on deposits can be used to facilitate transactions, and this resembles banking. This activity can be part of an e¢ cient arrangement even if the third party has an inferior storage technology. Thus, bank liabilities can be useful for payments even if dominated in return. Although other things being equal, it is obviously better if the bank has access to good storage or other investment opportunities.
We want to ask, however, why the third party is less inclined than you to renege on obligations. In our approach, future rewards and punishments mitigate strategic behavior, but monitoring is imperfect (opportunistic deviations are detected only probabilistically). Agents with a higher likelihood of being monitored have a greater incentive to make good on obligations and, hence, are better suited to take on the responsibility of holding deposits.
All these are features we assume to be associated with a bank. The authors however begin ignoring these assumptions about a bank. And arrive at these ideas using mechanism design theory.
I don’t remember which blog/article pointed to a paper by Meir Kohn. He is an eco professor at Dartmouth who has done tonnes of work on financial history to understand whether it helps in economic growth.
What is amazing is his phd was in Operations Research. He took up economic/financial history as he was intrigued by monetary economics and high inflation in Israel.
He explains in this article:
Because of the severe inflation Israel was undergoing at the time, I became interested in monetary theory and macroeconomics. My dissatisfaction with the existing ways of modeling money led me to work on an alternative theory. Together with others, I helped to develop what came to be known as the cash-in-advance approach to money.
What is this cash-in-advance theory? About.com explains ( Kohn’s paper here):
The cash-in-advance constraint is a modeling idea. In a basic Arrow-Debreu general equilibrium there is no need for money because exchanges are automatic, through a Walrasian auctioneer. To study monetary phenomena, a class of models was made in which money was required to make purchases of other goods. In such a model the budget constraint is written so that the agent must have enough cash on hand to make any consumption purchase. Using this mechanism money can have a positive price in equilibrium and monetary effects can be seen in such models.
Hmm. Well what Kohn says next is what I found more interesting:
Although the cash-in-advance approach was an improvement over the existing ways of modeling money, I had by the early 1990s come to the conclusion that mathematical modeling was of very limited value in advancing our understanding of the economy. At the time I was writing textbooks on Money and Banking and on Financial Institutions. Reading some financial history, I found it much more illuminating than the mathematical models to which I, and many others, had devoted so much effort. I therefore decided to redirect my efforts in that direction.
My initial goal was to achieve a better theoretical understanding of the workings and function of financial systems through a study of financial history. However, the most important and interesting question about financial systems is what difference they make to overall economic progress. So I was drawn into a more general study of the process of economic development and growth.
He has since then spent nearly a decade on 2 projects. One on pre-industrial Europe Financial System and its impact on growth. He is testing out his lessons on Chinese financial system and growth. The reports are available online.
Both look excellent stuff . I was reading the paper on deposit banking in 1600s and is quite fascinating.
There are also 2 papers which look like must read:
Add Kohn to your reading list. Those interested in Economic/Financial history that is…
There were 2 news paper columns that I know of that track latest economic research papers.
Now Manas Chakravary of Mint has started a column dedicated for economic research papers called Simply Economics. It comes on Saturday with Lounge, Mint’s weekend weekly. Again, I can’t find a dedicated link to the column.
Manas is an extremely prolific writer and covers economic research in his other columns as well (Capital Account). However, Simply Economics is mainly to cover economic research. There have been 4 pieces till now – 1, 2, 3 and 4.
Great stuff so far. I hope he continues with this column.
I came across this wonderful paper (HT Gulzar) on corrpution from Jakob Svesson
This paper will discuss eight frequently asked questions about public corruption: (1) What is corruption? (2) Which countries are the most corrupt? (3) What are the common characteristics of countries with high corruption? (4) What is the magnitude of corruption? (5) Do higher wages for bureaucrats reduce corruption? (6) Can competition reduce corruption? (7) Why have there been so few (recent) successful attempts to fight corruption? (8) Does corruption adversely affect growth?
We all know what corruption is but I thought it is pretty easy to define it etc. This paper makes you rethink about all the issues on corruption.
In the end he lays out a research agenda on corruption”
In this paper, I posed eight questions about corruption. The answers are often not clear-cut, and there are many issues about corruption we simply know too little about. As the study of corruption evolves, three areas are of particular importance.
