Archive for the ‘Economist’ Category

Could the ‘Taylor Rule’ Have Prevented the Housing Bubble?

October 29, 2014

What was merely an academic exercise has become an applied tool for central banks. Just see whether your policy is in line with the T-rule and all shall be well.

Mateusz Machaj discusses the limitations of the rule and why we should avoid the hype around it.


UK monetary policy and Cricket…Switching gears from frontfoot to backfoot..

October 28, 2014

Andy Haldane reviews economic conditions in UK and change of mon pol stance. Using analogy from cricket, he had earlier said that in the batting (economic) corridor of uncertainty it is better to be on frontfoot:


How fair and effective are the fixed income, foreign exchange and commodities markets?

October 28, 2014

The International Finance Centres are now discussing questions like these which were bread and butter (or mickey mouse) before the crisis. Even asking such qs was a crime and laughed upon.

UK Govt and BoE had floated a study group in Jun-14 and they have released a interim report of sorts now:

The Fair and Effective Markets Review (FEMR) has today published a consultation document on what needs to be done to reinforce confidence in the fairness and effectiveness of the Fixed Income, Currency and Commodities (FICC) markets.

The Review was established by the Chancellor in June 2014, to conduct a comprehensive and forward looking assessment of the way wholesale financial markets operate, to help to restore trust in those markets in the wake of a number of recent high profile abuses, and to influence the international debate on trading practices.

The Chancellor, George Osborne, said:“The integrity of the City matters to the economy of Britain. Markets here set the interest rates for people’s mortgages, the exchange rates for our exports and holidays, and the commodity prices for the goods we buy.

I am determined to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them. I want to make sure it is done in a way that preserves the UK’s position as the global financial centre for many of these markets, with all the jobs and investment that brings.

The consultation that the Fair and Effective Markets Review has launched today is comprehensive, balanced and rigorous, and asks all the right questions. I look forward to the Review’s final recommendations in June next year.”

Wholesale fixed income, currency and commodity markets ultimately make it possible to do business across almost every sector of the global economy. They help determine the borrowing costs of households, companies and governments, set countries’ exchange rates, influence the cost of food and raw materials, and enable companies to manage financial risks associated with investment, production and trade.

However, in recent years there have been a number of high-profile abuses in these markets. These have included the attempted manipulation of benchmarks, alleged misuse of confidential information, misleading clients about the nature of assets sold to them, and collusion.

Interesting times..Despite all this, hype over finance and financial development continue..

Sovereign debt default can be postponed not prevented..

October 27, 2014

Carmen Reinhart and Christoph Trebesch (not Rogoff!) have this article in voxeu. They analyse the previous major crisis and how countries paid off their debts or defaulted on the same. The cost of default is not as high as it is made out to be:


How central banks end crisis (and create the next ones?)

October 27, 2014

It is all about operating in secrecy. Central banks end crisis by making sure no one knows what you are doing and who are the partners (Banks and FIs) in crime.And general public is made to feel that as if there is some magic going on.

Gary Gorton and Guillermo L. Ordoñez in this paper explain the importance of secrecy in ending crisis:


WTO headed World Bank/IMF way?

October 24, 2014

WTO has become a defunct institution with hardly anyone really caring for it. There was a time when WTO meeting generated enormous hype. Now IMF/WB meetings have just taken over completely. Even after the decline WTO stood for its one member one vote system. This is something which other so called world institutions should have adopted as well. But then most of the time we end up copying wrong ideas.

Emily Jones of University of Oxford writes that WTO wishes to change its one vote system:


Rejecting both sides of macroeconomics — demand side and supply side view

October 24, 2014

Jeff Sachs rejects both sides of macro calling for a more sustainable and inclusive macro theory:

I am a macroeconomist, but I dissent from the profession’s two leading camps in the United States: the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes. Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years. It is time for a new strategy, one based on sustainable, investment-led growth.

