Perspectives and history of India’s BoP

Deepak Mohanty, ED of RBI’s speeches are usually excellent and full of ideas and perspectives. In a recent speech, he summarises the developments.

He divides the phases of BoP in six phases:

India’s BoP evolved reflecting both the changes in our development paradigm and exogenous shocks from time to time. In the 60 year span, 1951-52 to 2011-12, six events had a lasting impact on our BoP: (i) the devaluation in 1966; (ii) first and second oil shocks of 1973 and 1980; (iii) external payments crisis of 1991; (iv) the East Asian crisis of 1997; (v) the Y2K event of 2000; and (vi) the global financial crisis of 2008. I will analyse the BoP trend in this sequence.

BoP and GDP are interconnected greatly as  shown in this must read manual on BoP. So, what happens in BoP impacts GDP and vice-versa. So, if one is giving a ppt on trends in GDP he could look at the same six phases for easier classification of India’s macro story.

 

Conclusions:

• First, the current level of CAD is far above the level sustainable for India.
• Second, structural policy measures are needed to reduce vulnerability emanating from high oil and gold imports.
• Third, current policies towards further diversification of India’s export basket, both destination and products, needs to be stepped up. Indian exporters need to accelerate efforts to move up in the value chain at the global level.
• Fourth, given the global uncertainties and volatility in capital flows, the resilience of capital account needs to be further enhanced by encouraging FDI inflows.

Nice read and coverage on the issue..

 

 

Imagine an economic historian reviewing economy from 1970s to current crisis

Today is a history blogging day..

Claudio Borio, of BIS in this super speech covers many ideas which have emerged out of the crisis. He begins with economic historian:

Hyperinflations Are Rare, but a Breakup of the Euro Area Could Prompt One

This is the title of a nice paper by Anders Aslund of PIIE.

He says hyperinflations happen rarely. However, collpase of currency unions is one very strong reason for hyperinflations in the past. This could be true in case of Eurozone collapse as well. Hence the collapse has to be averted at all cost:

Balance Sheet comparisons of Fed, ECB and BoE..

Well there is tons of research and discussion on central bank balance sheets and even comparing who did what.

However, this brief note from Ricardo Davico and Brian John Goldsmith of IMF is one of the simplest and neatest so far.

Although each of the central banks had a different approach, all three acted aggressively to inject liquidity into their economies and promote growth.

Looking at a magic number to summarise macroeconomic stability/instability – 4 could be the answer

An insightful paper from Norges Bank econs.

Its starts with intro from Jan Fredrik Qvigstad, Deputy Governor of the central bank. His  experience tells him anything above 4 mark shows build up of instability in that indicator:

Greece’s inefficient tax system – Case of lack of trust between citizens and government

Each time one reads  a paper featuring Greece on systems etc. one can’t miss the comparisons with India.

A superb paper on Greek tax system by University of Athens econs - Georgia Kaplanoglou & Vassilis T. Rapanos.

The paper aims at highlighting a number of shortcomings in the design and enforcement of the tax system in Greece, which have played a key role in the exacerbation of fiscal deficits that led to the current sovereign debt crisis. More precisely, we argue that these shortcomings that result in low tax revenue, relate to the structure of the Greek economy and to the failures of formal institutions (such as poor function of the tax administration and lax tax enforcement). At the same time such failures are rooted in and at the same time reinforce failures of informal institutions, namely low levels of trust to institutions and perceived fairness of the tax system.

 Nice bit. They say lack of formal institutions is not the only answer to Greece (and other economies) tax problems:

The third section attempts to explain the above empirical findings in terms of the longstanding failures of formal institutions. Despite the fact that evidence is sparse and fragmentary, all available indicators point to the fact that the low and unfairly
distributed tax yield is primarily due to the  poor functioning of the tax administration, lax tax enforcement, inefficiency of tax collection and the lack of effective dispute resolution mechanisms. Such failures result in high tax evasion and a thriving
underground economy. 

These findings cannot be interpreted in economic terms alone. The standard view of tax theory is that taxes are a necessary harm whose ‘excess burden’ has to be minimised in order to finance some undefined public expenditures. Standard tax evasion theory treats the decisions of individual taxpayers with regard to their tax payments in a similar way (e.g. Allingham & Sandmo 1972; Yitzhaki 1974). Two issues escape the attention of such models. The first one is that in the real world citizens of democratic political jurisdictions perceive a connection between the taxes they pay and the government services provided to them. In this context, citizens could ‘voluntarily’ pay their taxes if they trust their government to deliver the services it has promised. The second issue is that, even if a citizen trusts her government, the citizen’s behaviour will still be influenced by how she perceives other taxpayers to behave. In other words, tax evasion should be treated not only as a pure economic but also a social phenomenon (Sandmo 2005).

Superb reading..

Impossible trinity is like the Hindu mythology trinity…

Deepak Mohanty compare the two trinities in a speech on capital flows and controls at ADB conference:

On learning from (economic) history – Truths and eternal truths

A fascinating speech by Norges Bank  Deputy Governor Jan F. Qvigstad for history and economic history students.

He says most scientific fields have their set of truths:

How Fed policies post-crisis could have been better?

A Fed official criticising the Fed policies post crisis. This is nothing new for Dan Thornton as he has been doing it for a while.