First and most urgently, scant evidence exists on how to combat corruption. Because traditional approaches to improve governance have produced rather disappointing results, experimentation and evaluation of new tools to enhance accountability should be at the forefront of research on corruption.
Second, the differential effect of corruption is an important area for research. For example, China has been able to grow fast while being ranked among the most corrupt countries. Is corruption less harmful in China? Or would China have grown even faster if corruption was lower? These types of questions have received some attention, but more work along what context and type of corruption matters is likely to be fruitful.
Finally, the link between the macro literature on how institutions provide a more-or-less fertile breeding ground for corruption and the micro literature on how much corruption actually occurs in specific contexts is weak. As more forms of corruption and techniques to quantify them at the micro level are developed, it should be possible to reduce this mismatch between macro and micro evidence on corruption.
Read on for details. It is really worth it
In this new short note from FRBSF economist analyses inflation expectations in US.
Predicting the course of inflation is one of the most important challenges facing monetary policymakers. Useful aids to such prediction are the measures of expected future inflation obtained from prices in government bond markets. An examination of recent inflation-indexed and non-indexed U.S. Treasury bond yields suggests that financial market participants believe that the probability of prolonged deflation has become fairly small.
This Economic Letter analyzes inflation expectations and deflation risk by looking at differences in yields between standard Treasury bonds, which are not indexed for inflation, and Treasury inflation-protected securities (TIPS), which are indexed. Stated another way, such an analysis provides a means of measuring differences between nominal and real Treasury yields of the same maturity, which yields important information for measuring inflation expectations. Such an examination suggests market participants believe that the probabilities of deflation at the one- and five-year horizon are currently small. But at the peak of the credit crisis in the fall of 2008, bond investors believed that deflation risks were quite high.
When we think about central bank functions, it is important to know that their functions are governed by an Act/Law etc. The act determines what a central bank should do, objectives etc. This is because central banks are created by governments and legislation is a way to tell the bank what to do and what not to do.
This struck me when I was reading RBI’s Oct-2009 Monetary Policy review. Like all other central banks, RBI had started various facilities to help housing finance companies, non-banking finance companies etc etc. As crisis has eased, RBI has decided to unwind these facilities. The statement however added this legal angle:
As indicated in the Annual Policy Statement of April 2009, the following liquidity facilities provided by the Reserve Bank to banks and financial institutions are available up to March 31, 2010: (i) the export credit refinance (ECR) facility (limit up to 50 per cent of eligible outstanding rupee export credit) under Section 17(3A) of the Reserve Bank of India Act (RBI); (ii) the special refinance facility for scheduled commercial banks [limit up to one per cent of net demand and time liabilities (NDTL) as on October 24, 2008] under Section 17(3B) of the RBI Act; (iii) special term repo facility to scheduled commercial banks for funding to mutual funds (MFs), non-banking financial companies (NBFCs) and housing finance companies (HFCs) [limit is in terms of relaxation in the statutory liquidity ratio (SLR) up to 1.5 per cent of NDTL]; (iv) refinance facility to Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB) and Export- Import Bank of India (EXIM Bank) [under Section 17(4H), Section 17(4DD) and Section 17(4J), respectively, of the RBI Act]; and (v) the forex swap facility to banks for tenor up to three months.
We usually just read about these facilities and that is it. But RBI tells you that all these facilities are under some section of RBI act (in this case Section 17). I was just seeing the RBI act and in it section 17 is Business which the Bank may transact. Though I don’t understand legal stuff, just a quick scan helps. It tells you RBI has not taken these actions randomly but the act allows it to. So, if RBI is doing anything, it is following some part of the act.
Similarly, when Fed intervened to help AIG, Bear Stearns it took help of Section 13 in its act. Minneapolis Fed research note even calls it history of a powerful para:
When the Federal Reserve Board authorized the Federal Reserve Bank of New York to lend $29 billion to JPMorgan Chase in connection with its purchase of Bear Stearns, much was written about why the Federal Reserve took such an action, and appropriately so. That discussion will likely ensue for many years. However, little attention was focused on how the Federal Reserve was able to take such action; that is, by what legal authority did the Federal Reserve intervene in the business of a nonbank (in this case an investment firm).
