I have been trying to read up on old literature on euroarea issues. Especially the opinion of Europe based economists. I am surprised to find quite a few critiques of Eurozone and EMU even in early days.
Archive for June, 2010
As this crisis started, there was introspection from some economists (though some still did not change their views which was disappointing). The central view that came forward was macro-models did not have finance and finance models did not take into account macro developments. So, both macroeconomists and financial economists did not understand the linkages and underestimated the crisis.
ECB’s recent research bulletin looks at all these three issues. It covers research on these issues:
Wage dynamics in Europe: some new findings By Ana Lamo and Frank Smets
The response of wages to the sharp contraction in economic activity during the recent crisis has been very subdued in the euro area. The research summarised in this article uncovers some features of wage setting in Europe that contribute to the aggregate degree of wage rigidity.
When does fiscal stimulus work? By Günter Coenen, Juha Kilponen and Mathias Trabandt
Expansionary fiscal policies have been used extensively during the financial and economic crisis with the aim of boosting overall economic activity. Building on insights from structural macroeconomic models, this article highlights key factors that are important for successful fiscal stimulus programmes
Risk, Uncertainty and monetary policy By Geert Bekaert and Marie Hoerova
This article documents a strong co-movement between a measure of stock market risk (the VIX) and monetary policy. It analyses which of two components of the VIX, risk aversion or uncertainty, are primary drivers of this co-movement. The main findings are that an easing of monetary policy leads to a decrease in risk aversion in the medium run while higher uncertainty leads to a laxer monetary policy.
Very useful literature survey from a European perspective. Especially the first case on wages. In Europe labor market what has happened is either people have lost jobs or hours at work have declined. However wages have not declined. Why?
When examining the determinants of wage stickiness, the WDN evidence suggests that collective bargaining institutions, employment protection legislation (EPL) and product market competition are important factors shaping the response of wages, employment and prices to economic developments. In particular, higher-level bargaining, stringent EPL and a lack of goods market competition lead to higher real wage rigidity and a stronger employment response to shocks.
Pick up of balance sheet analysis of central banks is one big positive from the crisis. It is a very interesting field but has been ignored till Fed intervened massively and expanded its balance sheet, followed by others.
SNB balance sheet has also expanded three times from pre-crisis levels. Philipp Hildebrand, Chairman of SNB discusses this in his speech. The balance sheet has expanded on two counts – one buying Swiss govt bonds and two buying foreign exchange.
Now BoE has this interesting way of presenting its minutes. In US, dissent is mentioned explicitly and also the dissenters also presents his reasons for the same. Like Kansas Fed President Thomas Hoenig again dissented in the June FOMC meeting. The statement said:
WTO’s Annual Trade Report will be on the theme – “Trade in Natural Resources: Challenges in Global Governance”. So, WTO has this interesting e-forum to discuss the relationship between international trade and natural resources. In this interesting initiative, people are asked to discuss relevant issues on the topic in form of shirt articles. WTO then publishes them on its website.
I came across this interesting piece by Rashid Sumaila (Associate Professor, University of British Columbia Fisheries Centre) and Leslie Delagran (Economist, Oceana). The authors point that fisheries are decling and the reason is the government subsidies:
Rather than collecting rents from resource exploitation, governments have been actively subsidizing fishing, leading to even greater fishing effort and resource depletion. Subsidies that expand fishing capacity, including subsidies for vessel construction and modernization, operating costs (particularly fuel), construction of fishing ports and processing plants, payment for foreign access agreements and marketing support are estimated to total about $16 billion globally each year (Sumaila et al., in press).
This has been distorting the incentives and people aer just overexploiting the fisheries. This is even the case for private fisheries and not just for commons.
Number of governments have taken initiatives to provide subsidies to poor people that help buy computers. The question is have computers helped children improve their performance?
IMF economist Shaun Roache in this paper says:
The macroeconomic effects of large food price swings can be broad and far-reaching, including the balance of payments of importers and exporters, budgets, inflation, and poverty. For market participants and policymakers, managing low frequency volatility—i.e., the component of volatility that persists for longer than one harvest year—may be more challenging as uncertainty regarding its persistence is likely to be higher.
This paper measures the low frequency volatility of food commodity spot prices using the spline- GARCH approach. It finds that low frequency volatility is positively correlated across different commodities, suggesting an important role for common factors. It also identifies a number of determinants of low frequency volatility, two of which—the variation in U.S. inflation and the U.S. dollar exchange rate—explain a relatively large part of the rise in volatility since the mid-1990s.
Interesting approach. Breaking up volatility as low frequency and high frequency and seeing what explains latter. Am wondering could we use the same approach for calculating inflation as well? We usually exclude food and fuel from headline to get core. Could we instead just seperate high volatile food items from headline? This is particularly important for India (and other developing) where food forms bulk of the basket. We have these trimming inflation from Dallas and Cleveland Fed but they exclude hugh volatile items in general.