He divides the crisis in two phases. From Aug-07 to Lehman and Post-Lehman. As per him, Fed should have expanded its balance sheet in the first phase itself as signs of crisis were evident. This would have allowed Fed to be far more pre-emptive

I have argued that the Fed didn’t massively increase the monetary base in early 2008 when it should have but did following Lehman Brothers’ bankruptcy announcement because it  had no choice, and also took steps to maintain the monetary base at the post-Lehman level rather  than allowing the monetary base decline passively as it should have as financial market stabilized and the recession ended. Faced with unacceptably high unemployment and anemic economic  growth, the FOMC tried to stimulate aggregate demand by attempting to reduce longer-term  rates using forward guidance, QE, and Operation Twist.

The FOMC’s behavior was motivated  by policymakers nearly religious faith in the EH, the fact that the Fed only make loans and investments or controls the federal funds rate either through open mouth operations or by  engaging in large-scale open market operations, and the increased emphasis on “financial market  frictions” to account for what some see as the apparent historical effectiveness of monetary  policy. The last of these helps explain the FOMC’s failure to significantly increase the monetary  base in early 2008. The first two account for the zero interest rate policy, QE, and Operation  Twist.

The Fed’s response to the financial crisis would have been much better had policymakers  taken the massive empirical rejections of the EH seriously, considered the fact that long-term  Treasury yields were unresponsive to the 425 basis point increase in the federal funds rate target  from June 2004 through June 2006, and believed, as I do, that real long-term rates are largely driven by economic fundamentals, such as the rate of economic growth and are therefore and are effectively independent of countercyclical monetary policy. Moreover, policymakers should take  the Fisher equation seriously. If they did, they would realize that a zero nominal interest rate  policy is inconsistent with 2 percent inflation and positive economic growth, i.e., a positive real  long-run interest rate. While a zero nominal policy rate might be defensible for a relatively short period of time, it is totally indefensibly as a long-run policy 

 He says Fed has simply chosen to do something:

Finally, I believe that the FOMC’s extreme actions likely reflect Friedman’s (1970)  suggestion of a central bank’s version of the natural human tendency to say, ‘For God’s sake,  let’s do something,’ when faced by unpleasant developments. The action is its own reward, even  if it has consequences that make the developments still more unpleasant.” Unfortunately,  extreme actions can have negative consequences for growth and longer-run economic and  financial market stability. The long-run economic consequences of such a policy are difficult to  predict. However, such policies can have long-run consequences for the Federal Reserve  monetary policy; namely, the loss of credibility and influence as the increasingly extreme policy  actions generate smaller and perhaps worse outcomes (Wall Street Journal, 2012; Bank for International Settlements, 2012).

Strong critique of Fed policies..

Brief history of Bank of England

Superb account  by Andrew Haldane.

He discusses both history and recent changes in BoE post 2008 crisis.

Comparing Swiss eco with Japanese

Nice speech by Masaki Shirakawa of BoJ.

Compares Swiss economy with Japanese economy:

Man and Machine in Macroeconomics (Don’t’ blame Keynes..)

A nice paper by Kevin Hoover.

He says the initial macro framework famously called as Keynesian was not really because of Keynes. It was basically the work of Ragnar Frisch and Jan Tinbergen who have to be blamed if blamed is the right word. He gives an amazing short history of macro:

Five Questions about the Federal Reserve and Monetary Policy…(Fed also giving more weight to unemployment over inflation)

A nice speech by Fed chair Ben Bernanke.

He answers five qs on Fed and mon policy:

Why we should be interested in the history of currencies..

Superb speech by Ernst Baltensperger. He has written a book on history of Swiss Franc commissioned by SNB.

Some bit on importance of history and econ history:

Which central banks communicate the most on fiscal policy?

This morning one of the most circulated newspaper item is how India’s FM has asked India’s central bank to march in steps with government. So RBI should cut rates along with government’s new found vigour for reforms.  This talking by one authority on other’s roles is interesting. Central banks talking on fiscal policy and fiscal on central banks. The debate is always open whether it should be encouraged at all.

Julien Allard, Marco Catenaro, Jean-Pierre Vidal and Guido Wolswijk of ECB look at the issue though from a different angle. They look at central banks which talk on fiscal policy. The focus of central bankk communications is on mon policy. This one looks at key central banks and whether and how they communicate their views on fiscal policy:

Asymmetric Federalism in India…

A superb note on the topic by Govind Rao and Nirvikar Singh.

The idea of building fiscal union in Europe and sharing examples from other countries is being keenly discussed. This blog has expressed deep interest in the subject from an Indian perspective.

Here is a superb paper on how fiscal federalism in India is asymmetric. What does asymmetric mean:

Goethe and problems with fiat money…

A nice speech by Jens Weidmann of Bundesbank. One does get to read about Goethe whenever you read on literature etc. However, it seems even Goethe knew about dangers of fiat money:

Inside story on how Draghi convinced ECB to buy bonds?

A superb inside account from Reuters. It narrates how Draghi managed to convince ECB officials to agree to Sep-12 policy of   conditional  unlimited bond buying.

It all started on this surprise speech at London in late July (comments here):

Dreaghi’s frank interview on Germans not liking ECB and its policies

Mario Draghi is far more frank and open than either Trichet or most central bankers around.

A nice interview of him by Alexander Hagelüken and Markus Zydra of   Süddeutsche Zeitung. He says ECB would love it if it could always work  together with Bundesbank :

Winding and unwinding extraordinary monetary policy…

A must read speech for mon eco students. It is by David Miles of BoE.

He begins defending state of economics: