The much hyped event is finally over – India Union Budget 2009-10.
I am still trying to understand the maze of Indian public finances (btw, just like the budget, this is an annual exercise as well without any success actually) .
A couple of quick points:
Irving Fischer Committee of BIS released a very useful publication -The use of surveys by central banks.
RBI has participated extensively in the report and we get some good understanding on various surveys conducted by RBI.
Surveys conducted by Reserve Bank of India
C.L. Agarwal, Reserve Bank of India
Results of inflation expectations survey of households
S.N.S. Tyagi, Reserve Bank of India
Reserve Bank of India surveys on corporate statistics
V.C. Augustine, Reserve Bank of India
Surveys for compilation of external sector statistics in India
Narender Singh Rawat, Reserve Bank of India
Survey of ownership of deposits with scheduled commercial banks in India – evolution, methodology and issues
Deepak Mathur, Reserve Bank of India
Excellent stuff. It will be great if RBI initiates discussions on the findings of these surveys in a more extensive manner. Frankly, I did not know there are so many surveys.
RBI Governor, Dr Subba Rao has given an excellent speech on the state and limitations of Indian economics stats system. He cites 5 problems:
(i) Data Revisions: Measuring the economy remains a complex task and data uncertainty is a fact of life. Data revisions are a legitimate part of statistical compilation and dissemination. However, here in India, data revisions and systemic biases in data revisions are more frequent and common place. Most economies have to contend with an uncertain future; here, in India, we are having to contend with an uncertain past as well.
(ii) Inflation Measurement: currently, the WPI inflation is in negative territory – a sign that could be misinterpreted as the economy being in deflation even when there is no contraction in aggregate demand – while the inflation rates from the four CPIs are in the range of 9-10 per cent
(iii) Information on Leading Indicators for Business Cycles
(iv) Financial Soundness Indicators
(v) Data on Employment: Finally, I come to a major gripe. Globally, trends in employment are one of the most important inputs in setting monetary policy response. Unfortunately, we do not have any reliable nation-wide statistics on employment. Data on factory-sector employment are available from Annual Survey of Industry, but with a large lag that makes it virtually useless for monetary policy purposes. Farm sector employment data are also available at poor frequency and with long lags. Non-farm pay rolls capture employment trends in some economies. But, in India, data on organised sector employment, as obtained from employment exchanges, cover a very small part of the workforce. Against this backdrop, timely and accurate information on employment conditions will enhance our understanding of inflationary dynamics in the economy, and thereby improve the conduct of monetary policy.
I have always stressed on the need to reform the Indian stats system but finds no takers. It is pretty painful to analyse anything on Indian economy. You take data from one source and prepare a report. Then you get a call/email from someone saying data from such and such source (equally a good source) suggests this trend which is different from your report. And the entire analysis falls flat. And then there are other problems of not finding data, reports though media is ripe of stories on the same.
Good to see RBI Governor talking about the issues. Hope there is some action on the same.
PS. The conference papers are here and here is a brief summary of views and issues.
I had pointed to a Riksbank Dep Governor chatting on the web. The transcript is here:
Here are some intereting Qs and some equally interesting answers:
What are you going to do this summer? Henrik
Reply: I am going to take a few weeks’ holiday. I look forward to being able to read something other than all the work documents I usually read.
Why make a repo rate forecast when you change it all the time? Gunnar
Reply: We use the repo rate path to explain our thinking with regard to monetary policy in the slightly longer term. But the path is a forecast, not a promise. When the conditions for the economy change, the forecasts also change, including those for the repo rate.
PS.
She is 62 years, so not really a young Dep Governor as some would expect.
We usually see economists criticising and appraising policymakers’ moves in their research papers. I came across a speech of a policymaker who reviews the recent academic research.
It is by Kiyohiko G. Nishimura, Dep Gov at Bank of Japan. Usually policymakers use research to support their views. His speech looks at recent research which has tried to provide solutions for the problems we see today.
Interesting….
