Archive for June 18th, 2008

Who developed the original Modgiliani and Miller theorem? or CAPM?

June 18, 2008

I love such papers/ideas which say original idea was actually written by such and such. You keep reading physics people accusing economists of picking up models from their field and applying it to explain economics. I r’ber reading somewhere that one of the greatest economist (any guesses??) also explained most of economics using physics models.

I came across this paperfrom Luca Barone (of Goldman Sachs) which says much of financial economics is wrongly credited. For instance Modgiliani and Miller theorem was developed by John Burr Williams, CAPM by Treynor not Sharpe, Portfolio Theory by de Finetti not Markowitz etc !!! There are many such concepts, check the list on Page 3.

Basically, Barone summarises work by Marc Rubenstein‘s book – A History of the Theory of Investments: My Annotated Bibliography. Rubenstein is one of the best financial economists around and developed the binomial options pricing model and much of financial engineering. He also developed the infamous Portfolio Insurance strategy which was criticised for its role in 1987 crash.

He has also done a lot of work on history of finance and that is what the book is about. You can see his work here. He wrote another series- Great Moments in Financial Economics Series (freely available) which explains most of the history.

Stop Jean Claude Trichet

June 18, 2008

Eurointelligence pointed to this interesting website – developed by a well-known French economist, Marc Touati. The website seeks signs to appeal to Trichet (ECB President) not to raise its rates in the next meeting on July 3 2008.

Basically Trichet had indicated strongly in the last meeting on 5 June 2008 that rates would be increased in the next meeting (which is July 3 2008) tracking surging inflation. lists 5 reasons for raising rates (read them on the site). Already 3746 people have signed the petition.


A new list of reforms for Indian economy

June 18, 2008

A Mint story pointed y’day about a Goldman Sachs paper(authors GS economists- Jim O’Neill and Tushar Poddar).

The paper says India needs to do 10 reforms to achieve a per-capita GDP of $20,000 (Rs8.58 lakh today) by 2050. Currently it is around (as per wikipedia) $4,542 at PPP and $1,089 in nominal terms. These 10 reforms could also add 2.8% pa to India’s existing growth rate.

1. Improve governance
2. Raise basic education levels
3. High end education
4. Inflation targeting
5. Introduce a credible fiscal policy.
6. Liberalize financial markets.
7. Increase trade with neighbours.
8. Increase agricultural productivity.
9. Improve infrastructure.
10. Improve environmental quality.

The list of reforms reminded me of two one-time famous list of reforms- Washington Consensus (WC) which was a 10 point reform list released in 1990 and Mckinsey’s 13 reform list for India (free subscription; you can see the list of 13 reforms here as well) in 2001. WC was a set of reforms applicable to all countries that would help countries become developed and Mckinsey was focused on India that would help India achieve 10% growth rate. 

WC has been hugely criticised by wide number of people (see the wikipedia entry for its straight-jacket approach and is also called a laundry list. WC was thrashed to pieces when countries that adopted WC failed miserably- Thailand, South Korea, Argentina etc. Mckinsey report on the other hand just lost that fanfare after few days of media coverage.

On just comparing the three lists, I see only 2 common points- fiscal policy discipline and  trade liberalization (GS report only mentions trade liberalisation with neighbors). GS has got a big point – improve governance which covers most things related to government policies. On comparing McK and GS reports, I see agriculture, trade, fiscal policy, infrastructure as common points.

I really don’t understand these reform lists. It is easy to suggest reforms but many questions still remain. For instance, How do you decide, which reform is more important? No country can do all the reforms at one go and it is difficult. In practice what happens is you choose some reforms, run them parallely. Some gain momentum, some tug along and some die. So how do you decide? If we look at McK reforms it has reforms which have not been done yet- labor reforms, property rights system and GS report has new set of reforms – education, inflation targeting etc. So, if you look at the two lists what you get is something like 15 odd reforms and you don’t know where to begin. These studies are problematic and you can make n number of reform lists. A better approach is to follow Rodrik et al study – Growth Diagnostics which identifies the constraints and works on them first. Also, these studies should understand second best institutions work equally well.

Another thing I noticed is how the list changes with time and focuses on the “In things”. In 2001, you had lots of talk on SSI reservation, property rights, labor reforms etc and McK report mentions them. These days, we hear a lot about education, financial market liberalisation, inflation targeting etc and that is what we see in the GS report.

And a final most important point, most reforms in McK report have not been done at all or are moving at a slow pace. Still India has touched growth levels of nearly 10% (9.6% in 2006-07) and has been above 9% for the past 3 financial years :-)

PS. I remember attending a talk by one of India’s eminent economists at the time this Mck report was released. He said I had asked the team to come to my office and explain their list of reforms. The team never showed up.

Assorted Links

June 18, 2008

1. WSJ Blog points markets don’ expect Fed to increase rates.  

2. Cowen (of MR) asks which was the best paper in 1958 – My vote also goes to Modigliani-Miller paper. He also points NZ economy is declining

3. Krugman points how airlines are cutting costs amidst rising oil prices

4. Mankiw points to a new Bernanke speech on healthcare. I was surprised too seeing the topic

5. NB points firefox using nudges

6. Rodrik points indutrial policy might comeback in US

7. Fin Prof points to an interesting article- Are you a stock or Bond?

8. IDB points to a bleak India picture

9. Deux Blog on banking losses in Euroarea. It is really complex to understand all this.

10. DB Blog points Romania using e-procurement to reduce corruption.


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