Archive for July 17th, 2008

Understanding the inflation trends in India

July 17, 2008

I wrote a paper trying to understand the inflation trends in India.

The trends are divided in two types – long term trend and a short-term trend. On a long-term the story is pretty clear- inflation has come down over the years. On a short-term (that is looking at a week to week trend), I find there is stickiness in the data. By stickiness I mean, the next inflation figure is usually around the current figure. The stickiness becomes weaker with each passing week.

This stickiness has many implications for policymakers. It implies the trends are difficult to correct (and this is applicable both ways lower and higher) and also shows why mon pol works with a lag. Though, the analysis needs to be refined and better tools have to be used.

I have also analysed the impact of mon policy measures on inflation trends. The mon pol works with a lag and it is usually noted at 1 year (that means effect of mon pol steps on rising inflation takes about one year).

Let me know of your comments.

Political economy of finance reversed?

July 17, 2008

I had pointed earlier about a superb paper from Stehen Haber where he shows why financial systems remain under-developed.

However, what we are seeing is opposite in places where fin system is developed. It has become so powerful that the entire idea of underdevelopment has been turned on its head. In this excellent roundtable conversation the questions were raised amidst who is who (Soros, John GIeve etc):

FORD: Back to the big picture. What will happen to the financial sector in Britain and the US as a result of all this? Will it shrink? Should it? Are there areas of business which shouldn’t revive because they were fundamentally unstable and unsatisfactory?

SOROS: It should shrink. It has really got overblown. The size of the financial industry is out of proportion to the rest of the economy. It has been growing excessively over a long period, ending in this super-bubble of the last 25 years. I think this is the end of that era.

Then Dr. Reddy in his recent speech said:

whether there is, what may be called, financialisation of the political economy? The attractiveness of financial intermediaries in terms of high profitability, significant growth – especially cross-border, massive spread of investors, and the inadequate scope for application of principles of rules of origin in the financial sector could have resulted in enhanced clout for these intermediaries in the political economy. Incidentally, Professor Jagdish Bhagwati’s reference to Wall Street – Washington links is relevant in this context.  

The Jagdish Bhagwati reference  Dr. Reddy mentions, I covered it here. Then one must also read this interview of Dr. Liz Warren, Law Professor at Harvard: 

The consumer financial services industry has been the single biggest contributor in the 2000 election cycle, in the 2002 election cycle, and they’re on target to do it again in the 2004 election cycle. George W. Bush’s single biggest contributor to his [2000] presidential campaign was MBNA, the second biggest credit card issuer in the country.

And let’s be clear who’s on the other side: It’s a bunch of middle-class families who are in financial trouble. They don’t give money to political action committees; they don’t hire a bunch of lobbyists; they don’t take out a lot of newspaper ads; they don’t get a big public relations campaign going. … This is about as lopsided as you can get in Washington. Sen. [Russ] Feingold, of McCain-Feingold, once remarked that the bankruptcy bill should be the poster child for why we need campaign finance reform in America. It’s a great big multibillion-dollar industry talking to Congress, whispering in their ear. …

And then you have views of Joh Bogle who always questions the developments in various forums.

The irony is a large part of the world still does not have basic bank accounts. In the same roundtable pointed above, Mark Hannam of Prospect magazine says:

Half of the world or more is still un-banked. Many communities depend on microcredit for access to finance. The opportunity for growth of financial services is still enormous. Large financial institutions based in the west can carry on growing for a long time without having to lend any more money to over-indebted western consumers.

What lessons should a policymaker take from all these developments? Unfortunately, none of the committees that are set up to review financial systems in developing countries acknowledge these developments. I agree, that the main idea is to kick-start the financial system in these places and by mentioning these risks, it won’t start. But again efforts have to made early on to ensure we don’t have a financial system we are seeing in developed world where it has become a norm- all profits are mine, all losses are yours.

Clearly more thought is needed on the topic.

Assorted Links

July 17, 2008

1. Krugman on how FF got so big? Also read his post on impact of rising commodity prices

2. WSJ Blog points Fed holds its breath on inflation. CPI in June- 08 touched 5%

3. WSJ Blog points to Venezuelan way to curb inflation.

4. Mankiw points time to pay menu cost. He also points to articles from-  Summers on FF mess and Meltzer on Fed.

5. JRV points naked short-selling is banned in 19 financial stocks in US. I have mentioned earlierthat shortselling is limited to books. I had also pointed (see this as well) that experts in India make a big hue and cry when such decisions are taken in India. It is pretty similar worldwide and it hardly changes with the nature of development.

6. MR asks what should government do to stmulate the economy 

7. DB Blog points to a new paper that shows both culture and institutions shape each other.


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