I would have thought so along with other believers in nudge. However, this paper by John Beshears, James Choi, David Laibson and Brigitte C. Madrian says not really. They conduct a laboratory experiment amongst Harvard University Staff and do not find evidence that people make better financial choices:
We use an experiment to estimate the effect of the SEC’s Summary Prospectus, which simplifies mutual fund disclosure. Our subjects chose an equity portfolio and a bond portfolio. Subjects received either statutory prospectuses or Summary Prospectuses. We find no evidence that the Summary Prospectus affects portfolio choices. Our experiment sheds new light on the scope of investor confusion about sales loads. Even with a one-month investment horizon, subjects do not avoid loads. Subjects are either confused about loads, overlook them, or believe their chosen portfolio has an annualized log return that is 24 percentage points higher than the load-minimizing portfolio.
Hmmm.. I am actually not surprised with overall results though am surprised that it does not show any positives. Only thing summary prospectus helps is in making quicker decisions which later analysis reveals is not really great as far as financial choices are concerned. What is worse is the confusion over entry loads continues despite simpler information layout.
I recall SEBI also thinking about summary prospectus (am not sure whether it has been passed). Though, it is a lab experiment, so we can never really assume it to hold in all cases. But it provides a food for thought as it has interesting and challenging findings.
I often think about this dilemma policymakers have- on one hand try and help people make better fin decisions by using nudges like simple prospectus etc. But on the other hand the financial decision making (even basic simple stuff) appears to be quite difficult for general public and the policy changes don’t really help. And this is not just for general public. I have seen people working in financial industry also struggle in making financial decisions. However, this does not imply policymakers don’t try.
I am hopeful more such studies are carried to get some more understanding of the broad issues on what works and what does not.
The main issue for India in its Union Budget 2009-10, is to make a plan to consolidate its finances. The Government has to not just decide when to begin consolidating but also lay a credible path for the same.
I found a couple of resources to understand more on public finances.
European Commission publishes a report on EU finances every year. Each year there is a different theme.
2000 The Stability and Growth Pact one year on. Focus on taxation in the EU.
2001 Fiscal policy and cyclical stabilisation in EMU. The quality and sustainability of public finances.
2002 Public expenditure in EU countries. Is there a role for discretionary fiscal policy in EMU?Key budgetary issues for the candidate countries of central and eastern Europe.
2003 Public investment and its interaction with the EU’s budgetary rules. Can fiscal consolidations in EMU be expansionary? Meeting the EU’s budgetary requirements: national expenditure rules and fiscal relations across levels of government.
2004 The benefits of fiscal discipline. The quality of public finances: What role within the EU framework for economic policy coordination?
2005 Structural reforms and budgetary objectives. Fiscal challenges during convergence in the recently acceded Member States.
2006 National numerical fiscal rules and institutions for sound public finances. Fiscal policy in good times.
2007 How to stick to medium-term budgetary plans. Lessons from successful fiscal consolidations.
2008 The quality of public finances and growth: a conceptual framework. The efficiency of tax systems.
2009 The fiscal costs of financial crises: past evidence and implications for today’s crisis. Public finances in booms and busts.
All are quite useful. From Indian perspective reports of 2006, 2007 and 2009 should be useful.
PFM Blog also points to useful advice from Goran Persson, who stitched Swedish public finances after 1990 crisis. It also has an interview of Richard Allen, the PFM expert at IMF. I reviewed his excellent paper on the issues here.
Andrew Haldane is becoming a big hit for ME. His speeches not just carry great insights but is full of humors as well (see his previous speeches here and here).
The title of the post is the title of his recent speech. He points to seven lessons:
Read the speech for more details. It has great insights on UK’s financial sector as well.
CBO has released a short analysis of US deficit in future under different interest rate scenarios.
Under each scenario, interest costs would be higher than CBO estimated in its analysis of the President’s budget (see Table 2). The effects would be minimal for 2009, but between 2010 and 2019 interest payments in under both scenarios 1 and 3 would be about $1.3 trillion higher; in scenario 2, interest payments would be $5.6 trillion higher. The cumulative deficit and debt held by the public at the end of the 10-year period would rise by slightly smaller amounts. A small portion of the additional interest payments would be offset by larger remittances by the Federal Reserve on its earnings from holding Treasury securities.