The broad answer to that question is the obvious one—the Federal Reserve Act provides such authority. The specific answer is Section 13 paragraph 3 of the Act, which begins: “In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may …,” and then there’s a lot of technical language which essentially means that the Federal Reserve can lend money to “any individual, partnership, or corporation,” as long as certain requirements are met.
Fed cleverly used this tool to support the fin firms. Minus this, it could not have and would have to take special permission from US Treasury.
Now there are questions about defining this section properly yo understand what it can do and not do. Again the changes will have to be made in the Act.
All this points to the importance of knowing central banks acts. It is all written there.
There is so much being written on financial regulation that one’s head just aches. There is much confusion and no clarity on how do you summarise them.
I came across this useful way of simplifying and classifying financial regulation from Mark Carney of Bank of Canada. In his speech he summarises the financial regulation debate as working on 2 issues:
There are two main approaches to reform:
Both are necessary.
This is precisely the state of the problem. In the first, we talk about a sound banking system getting least impacted by the economic cycle. So we need capital ratios. now leverage ratios etc etc. In second, we need to ensure the financial crisis does not lead to systemic risk, credit crunches etc etc.
The moment we organise our thinking on these lines, it makes the task so easy. You start thinking about the problems and solutions accordingly. All fits in pretty neat.
The speech also has some interesting Canada add-ons to making the system more resilient.
ICRIER, the New Delhi based think tank has released its review of Indian economy for 2009-10.
Despite signs of recovery from the global financial crisis, the GDP growth rate for the Indian economy is likely to be between 5.8 to 6.1 per cent in 2009-10, below the 6.7 per cent recorded in fiscal 2008-09. While there has been an improvement in Indian industry, particularly the manufacturing sector, the adverse impact of the fall in kharif production due to a rainfall deficiency will act as a drag on the overall growth of the economy. In the current financial year, the major policy challenges for the government will come from the rather sharp rise in inflation and deteriorating public finances. The balance of payments situation may also require policy attention despite a narrowing of the current account deficit and a considerable capital account surplus because of the appreciation of the rupee.
It has interesting scenario analysis on India’s debt ratio (Gross Govt Debt as a % of GDP) in future given changes in interest rates, primary deficit and growth rate in nominal GDP. Lots of possibilities there with the best case for India being interest rates at 7%, primary deficit at 3% and GDP growth at 14%.
It also looks at the likely growth rate of GDP given the weak monsoons. They expect agriculture to decline by about 4.2% to 6.0% in 2009-10 and GDP at 5.8% to 6.1%. This is lower than EAC estimate of 6.5% plus and in line with RBI’s 6% with an upside bias.
On Tuesday morning (3 Nov 2009), I saw this press release at RBI website and just kind of ignored it.
However, it is pretty interesting from historical point of view.
First, the RBI press release says:
The Reserve Bank of India (RBI) has concluded the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF), under the IMF’s limited gold sales programme. This was done as part of the Reserve Bank’s foreign exchange reserves management operations. The purchase was an official sector off-market transaction and was executed over a two week period during October 19-30, 2009 at market based prices.
It may be recalled that the Executive Board of the IMF, on September 18, 2009 announced its decision to sell 403.3 metric tonnes (or 12,965,649 fine troy ounces) of gold as a central element of its New Income Model and in order to increase its resources for lending to low-income countries. The IMF also decided that the initial offer of the sale of the gold would be directly to official holders, including central banks.
I was wondering where did 403.3 MT came from? IMF has a detailed factsheet which explains this:
The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF’s total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $9.2 billion) on the basis of historical cost. As of August 28, 2009, the IMF’s holdings amounted to $98.8 billion at current market prices.
A portion of these holdings was acquired after the Second Amendment of the IMF’s Articles of Agreement in April 1978. This portion, amounting to 12.97 million ounces (403.3 metric tons) with a market value of $12.4 billion as of August 28, 2009, is not subject to restitution to IMF member countries (see below), unlike gold the IMF acquired before 1978.
Hmm. So it is this 403.3 MT which IMF acquired in 1978 which is being used in this transaction. Anything more than this, it would have been complex as sales of Gold requires permission from member countries and the 403.3 MT is free from the restitution clause, Restituion clause means any gold IMF has before 1975 could be sold to member countries (members as on 1975) as the former price of SDR 35 per ounce. So, just to prevent any hassles they first went forward with the 403.3 MT not part of the restitution clause.
