Archive for the ‘Economist’ Category

Rethinking economics after the crisis — Making economics more relevant for policy..

July 2, 2014

A superb speech by Benoît Cœuré of ECB. It is really important that economic policymakers also reflect on the state of the profession barring a few academicians who are often ignored. With people like Coeure talking, hopefully more it reaches more ears.

He says policymakers do not have the luxury if academicians..

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Should we have minimum prices for alcohol?

June 30, 2014
Joan Costa-i-Font of LSE thinks having a minimum price for alcohol (albeit at higher levels) will help lower alcohol consumption. 
This is surprising given most of the time such bans fail. Companies/people always have ways to work around the ban.

Moving on to behavioral indifference curves…

June 25, 2014

Prof. John Komlos of Ludwig-Maximilians University has this interesting paper.

He says it is high time we move onto behavioral indifference curves (which have kinks) from the usual indiff curves (which are smooth downward sloping):

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Revolving door between finance executives and financial regulation..who benefits and how?

June 24, 2014

A really interesting paper given the times we are in. Despite the huge criticism of finance sector, both its employees and regulators continue to remain coveted jobs.

The authors build it as inflow vs outflow kind of problem:

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What happens when divorce laws switch from mutual consent to a unilateral regime?

June 24, 2014

Interesting paper by Raquel Fernández and Joyce Cheng Wong.

One is always looking for certain natural experiments to check the impact. Change in policy regime is like a natural experiment. So, in this paper authors look at the impact when divorce regime changed in US. Earlier, regime was mutual consent which meant approval for both partners was need. Then it changed to unilateral where just one party had to agree. What was the socio-economic impact of such changes?

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History of bankruptcy in early modern europe

June 20, 2014

EH.net keeps one abreast of some really interesting books on econ history. Its book review section is really top stuff.

In the latest book review, it points to this book which looks at history of bankruptcy in early modern Europe. It is reviewed  by Bradley A. Hansen of University of Mary Washington.

I mean why study of bankruptcy is important? Well, it gives us tremendous insights:

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Reform of the Anglo-Saxon economics curriculum

June 20, 2014

Robert Skidelsky joins the debate over reforming economics pedagogy. This is followed by interesting comments from Brad Delong. With so many joining the chorus for change, not sure when it will change? And this is not just about the anglo-saxon world. It is also about other parts of the world where what is taught in the west is blindly copied. Atleast in the west, some people understand the limitations of current economics teaching, in the other places this is not even understood. There is just competition on most places to keep pace with the west..

Skileddesky says economics teaching should be more pluralistic:

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Does Europe face the prospect of a lost decade?

June 19, 2014

Christian Noyer of Banque De France asks this q in a recent speech.

He says lost decade could happen in Europe for two reasons (though adds it is not limited to Europe alone):

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World Cup Football: 770 Billion Minutes of Attention (Economics)

June 19, 2014

Thales Teixeria of Harvard has some interesting facts/trivia on the football world cup and how it is all about attention economics.

He says FIFA world cup is the 7th largest business in the world on annual basis:

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Raising female economic participation in India..

June 18, 2014
Piritta Sorsa of OECD Economics Department compares the women participation in workforce in India and BRIC members. It is the lowest in India.
She says by getting more women into workforce will boost GDP by a few points:
Female labour market participation in India is lower than in other emerging markets. This column discusses the dynamics and causes of this issue. Many women have dropped out of the labour market in the recent years, or work in low-paying jobs without social benefits and with large wage differentials. Raising female labour force participation could boost economic growth up to 2.4% with a package of pro-growth and pro-women policies.
There is a need to work on the entire ecosystem to get more women enrolled into workforce. It will not just happen by opening/reserving more jobs for women.

Albert Hirschman’s hiding hand and behavioral economics

June 18, 2014

An interesting article by Prof. Cass Sunstein.

This article is a preface to the Hirschman’s  classic on development (haven’t read though):

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Why standard macro models fail during crises?

June 18, 2014

I mean just because we think this time is different and pile on expectations. We fail to appreciate that there could be events which could just scuttle the whole thing. No model can incorporate the entire gamut of uncertainty and uncertain events.

David F. Hendry and Grayham E. Mizon say these basic ideas in a more technical way:

Many central banks rely on dynamic stochastic general equilibrium models – known as DSGEs to cognoscenti. This column – which is more technical than most Vox columns – argues that the models’ mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin ‘law of iterated expectations’ fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed.

