Archive for October 13th, 2008

Nobel Prize Economics 2008 goes to Paul Krugman

October 13, 2008

Paul Krugman gets the prize for his work on International Trade and Economic Geography.

Here is the press release, information for public and literature review of his work.

Addendum:

It is time I update this post. I have come across a lot of posts on Krugman, his work, criticism etc. Let me add my views and point to loads of interesting stuff.

I took note of  Krugman for his work on Currency Crisis. His work on currency crisis and near perfect diagnosis and prediction of impending crisis in South East Asia was simply superb. I knew he is always in line for “The Prize” for his work on international trade but didn’t know much about it. The Nobel Prize Committee explains his work in this superb short note- information for public.

Reading Krugman is never easy. He doesn’t mince words and is a bit too straight forward. Economists disagree about everything but if you have Krugman not on your side, you have had it. He just rips you apart. If his getting the prize was a question of not whether but when, Krugman getting the criticism was not a question at all.

There are couple of criticisms. One, why did Krugman get the Prize alone (see this for a debate)? As it has been predicted for a long time now, if the Nobel Committee decides to award the prize for international trade it would go to the trio- Jagdish Bhagwati,  Avinash Dixit and Paul Krugman. 

Jagdish Bhagwati has been on the Nobel list for a long time and this has been acknowledged by many economists. He has been the lone crusader for free trade and for a long long time. Both Dixit and Krugman have moved to otehr areas but Bhagwati has stuck to trade. If someone has to get the prize for international trade, Bhagwati is at tops. Moreover, Bhagwati has been Krugman’s adviser and even published Krugman’s landmark 1979 paper – Increasing Returns, Monopolistic Competition, and International Trade. Krugamn’s model in this paper was largely based on Avinash Dixit and Joseph Stiglitz paper written in 1977 – Monopolistic Competition and Optimum Product Diversity.

Though both Bhagwati and Dixit have praised Krugman umpteen times (See this for Bhagwati’s praise and this for Dixit), I am sure they and others would be disappointed as well. Though, Rodrik in his post says he knew Krugman was the only one.

Actually, Bhagwati and Dixit should just ignore the Nobel Committee and carry on with their work (they have actually been doing the same). The selection for the prize is highly unknown. Sometimes, it is given to Economists for work done long long ago (On reading David Warsh’s Economic Principals one realises that 1989 winner Trygve Haavelmo had taken more keenly to fishing than economics, similarly work by Nash and Mundell was done in their early 20′s ). Sometimes it is given to economists who are too old (William Vickrey, Leonid Hurwicz) and the prize money is useless for them. Sometimes the award is given too late and one of the main founder of the area of work is no more. It is ridiculous to imagine no Fisher Black in the prize for option pricing model, no Amos Tversky for his work on behavioral economics etc).

Another criticism is that people feel Krugman as an economist is dead (thanks to Neeraj for the pointer; see this as well; this as well). They say Krugman is no more an economist but a political columnist and has done little in past 10 years. Samuelson in a light humor before the prize, saidhe was more disappointed with Pulitzer committee than Nobel Committee for not honoring Krugman. Quite a few Economists write a column in newspapers and magazines but they don’t give up economic research. Krugman did the opposite and hence the treatment. Dixit in his recent piece in Voxeu.org, defends Krugman and says the prize is for economics not polemics :-) . Actually, I don’t understand this criticism at all.  Though, Nobel Committee recognises Krugman’s columns and his blog, the prize is above all for his work in economics.

Some material worth reading:

Is Current Account Deficit a cause of concern?

October 13, 2008

My viewpoint in Economic Times.

New Zealand applies lessons from behavioral economics

October 13, 2008

I have posted quite a bit on behavioral economics and have often wondered why policymakers continue to ignore it. However, times seem to be be changing slowly.

New Zealand and Australian Governments have issued guarantees on the bank deposits. Their financial system is under deep stress and this was always coming. Guarantee on bank deposits provides signal to the public that there is nothing to worry and avoids any bank runs.  Australian government additionally also guarantees wholesale funding. Retail funding is deposits given by public to banks and wholesale funding is inter-bank borrowing and lending.

The wording used by NZ caught my eye. It says:

The Minister of Finance announced today that the Government has introduced an opt-in deposit guarantee scheme.  The scheme covers deposits for New Zealand-registered banks and eligible non-bank deposit-takers (including banking societies, credit unions and finance companies).

This opt-in strategy is straight from behavioral economics. It is nothing but the defaults used strategy to increase savings. The default here is opt-in which means banks would have to opt for the guarantee scheme and then only it will be covered by NZ Finance Ministry. The opposite is opt-out under which all banks would have been covered and if a bank didn’t want it it could have opted out from the scheme.

The NZ believes its financial system is safe and hence has used opt-in. Infact, NZ govt is trying to signal the same to the markets. If the risks from financial system were higher, it would have instead used a opt-out strategy.

Australia also uses opt-in but is not as explicit as NZ:

Eligible ADIs (Authorised Deposit-Taking Institutions ) must apply to the Government for a guarantee to attach to new and existing issuances of debt securities. 

 

Unlimited dollar infusions by Central banks

October 13, 2008

The Central Banks have simply gone berserk in providing liquidity to financial markets.

In a fresh move ECB, BoE, Swiss Central bank and Bank of Japan will now provide unlimited dollars to their financial firms.

The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction.  

For this they have revised swap ceilings with Fed.  For a primer on swap lines see this

Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.

Assorted Links

October 13, 2008

1. ASB on currency futures

2. TTR says he does not understand the need for Indian banks to go abroad

3. Krugman says time has been squandered

4. Nudges points to Thaler’s views on the crisis

5. CMB says institutions are overrated

6. Mankiw points auctions to inject capital

7. Rodrik on fin innovation


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