Has globalisation made inflation forecasting difficult?

Mark A. Wynne and Patrick Roy of Dallas Fed have written a short paper on this subject.

Their findings:

The structural change that poses a perennial challenge to forecasters has been turbocharged with the integration of China, India and other emerging giants into the global economy. We asked whether this surge in globalization over the past two decades has made it more difficult to forecast inflation.

We addressed the question from two angles. First, we looked for evidence of deterioration in our ability to forecast inflation as countries have become more integrated with each other. Second, we looked for evidence that forecast errors were greater on average in countries that rank higher on conventional globalization indicators.

U.S. inflation does appear to have become more difficult to forecast as we moved from the 1990s to the 2000s; however, the opposite seems true in almost every other country we looked at. Our prior belief, based on U.S. experience, that globalization has made inflation harder to forecast doesn’t appear to be borne out.

Nevertheless, we do find some evidence of greater difficulty in forecasting inflation in economies that are more open to international developments, although the relationships seem heavily influenced by outliers.

There was a lot of discussion before this crisis on impact of globalisation on inflation (see my paper for a short literature review). However, we hardly see any discussion/research on the same now a days.

Behavioral economics perspective on Consumer Consumer Financial Protection Agency

After House Committee on Financial Services heard views on CFPA, there was another hearing by Banking Senate Committee.

The testimonies are very interesting. It has behavioral economics perspective to it. You have Sendhil Mullainathan, Behavioral eco professor at Harvard. His testimonyis a must read for all ben eco followers. He tells you the ben eco perspective on regulation and how it should be applied to financial markets. His analogy of consumers problems in buying paints vs buying digicam and using it for financial markets is excellent. In sum, Information asymmetry in fin markets is high and complex products multiplies the asymmetry. A regulation which ring fences good products from bad ones is the key.

Then we have Michael Barr who is with US Treasury but has also worked on behavioral economicsalong with Mullainathan.

Richard Blumenthal, Attorney General State of Connecticut, tells you about predatory financial practices in his state. It is quite funny to imagine such things happening in US. We in India/emerging economies these practices only happening in their countries.

Superb Stuff….