The core challenge of macroeconomics is to allocate society’s resources to their best use. Workers who choose to work should find jobs; factories should deploy their capital efficiently; and the part of income that is saved rather than consumed should be invested to improve future wellbeing.

It is on this third challenge that both neo-Keynesians and supply-siders have dropped the ball. Most high-income countries – the US, most of Europe, and Japan – are failing to invest adequately or wisely toward future best uses. There are two ways to invest – domestically or internationally – and the world is falling short on both. 

Domestic investment comes in various forms, including business investment in machinery and buildings; household investment in homes; and government investment in people (education, skills), knowledge (research and development), and infrastructure (transport, power, water, and climate resilience).

The neo-Keynesian approach is to try to boost domestic investment of any sort. Indeed, according to this view, spending is spending. Thus, neo-Keynesians have tried to spur more housing investment through rock-bottom interest rates, more auto purchases through securitized consumer loans, and more “shovel-ready” infrastructure projects through short-term stimulus programs. When investment spending does not budge, they recommend that we turn “excess” saving into another consumption binge.

Supply-siders, by contrast, want to promote private (certainly not public!) investment through more tax cuts and further deregulation. They have tried that on several occasions in the US, most recently during the George W. Bush administration. Unfortunately, the result of this deregulation was a short-lived housing bubble, not a sustained boom in productive private investment.

New strategy:

Though policy alternates between supply-side and neo-Keynesian enthusiasm, the one persistent reality is a significant decline of investment as a share of national income in most high-income countries in recent years. According to IMF data, gross investment spending in these countries has declined from 24.9% of GDP in 1990 to just 20% in 2013.

In the US, investment spending declined from 23.6% of GDP in 1990 to 19.3% in 2013, and fell even more markedly in net terms (gross investment excluding capital depreciation). In the European Union, the decline was from 24% of GDP in 1990 to 18.1% in 2013.

Neither neo-Keynesians nor supply-siders focus on the true remedies for this persistent drop in investment spending. Our societies urgently need more investment, particularly to convert heavily polluting, energy-intensive, and high-carbon production into sustainable economies based on the efficient use of natural resources and a shift to low-carbon energy sources. Such investments require complementary steps by the public and private sectors.

The necessary investments include large-scale deployment of solar and wind power; broader adoption of electric transport, both public (buses and trains) and private (cars); energy-efficient buildings; and power grids to carry renewable energy across large distances (say, from the North Sea and North Africa to continental Europe, and from California’s Mojave Desert to US population centers).

But just when our societies should be making such investments, the public sectors in the US and Europe are on a veritable “investment strike.” Governments are cutting back public investment in the name of budget balance, and private investors cannot invest robustly and securely in alternative energy when publicly regulated power grids, liability rules, pricing formulas, and national energy policies are uncertain and heavily disputed.

Nothing different really. For a long time economics is interested in issues which matter to no one except their publishing business:

These considerations are reasonably clear to anyone concerned with the urgent need to harmonize economic growth and environmental sustainability. Our generation’s most pressing challenge is to convert the world’s dirty and carbon-based energy systems and infrastructure into clean, smart, and efficient systems for the twenty-first century. Investing in a sustainable economy would dramatically boost our wellbeing and use our “excess” savings for just the right purposes.

Yet this will not happen automatically. We need long-term public-investment strategies, environmental planning, technology roadmaps, public-private partnerships for new, sustainable technologies, and greater global cooperation. These tools will create the new macroeconomics on which our health and prosperity now depend.

These are not even issues in most econ departments across the world who are just busy solving max/min problems..

The mumbo jumbo of forward guidance..

October 22, 2014

David Miles of BoE has this article on forward guidance. FG was something which was slated to replace all mon pol tools or supersede them. With all these inflation targeting forward looking central banks came the idea of guiding markets towards the future policy decisions. So statements like what central bank is likely to do etc became fashionable. Some central banks started even giving paths over how their interest rates shall move going ahead. In other words central banks became nothing but Gods.  There is a reason why they are so hyped and celebrated after all.

