Did Term Auction Facility (TAF) work?

TAF was initiated by Fed in response to the crisis where both Libor spreads were widening and liquidity drying up dramatically.

So did it work? This paper by John Taylor (of Taylor rule) says it didn’t !!

At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions–including the introduction of a new term auction facility (TAF)–to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.

 

Mercantilism is back!

Who says times have changed? It isn’t just about finance crisis or food crisis, but even growth theories. Most of the now developed countries grew on the basis of Mercantilism or export driven strategies. These were then discarded for fancier ideas like Washington Consensus. Now, the whole things seems to be coming back.

Growth Commission is set up to look at the overall growth experience in the world. It is headed by Michael Spence and on looking at their website have put up lot of papers/case-studies on their website.

I read this Growth Commission paperby Michael Spence and Mohamed El-Erian where the authors say exports are really important for a country’s growth. The authors put up a good picture on what drives growth in an economy and exports is one of them.

All successful high-growth economies have had policies that were designed to help start and accelerate the process of export diversification and structural transformation. These included the following (with the mix varying):

• Tax and other incentives to attract foreign direct investment.
• Special export zones with supporting infrastructure, tax provisions, and import tariff relief.
• Management of the exchange rate to maintain competitiveness in the export sectors

These comments by Spence are being discussed widely. For instance at the WSJ Blog, Simon Johnson (see this one as well) (IMF Chief Economist). Once this reported is submitted in May, I am sure more would follow.

So, has anything changed?

Remembering Theodore Schultz in times of food crisis

I just happenned to read the Nobel Prize speech given by Theodore Schultz on receiving the prize in 1979. On reading the speech I had to recheck whether it was 1979 or 2007. Every word of the speech is relvant today. It seems all crisis are same- financial or food.

This inspired me to write a piece for Mint where I remember Schultz and suggest what his recommendation would be for the ongoing food crisis- incentivise agriculture.

Here is a good short piece on Schultz from one of his students. He had a good sense of humor

Assorted Links

1. WSJ Blog points inflation hawks are back. See this post as well

2. WSJ BLog says trends in life expectancy similar to incme inequality

3. Mankiw points what Harvard students want from Bernanke visit

4. Rodrik on financial globalisation

5. Frankel points to growing correlation in LIBOR spreads

6. Johnson on food prices

7. Ajay Shah points to developments in Chinese education

8. JRV on LIBOR reliability

9. IEB on Indian real estate