Janet Yellen in her recent speech reviews all the latest issues in US economy:
if you listen to popular business news channels, you might hear a drumbeat of concern that the Fed could let inflation get too high. Those who hold this view point to the rise in Treasury yields and commodity prices this year as signs that runaway inflation is on the horizon. They muster three arguments. The first is that the Fed has pumped up the money supply and expanded its balance sheet to fund its financial rescue programs, potentially igniting inflation. The second is that the Fed runs the risk of repeating the errors of the 1970s by focusing on mistaken views of economic slack rather than rising prices. The third is that large fiscal budget deficits will create higher inflation. I take all of these concerns very seriously and will address each in turn.
This Riksbank press release says:
On Thursday, 2 July, at 1 pm, the Deputy Governor Barbro Wickman-Parak will chat via the Riksbank’s website, www.riksbank.se, about the monetary policy decision and the conclusion of the Monetary Policy Report. Questions can be submitted from Thursday 2 July at 10 am via the Riksbank’s website, www.riksbank.se.
I have not seen this anywhere so far. Central Banker chatting and responding to questions of the public! Wow! This is quite good as the Riksbank is making itself heard and accessible to public. This surely provides confidence to the public that central bank is after all making decisions for the public’s welfare.
I had just pointed a while backthat Riksbank has been given a award for making its various reports comprehensible to members of the general public who are interested in reading them. It surely is making rapid strides in giving a new meaning to the central bank communications.
It will be great if Riksbank published the transcript of the chat session as well. It might teach people a thing or two about writing economics in a simple language and clarify the role of central bank as well.
PS.
If visitors are aware of any other central bank doing the same, please let me know.
World Bank’s Doing Business Initiative has released a report on India. The summary is here and full report is here (heavy pdf file).
Mint has an interviewof Penelope J. Brook, of IFC explaining the broad findings. Some more findings on DB BLog. And here is a reminder on what DB Report tells you:
Doing Business in India does not measure all aspects of the business environment that matter to companies or investors, nor all of the factors that affect competitiveness. It does not, for example, measure security, macroeconomic stability, corruption, labor skills, the underlying strength of institutions or the quality of infrastructure. Nor does it focus on regulations specific to foreign investment.
BIS reviews the crisis and the policy responses in its Annual Report 2008-09. As always, it is a lucid read with graphs and charts.
The failures that caused the crisis were broad-based. They included macroeconomic factors, such as large and persistent global current account imbalances and low real interest rates over a protracted period. And they also included microeconomic factors, such as flawed systems for measuring and managing risk, misaligned incentives and inadequate corporate governance at financial institutions. The result was a build-up of excessive leverage in the financial sector and in the household sector in a number of countries. Neither market discipline nor regulation and supervision were able to prevent these developments.
Gill Hammond of Bank of England has prepared a superb handbook. It tells you how inflation targeting (IT) is carried out in several countries. I have always known that though it is one framework, there are numerous differences in the ways central banks achieve the target.
This handbook just confirms it. This paper is particularly good as it has compared all IT central banks across a few common points. It has prepapred a common chart for all the IT central banks and so it helps you compare immediately.
Superb Stuff.
Bank of England Economists have written a nice primer on quantitative easing. It explains how it impacts markets and effects various players. It also points to a short review of empirical work on QE:
Quantitative easing has been used on few occasions in the past, so there is little empirical evidence on which to draw. One obvious international example is the experience of Japan earlier this decade. Bernanke et al (2004) found some evidence of an impact on long-term interest rates from quantitative easing. However, Baba et al (2005) concluded that the Bank of Japan’s commitment to keep policy rates low was more important for reducing long-term interest rates than its use of quantitative easing. Asset purchases have also been used to influence government bond yields in the United States in the past. Bernanke (2002) highlighted that the Federal Reserve was successful in maintaining a ceiling onlong-term Treasury bond yields in the 1940s.
Recent announcements of asset purchases by central banks provide further evidence that such purchases can influence asset prices. Kohn (2009) highlighted that the Federal Reserve’s announcements of purchases of mortgage-backed securities and Treasury bonds reduced mortgage and other long-term rates in the United States appreciably — by some estimates by as much as a percentage point. And the Bank of England’s announcement on 5 March that the Bank would be purchasing £75 billion of assets financed by central bank money also appeared to have an impact on UK government bond yields. Gilt yields in the 5 to 25 year maturity range eligible for purchase fell around 40–90 basis points by the end of the day following the announcement.
Evidence on the impact of money injections on output and inflation is sparser. For the Japanese episode, Kimura et al (2003) found the effect to be small but highly uncertain. It is difficult to know how important quantitative easing was in the case of Japan without knowing how much worse the recession would have been without it.
The impact on yields was short-lived as we have seen them rising again. Moreover, yield moement depends on a list of other factors and it will be difficult to pinpoint the fall on QE alone.
A good quick read.
IMF in its June 09 research bulletin has brief literature survey on all these 3 issues.
Selim Elekdag reviews financial stressThe financial turmoil that started in the summer of 2007 mutated into a full-blown global crisis. The world economy has experienced a major downturn associated with one of the most severe episodes of financial stress witnessed in decades. While an episode of financial stress encompasses turbulent periods—such as the recent crisis—it also includes related events that only result in asset price corrections, which on occasion may be linked to banking distress. This article briefly surveys recent IMF research related to financial stress across both advanced and emerging economies.
Hui Tong reviews financial market linkages with real economyThe 2007–08 financial crisis began with problems in the subprime mortgage market in the United States but quickly turned into a global financial crisis. The crisis resulted in a wide range of adverse effects on the real economy, as nonfi nancial firms around the world appeared to spiral downward. A key potential contributor to the plight of the nonfinancial firms was the fi nancial crisis itself in the form of a negative shock to the supply of their external financing needs. This article briefly surveys recent IMF research on the real effects of the crisis.
Finally there is an interview of Marocs Terrones who reviews historical analysis of recessions in a Q&A format.
Good insights.
Franklin D Roosvelt was the US President during Great Depression. Some econ research praises FDR for his role in Great Depression, the others point to some grave errors in his policies. The first says Obama should be as courageous as FDR and latter suggests Obama to avoid the same mistakes.
Anyways, on 5 March 1933 FDR proclaimed Bank Holiday. William Silber of NY Fed provides an excellent account of the event in this research note.
After a month-long run on American banks, Franklin Delano Roosevelt proclaimed a Bank Holiday, beginning March 6, 1933, that shut down the banking system. When the banks reopened on March 13, depositors stood in line to return their hoarded cash. This article attributes the success of the Bank Holiday and the remarkable turnaround in the public’s confidence to the Emergency Banking Act, passed by Congress on March 9, 1933.
Roosevelt used the emergency currency provisions of the Act to encourage the Federal Reserve to create de facto 100 percent deposit insurance in the reopened banks. The contemporary press confirms that the public recognized the implicit guarantee and, as a result, believed that the reopened banks would be safe, as the President explained in his first Fireside Chat on March 12, 1933.
Americans responded by returning more than half of their hoarded cash to the banks within two weeks and by bidding up stock prices by the largest ever one-day percentage price increase on March 15—the first trading day after the Bank Holiday ended.
The study concludes that the Bank Holiday and the Emergency Banking Act of 1933 reestablished the integrity of the U.S. payments system and demonstrated the power of credible regime-shifting policies.
Read the whole thing for details. A nice lesson in economic history. It provides you a good snapshot of the policies made at the crisis time.
PS.
Though am sure economists would differ whether bank holiday worked or not. There must be a lot of literature on the same. But then that is economics for you and you need to take research findings with a pinch of salt.
World Bank hosts this popular conference every year. It is called ABCDE (Annual (World) Bank Confernce on Development Economics). The 2009 conference was held in Korea and the papers are here.
The papers on Indsutrial Policy look quite good (haven’t seen others). The paper by Ha-Joon Chang, University of Cambridge is titled as - Industrial Policy: Can We Go Beyond an Unproductive Confrontation?
This is needed for almost everything in economics.
I received an email from a visitor about this free e-bookfrom OECD which serves as a primer on International Trade. It is written by Patrick Love (OECD economist; can’t find his profile page) and Ralph Lattimore.
The visitor is promoting the book and thought it might be useful for Mostly Economics Readers. The other visitors can see the book in case they find it interesting.
I will try and write a review later on the book in the blog.
PS.
This blog is not used for any advertisement purposes. However, if visitors have useful eco/fin related e-books which could be useful for ME readers, I don’t mind adding it on the blog.
Yes Indeed! Nava Ashraf, Colin F. Camerer and. George Loewenstein say so in this paper.
Adam Smith’s The Wealth of Nations, first published in 1776, helped create the discipline of economics with its conjuring of the invisible hand, self-interest, and other explanations of market forces that have influenced academics, governments, and business leaders ever since. But it’s the insights from one of Smith’s earlier works, The Theory of Moral Sentiments, that caught the attention of Harvard Business School professor Nava Ashraf and coauthors Colin Camerer and George Loewenstein.
In “Adam Smith, Behavioral Economist,” published in the summer 2005 edition of The Journal of Economic Perspectives, the authors find that Smith’s insights from 1759 can contribute to modern thinking on everything from our fascination with celebrity to the theory of loss aversion. In fact, says Ashraf, Moral Sentiments presages the emerging field of behavioral economics.
Nava Ashraf explains in this HBSWK interview:
Ann Cullen: How did you and your coauthors come to be interested in this lesser known publication of Adam Smith?
Nava Ashraf:Several years ago while taking a graduate course at Harvard on the Scottish Enlightenment, I wrote a paper called “The Morals of a Market Society” focusing on the virtues Smith wrote about in The Theory of Moral Sentiments (TMS). Once I started more research in behavioral economics, I realized how closely Smith’s work from TMS related to this emerging field. Indeed, it looked very much like the field of behavioral economics, which economists usually think of as a “new” field, was in fact rigorously studying the very factors that Smith, arguably the “father” of modern-day economics, had always thought were critical in human behavior and interaction.
Simultaneously, both my esteemed coauthors, Colin Camerer and George Loewenstein, had been exploring TMS and had mentioned in their own work how important it was for economists to read this lesser known work. So it was great fun for the three of us to write this paper, to bring together Smith’s insights with advances in behavioral economics research. Our hope is that it encourages people to go back to TMS and read it for themselves—it’s a truly wonderful book.
What are the main Smith thoughts that make him a beh economist??
Q: According to your article, Smith’s Theory of Moral Sentiments argues that behavior is determined by a struggle between “passions” and the “impartial spectator.” What did he mean by this?
A:Smith believed that much of human behavior was under the influence of the “passions”—emotions such as fear and anger, and drives such as hunger and sex—but these passions were moderated by an internal “voice of reason,” which he called an “impartial spectator.” The impartial spectator allows one to see one’s own feelings and the pulls of immediate gratification from the perspective of an external observer. In the area of self-control and self-governance, the impartial spectator takes the form of a long-term interest (i.e., I won’t have that cookie today because I can see that I will regret it down the road). In the area of social interaction, the impartial spectator allows us to see things from another’s perspective rather than to be blinded by our own needs.
The conflict between the passions and the impartial spectator is the most fascinating part of Smith’s TMS for me. The conflict is particularly important when studying savings decisions, since savings is exactly a decision to delay immediate gratification for a long-term interest, to stay the voice of a short-term pull for the voice of the impartial spectator.
With my coauthors I applied this framework to designing a savings product for a bank in the Philippines that helps clients act in line with their long-term interests. In this “commitment savings product,” clients sign a contract with the bank that doesn’t let them withdraw their own money until a certain amount or date has been reached. It gives their control over to the bank to help them overcome short-term impulses to spend. The product had a large and significant effect on clients’ total savings, helping clients to buy land, improve their businesses, pay for large educational expenses, etc.
The paper on Phillipines’ saving product is here and Ashraf’s other research is here.
To show Adam Smith as a behavioral economist and his work as a presage for beh eco is simply crazy. Again, if you don’t know history you are bound to be surprised. But this is just too much of a surprise. It is a complete shock….
I was completely unaware about this paper for a long time. This paper was publised in 2005 and I just found it now. Needless to say it is pretty exciting.