I was also seeing this transript of IMF conference Call on sale of 200 MT to RBI. One questioner asks:
QUESTIONER: Thank you. When you planned this sale, you planned on $850/oz price. Now it’s more than $1,000. Do you have a feeling that you couldn’t have been more lucky?
SENIOR IMF OFFICIAL: Obviously, it’s a good price relative to the original assumptions. You might recall, as part of the agreement on stepping up our financing to low-income countries, we had already agreed that part of the proceeds from the sale would be used to generate resources for concessional lending. So this certainly helps with that.
Of course, this is only half the sale that we have completed, so we don’t want to get ahead of ourselves. We still have another half to go. I hope we’ll still be lucky.
Lucky IMF…
The transcript also explains that RBI was discussing this for a while and the final transaction happenned over 14 days:
QUESTIONER: And I was wondering why the sales—this is just for my knowledge—take place over two weeks?
SENIOR IMF OFFICIAL: Well, given its size, I think both from the Fund’s point of view and also the Reserve Bank of India, this was a really to give some protection against short-term fluctuations in the price. Obviously this is an off-market sale, but we do it based on the price prevailing on the day. The price can fluctuate up and down for various reasons on a day-to-day basis. So we felt it would give some protection against short-term fluctuations to do it on a phased basis over two weeks, rather than just all at the price prevailing on one day.
There were 2 modes via which IMF planned to sell:
And at the time, we noted that the Board approved two broad modalities for the sale. One was direct off-market sales to official purchasers, if there was interest from official purchasers. And the second was on-market sales which would be conducted in a phased manner consistent with the approach followed by central banks that participate in the Central Bank Gold Agreement.
So, this is an off-market deal based on market prices.
IMF press release on sales to RBI is here, IMF press release to start this facility in Sep-09 is here and FAQ’s on IMF Gold Sales is here.
Apart from World Economic Outlook, IMF also releases regionwise Economic Outlooks. Both are bi-annual publications. In its latest Asia outlook, IMF has an interesting chapter on Japan’s exit policies in its 1990s crisis and lessons that can be drawn from the same.
It breaks the Japan’s crisis in 3 phases (1990-97, 1997-2000, 2001-03) and shows how the crisis kept coming back. Each time there was some recovery, the policymakers pulled a bit of stimulus, there was an external shock (first Asian crisis and then dot com crisis) which pulled the economy again into recession. Infact, just like we saw in Great Depression , the second phase of recession in Japan was more severe.
The main reason for this slipping was Japan’s demand never picked up and the initital support was only seen in equity indices and export markets. It was only when there were proper plans to restructure the finance sector and unmask the full scale of problems, the economy recovered in the 3rd phase. This is in line with what Simon Johnson also said recently.
What are the lessons from Japan?
The article then points to lessons which can be applied today:
So keep them on but have some exit strategy in place is the one line lesson.
Millennium Development Goals or MDGs were at one point of time the most talked about thing in economics. It was allover the place. Now we just have no coverage apart from an article or two once in a while in the mainstream media. Nonethless, achieving or nearing the goals is very important.
Esther Dulo of Poverty Action Lab suggests 7 buys for UN that can help reach MDGs:
Governments need rigorous evidence on program effectiveness to make informed choices on where to invest scarce resources in the fight against poverty. Randomized evaluations use straightforward statistical techniques like those used in medicine to measure program effects. By distinguishing programs that work from those that don’t, and sorting highly effective programs from those that work but come with a higher price tag, randomized evaluations help answer tough questions on comparative cost effectiveness and are central to generating rigorous evidence for development effectiveness.
More than ever before, we have the scientific evidence to guide global policy. Practical and rigorously tested interventions exist that can inform policy to reduce poverty and, if massively scaled up, produce tangible and timely progress on the MDGs.
Her 7 buys:
Her presentation to UN is here. In the ppt, she shows how each of these are linked to the MDGs. It is not necessary that one buy helps in one goal. For instance deworeming helps both overall health and children education.
She also points to research studies which show that above 7 buys have been proven. In nut shell it points to 7 most effective strategies J-PAL has found which can help alleviate poverty.
This I found to be quite a useful way to reach out research findings. PAL’s main work is not to just do research and argue whether random experiments work or not. It is also to inform the public policy think-tanks on what seems to be most likely to work in improving well-being and eradicate poverty.