Call them whatever- DSGE. ABCD, XYZ etc…There are limitations on what they can achieve and all such models should clearly specify what they cannot do or can fail potentially. In many ways this fascination for models etc is this fascination for making economics a science and having physics envy. When the main agent here is individual who can react really unpredictably, we can never be sure the way these models will work. But despite all this, we just believe so much in these models.

This does not mean we should ignore economic modelling. Not at all. Just that we should know their limitations which could be serious at times..

China may soon have no choice but to let its currency float..

June 17, 2014

Yu Yongding of Chinese Academy of Social Sciences ( a solid China expert) predicts China could soon allow its currency to float. Not that it wants to but it will be forced to..

He begins saying China so far is managing all the three legs of Mundell Trilemma:

The Nobel laureate economist Robert Mundell showed that an economy can maintain two – but only two – of three key features: monetary-policy independence, a fixed exchange rate, and free cross-border capital flows. But China is currently juggling all three – an act that is becoming increasingly difficult to sustain.

….This raises an obvious question: How has China managed to defy the Mundell trilemma by maintaining all three policy objectives simultaneously? The answer lies in China’s sterilization policy.

China has run a capital-account surplus for most of the last 30 years, and a trade surplus every year since 1993. The PBOC keeps the exchange rate stable by intervening heavily in the foreign-exchange market, creating so much liquidity that the authorities must engage in massive sterilization to avoid overshooting the targeted increase in the monetary base.

In China, unlike in advanced countries, monetary and sterilization policy are often one in the same. The degree to which monetary policy is expansionary depends on the degree to which the liquidity created by currency-market intervention has been sterilized.  

He says costs of sterilization are higher than the benefits and are actually distorting the economy. So he hopes and predicts that China will soon allow the currency to float:

Nonetheless, though predictions that China would abandon its exchange-rate controls in order to uphold monetary autonomy have proved wrong over the last decade, this time may be different. With China’s liberalization of interest rates and short-term capital flows making it increasingly difficult for the country to juggle Mundell’s “irreconcilable trinity,” one hopes that Chinese leaders will finally allow the renminbi to float, while keeping in place existing capital controls.

The day this happens it will mark as quite a momentous day for history of macroeconomics..

Importance of framing questions – an interesting example..

June 17, 2014

There is another interesting debate over whether the western world has run out of major innovations and are now going to be on a steady decline. Robert Gordan has been making this argument for a while. Ofcourse, there are people who disagree and say innovation likely to continue and generate future growth. Here are the debates — one, two, three.

Coming to the title of the post. Prof Gordon often asks this question which innovation do you value most – A toilet with piped water or a smartphone?

Are all of mankind’s best inventions behind us?

Economist Robert Gordon thinks so. When giving speeches, the Northwestern University professor often flashes a photo of a smartphone and a toilet on a screen and asks his audience what they would do if they had only two options: Keep everything invented up until 2002, or keep everything invented up until today—but give up running water and toilets. The answer to him is obvious: Indoor plumbing changed how people live, he says, smartphones are just a handier form of what already exists.

Which would you choose?

The answer here most likely (atleast for me) is toilets. Here there is a case of lack of supply as well. Much of India does not have toilets but phones have become too common.

But the same post takes a poll but frames the question differently:

Which invention of the past would you rather live without?

Here the choice is smartphones not toilets. But unknowingly you end up ticking on toilets!

Importance of framing the questions and nudging people into making choices.

 

Simple Presentation explaining Pikettymania…

June 17, 2014

Justin Wolfers does a great job explaining the logic behind Pikettymania which has gripped the world economic discussions. (HT: Marginal Revolution)

Really useful..

 

Book Review: Fatal Equilibrium

June 16, 2014

Just finished reading the second of the murder mysteries written by Marshall Jevons- Fatal Equilibrium. The blog reviewed the first mystery.

This one is bit of drag as the plot begins much later. The authors begin with the murder right away but takes a while before the plot starts and thickens. And suddenly it is all over making you wonder and wanting more.

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What did Bank of Japan lack in its previous policies to boost economy?

June 13, 2014

BoJ has been using Quant easing and related polices for more than 15 years now. So, why was it not as effective? Moreover, what is it new about its recent QE policy (called QQE bu BOj – Qualitative and Quantitative  Easing)?

BoJ chief  Haruhiko Kuroda reviews eco theory around QE and the QE polices of Japan :

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The political economy of hosting World Cups…should only developed world host these cups?

June 13, 2014
Nauro F Campos of Brunel University has an interesting post on the hot topic of protests in Brazil iver hostoing World Cup. How can a country which is so mad about football protest so much hosting this cup in their own country?
He says we need to look beyond simple economics to figure this thing out.

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A conversation between Ministry of Energy and Ministry of Finance…

June 12, 2014

IMF Blog has this interesting post on how Minister of energy calls up MoF over  discovery of some natural resource.

MoF who understands a bit of economics is not too thrilled given the experiences of countries with such resources. So what does he/she do? One idea is to distribute the revenues to people and then clawed back via taxation:

The Minister remembers reading a paper by Sala-i-Martin and Subramanian that argues citizens of an oil-rich country such as Nigeria—where institutions are weak—would be better off if all oil revenues were directly distributed to the citizens themselves. The authors’ main argument is that mechanisms of direct distribution circumvent inefficient or corrupt budget institutions and foster public demand for government accountability. If resource revenues are distributed to the public and clawed back through taxation, the argument goes, the public will demand accountability for the use of the resources.

MoF then floats a study to figure the pros and cons of direct distribution:

As a first step, the advisor looks at how other countries have responded in similar circumstances. To his surprise, he finds only one instance in which resource revenues are distributed directly, that is, in Alaska. However, the Alaskan approach is underpinned by strong budget institutions and official oversight, and the amount distributed is relatively small—only 3 to 6 percent of per capita income—and the direct distribution is made out of income earned from saved resource revenues.

To be thorough, the advisor also looks at the experiences of countries where governments provide cash or in-kind transfers to their populations—including conditional cash transfers, subsidies, and income support programs. He finds that these transfers have proven effective in reducing inequality, but that larger transfers to wealthier recipients might have the unintended effect of encouraging withdrawal from the labor force. He also learns that income support programs have tended to narrow their coverage in order to address the perception that they discourage recipients to work. He studies how entrenched energy subsidies are—despite being inefficient, inequitable, and bad for growth—as citizens see them as a way to reap benefits from resource abundance. Finally, he learns that the use of resource revenues outside the budget process can also fall prey to rent-seeking.

Nice bit..

IMF releases its Global Housing Index (Have housing prices in India declined?)

June 12, 2014

WSJ Blog points to a recent IMF initiative – Housing Markets Monitor. IMF is now going to present the housing trends every quarter. Interestingly, it shows housing prices have declined most in India. Wondering whether there is some other India the IMF is talking about? Where do we see decline in housing prices in India?

Anyways, Min Zhu, Deputy Managing Director, IMF shares his thoughts on housing and policy in this speech and blogpost. He says there are three kinds of policies to tackle housing bubbles — MiP, MaP and MoP:

Regulation of the housing sector involves a complex set of policies—the noted economist Avinash Dixit suggested the acronyms MiP, MaP, MoP to refer to microprudential, macroprudential and monetary policy, respectively.

Microprudential policy aims to ensure the resilience of individual financial institutions. It is necessary for a sound financial system but may not be sufficient; sometimes, actions suitable at the level of individual institutions can destabilize the system as a whole.

Hence we also need macroprudential policies aimed at increasing the resilience of the system as a whole. The main macroprudential tools used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements (Figure 4). Hong Kong SAR has imposed caps on loan-to-value and debt-to-income ratios since 1990s, Korea since 2000s, and during and after the global financial crisis, over 20 advanced and emerging economies have followed their example.

Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies—Ireland, Norway, and Spain— and emerging market economies— Estonia, Peru, and Thailand— capital adequacy risk weights were increased on mortgage loans with high loan to value ratios.

Though evidence thus far suggests that macroprudential policies are effective in the short-run in cooling off housing markets, it is clear that honing them remains a work-in-progress.

Finally, there is the monetary policy, which involves the central bank raising interest rates if they want to cool off the housing sector.  While monetary policy could be an important tool in many cases in support of macroprudential policies, the optimal allocation of responsibilities between prudential policy and monetary policy remains a matter of much discussion. What  is clear however, is that monetary policy will need to be more concerned than it was before with financial stability and hence with housing markets.

The tools for containing housing booms are still being developed. The evidence on their effectiveness is only just starting to accumulate. The interactions of various policy tools can be complex. But all this should not be an excuse for inaction. The interlocking use of multiple tools might overcome the shortcomings of any single policy tool. We need to move from “benign neglect” to an “all of the above” approach when it comes to policy choices.

Does not mention RBI’s measures to mitigate housing bubbles before the crisis…


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