This was all good till this crisis and things have become crazy since then. FG was taken more seriously as economies dived to assure markets but as things moved ahead one is not sure how to forward guide. Whatever you say, it is usually the opposite making you look mere human.

So Miles says, we should not be so precise. C-banks FG statements should be more qualitative:


Do We Need a Lender of Last Resort? Lessons from Australian banking history..

October 21, 2014

Nicolás Cachanosky of Mises Institute argues what Austrian school argues best- There is no need for a central bank.

Why can’t banks manage the money on their own? Why do they need a LOLR?


Paanch Kahani – five Ramayana stories of central banking…

October 20, 2014

Central Bank of Trinidad and Tobago has taken Ramayana really seriously. Last year this blog pointed, how the bank compared central bank to Lord Hanuman (to which this blog did not agree).

This year, the chief of the bank Jwala Rambarran looks at five more characters of Ramayana and once again points to lessons for central banking:


Coal industry and corruption cases are not limited to India..

October 17, 2014

Nice piece by Marina Lou of Greenpeace International.

She says how coal industry worldwide is rife in corruption:

Juan Pablo Perez Alfonso, one of the founders of OPEC, once compared the world’s fossil-fuel use to “drowning in the devil’s excrement.” There is certainly plenty of evidence supporting his prediction that the fossil-fuel industry, with its powerful corrupting influence, will “bring us ruin.” Indeed, coal-related corruption stories are breaking worldwide, shining a light on the murky space between “illegal” and “improper” where the extractive industries work.

Last year, in the Australian state of New South Wales, the Independent Commission Against Corruption investigated former Labor ministers Eddie Obeid and Ian Macdonald for conspiring to defraud the state over the issuance of multi-million-dollar licenses for coal exploration and mining. Today, the ICAC is conducting an even more far-reaching and complex investigation into a number of figures from the Australian Labor Party and the Liberal/Nationals Coalition, including for favoring the interests of Australian Water Holdings, a major infrastructure company.

Last month, India’s Supreme Court found that all 218 coal-mining licenses allocated by the government in 1993-2009 had been granted in an “illegal and arbitrary” manner, with the committee responsible for the process lacking transparency and rife with corruption. Following the landmark decision, the government has canceled 214 of the coal block allocations – and has fined several companies that have already begun production.

For its part, Indonesia is set to revoke the contracts of 17 coal producers that failed to pay government royalties. And, since the beginning of this year, the country’s corruption commission has been focusing on the extractive industry, including the state officials who facilitate mining companies’ illegal activities.

Likewise, China’s ongoing anti-corruption drive – the largest in its modern history – has begun to focus on the coal industry. Last month, two Communist Party officials from the coal-rich Shanxi province were charged with corruption and abuse of power, signaling that Shanxi may well move to the forefront of President Xi Jinping’s quest to eliminate entrenched corruption in the Party’s ranks. As Gao Qinrong, a former journalist from Shanxi, recently described the province, “It has coal; coal brought money; that brought corruption.”

These stories highlight a simple truth: Where the coal industry operates, bribery and venality are likely to be rampant. But this does not have to be the case. In order to reduce – if not eliminate – such corruption, several fundamental weaknesses in the regulation of how mining contracts are allocated must be addressed.

Then there are obvious ideas on how to limit corruption by increasing transparency. The natural resources if not managed well end up being a curse. I mean if places like Aus cannot manage, it is really difficult for others as well. So what to do? Make corruption legal in such cases?


Economics of Parenting…linking inequality with parenting styles

October 17, 2014

Pikeetymania all over… Inequality is being linked to all kinds of things and this time on parenting styles.

This this post, Matthias Doepke and Fabrizio Zilibotti connect the two things.  They say in societies where equality is high, parents allow children to be more imaginative and be carefree. In societies, where the ineq is high, parents are more demanding and strict:


To regulate or not to regulate mobile apps market..

October 15, 2014

Cato’s regulation magazine has this article on growing mobile apps market.

Earlier mobile apps were mainly to do with games, chatting etc. Now Now thanks (0r no thanks) to apps like Uber taxi etc they are posing threat to incumbent businesses leading to all kinds of noises from the former.

So what should regulators do? Three options:


Why asking Prof. Tirole for policy prescriptions is not right..

October 15, 2014

The newspapers/websites are full of Jean Tirole’s policy prescriptions. Some quote him and others pick his research to show the implications. However, if you read the research you wonder where is the prescription? Most of this scholarly research is ambivalent and laden with assumptions. It also tells you that either people who write such pieces have not read Tirole (and other past winners) or have not really understood the ideas.

David Colander writes a much needed post. He says people should not look for policy prescriptions from the prize winners. The Prize is for economic research which may have nothing much to do with policy.

He begins with the lamppost story and says we draw wrong lessons from it:


Are Services the New Manufactures?

October 14, 2014

Dani Rodrik in his new piece asks this question. His answer is obviously no..

He remains sceptical that services sector can replace the manufacturing space:

Adjusting Human Development Indices with inequality…

October 14, 2014

Prof Joe Stiglitz has this interesting point on growing malaise in US economy. What was once a huge pride is now a huge failure and source of embarrassment:


Jean Tirole is perhaps the closest a Prize winner has been to Graduate/PhD students….

October 14, 2014

You can hate him but just cannot ignore him. The Prize for 2014 has been given to Prof Jean Tirole of Toulouse 1 Capitole University.

There were two reactions from my friends. First said never heard of him and second had perhaps only heard of him. The first one is working in the elite finance industry and second is a PhD student in economics.  I mean why would a finance professional be interested in anything but markets and how can a PhD student ignore Jean Tirole?

Doing a PhD, the name Tirole keeps coming to haunt you quite often. His stamp on the subject is so vast that you just cannot avoid him in your coursework. He has written textbooks specifically for PhD students in industrial organisation, game theory, finance, banking etc and are hugely recommended. If this is not enough, his large number of papers are obviously there. The sheer work he has produced makes one scratch his/her head if all this is real or surreal? And then most of his papers/books are not for the faint hearted. The struggle to get through a few pages is an enormous task given the math and complexity involved.

So a really interesting choice. As this second friend said- this is the closest a graduate student has ever felt to the prize winner. Most of the time, even graduate students do  not know the works of the choices in a given year unless you have specialised in the area. But with Prof Tirole this is a rarity. If a Phd student has completely missed Prof Tirole then either he/she is lucky or needs to redo his coursework.

Prof Tirole has influenced a lot of fields and continues to dominate the space. Even if you ignore the math, his illustrations in industrial organisation are quite interesting and obvious as well.  I guess now Prof Tirole should also write a book for general public as well,,,

What has led to financialisation of developed economies?

October 13, 2014

Òscar Jordà, Alan Taylor and Moritz Schularick look at this question in this paper. They summarise the findings in voxeu.

Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking1and has been linked to the increase in income inequality in advanced economies,2 as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.

In our recent research we turn to economic history. We build on our earlier work that first demonstrated the dramatic growth of the balance sheets of financial intermediaries in the second half of the 20th century and how periods of rapid credit growth were often followed by systemic financial crises and severe recessions (Schularick and Taylor 2012, Jordà, Schularick, and Taylor 2013).


They say that main reason has been shift of bank credit towards mortgage lending or for home buying. Banks over the years have become like a housing fund:


If the unemployed formed a country, they would be the world’s 5th largest country

October 13, 2014

Sabina Bhatia of IMF reviews the recent bi-annual IMF/WB meetings (nice paid holiday trips for officials actually).

She collects the various ideas which were discussed this time. The prime issue of course being jobs:


We should also look at redistributive effects of financial deregulation

October 10, 2014



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