RBA released its Statement on the Conduct of Monetary Policy. This is released once in every three years. It is a kind of a joint statement by the central bank and Aus treasury on common understanding between the two on mon pol in Aus:
Archive for the ‘Financial Markets/ Finance’ Category
In the recent HBS Working Knowledge section, the authors discuss the paper. They show how shipping industry never learns from its mistakes. It overbooks ships during booms and then ends up paying for the losses in busts. The times are never different.
Minneapolis Fed’s Region mag has this terrific interview of Prof. Richard Thaler.
The interview as expected questions the basis of the rational school. It is full of anecdotes over how he met Kahneman/Tversky, his struggle to get into mainstream economics, his venture into behavioral finance (he never imagined that it will be finance where behavioral theories will have the maximum impact, his disagreements with Fama and so on.
A nice speech by Mr Henry A Kofi Wampah, Governor of the Bank of Ghana.
When one talks about making markets efficient, the usual thought is get the government out and let the markets be free. And then will come the invisible hand and there will be magic. Despite many people showing the flaw with this thinking, it remains in the minds of people and particularly media.
So here is this interesting tale of Nigeria.
A short and nice article on how Fama came to finance and how finance has developed over the years.
It is amazing to note how top econs/fin guys cite role of serendipity/luck in choosing economics and right areas. it is even more ironical how little econs count luck as a factor in analysing economic developments:
I just finished this wonderful book by Paul Krugman. What a terrific book on macro writing. A book which students should be asked to read to understand various lines of reasoning on macroeconomics.
It is sad that I only read this book after such a long time. Whatever we see in world economy particularly US now, was all expected and written by Dr Krugman way back in 1990s. He goes slightly wrong on his probabilities as he puts worst case scenario of a crisis in US at 25% (20% for things improving and remaining 55% for a status quo). But he clearly put the case of all things wrong in economy when few expected it.
Krugman says there are three kinds of econ writings:
Andy Haldane once again. I mean what speeches one gets to read from him.
This one on institutions (slightly dated though) becomes an immediate read for those which have not read. It is one of those speeches which touches on so many aspects of institutional economics. It is just amazing by all means.
He points how two forces – information and integration (of economies) mean institutions are more important than ever. Integration leads to world economy becoming more connected leading to one player affecting the whole system. Whereas too much of information is making the attention span shorter and unable to focus on long term aspects. We need institutions with long term memory:
Robert Shiller in his recent column:
economic research has not yet permitted us to estimate the value to society of so many of our best and brightest making their careers in the currently popular kinds of “other finance.” Speculative activities have plusses and minuses, much that is good and some that is bad, and these are very difficult to quantify. We need to be very careful about regulations that impinge on such activities, but we should not shy away from making regulations once we have clarity…
Quotes interesting recent research questioning the true value of finance careers..
Dallas Fed econs David Luttrell, Tyler Atkinson and Harvey Rosenblum summarise the costs of the 2007-09 financial crisis (did it end in 2009??).
The 2007–09 meltdown produced a huge downshift in the path of economic output, consumption and financial wealth. The nation has borne additional costs arising from psychological consequences, skill atrophy from extended unemployment, a reduced set of economic opportunities and increased government intervention in the economy. Assuming the financial crisis is the root cause of all that dislocation, an estimate of the crisis’ overall cost must be weighed against the potential costs of policies intended to prevent similar episodes in the future.
We conservatively estimate the loss of national output as a result of the financial crisis and its aftermath at between $6 trillion and $14 trillion. The high end of this range is equal to nearly one year of U.S. output. Including broader and more-difficult-to-quantify measures that reflect the lingering trauma experienced by millions of Americans pushes these costs still higher—possibly to as much as two years’ worth of forgone consumption.
Given this range of estimates, the tepid economic recovery and the collateral damage sustained, it is crucial to implement effective policies that avoid future episodes whose magnitude could exceed even the staggering costs and consequences of the most recent financial crisis.
Hmmm…A really high range of costs..nearly one year of GDP at the higher end of the range..
In this age of chronic mendacity in public life, where all of us are the victims of a propaganda-managed democracy, surely what students at the plus two level of education need is an economics that demystifies economics. The Indian public needs to know the “bad conscience and evil intent of apologetic” (this from Marx) that the pundits who disseminate free-market economics have committed themselves to. When they reduce “public finance to housekeeping in the name of ‘fiscal discipline’” (Bhaduri again) and thereby clandestinely make a case for “disciplining the poor to help the rich”, all the more we need open-minded, intellectually self-confident citizens to call their bluff. What then is the core of economics that will give “an intelligent and interested citizen the confidence to pose and raise relevant economic questions”, depending, of course, on the particular context? Bhaduri answers this question with reference to three areas – microeconomics, macroeconomics, and the Indian economy.
In the section on macroeconomics, he focuses upon the fallacy of composition, taking pains to explain the proposition that what is true for the individual is not true for society and that the whole is not equal to the sum of its parts, thereby debunking “methodological individualism”. Here he gets to the paradox of thrift and then to the basic difference between Keynesian and non-Keynesian macroeconomics, going on to explain how demand is generated by expenditure and illustrating the notion of the “multiplier”. He then debunks the quantity theory of money and links up money with deficit financing.
On the Indian economy, Bhaduri suggests that students need to know the sectoral structure of the gross domestic product (GDP) and employment, the class and regional distribution of income, and how these have evolved since Independence. Over the last 20 years, why has the rest of the world, whose real GDP has grown much slower than India’s, reduced poverty faster? How is it that India has such a large number of billionaires, second only after the US, and displays extremes of wealth and poverty, luxury and misery, and civilisation and degradation not found anywhere else in the world? In this context, what of the social choices made by a political system wherein to be a serious contender for a parliamentary seat in elections to the Lok Sabha the average amount that is spent is Rs 8 crore? Students then might ponder over “how much content is there to this form of democracy”. With so much unaccounted money flooding the Indian electoral system, does this not make a mockery of political equality at the polling booth?
In Micro, Prof Bhaduri says we need to learn just the following ideas:
The income and substitution effect is one thing and choice using soft information and hard information or exact information and inexact information is the second thing that is all I think which is really valuable in microeconomics.
He also takes a jibe at his fellow students in Cambridge who have forgotten economics (any guesses who??)..
In the end Prof Bhaduri says:
What I have said, I believe, with a little bit of thinking, you all can cut out those parts. (It is another matter what will come in examination. We will come to all that). Also I have outlined
what I think can be brought across to student much more easily than if you try to get all sorts of issues. Take Indian economics, it has all kind of information. You might choose not to
have this or something else, but some basic information which you think is important and why it is important. I said why I think this is important today. There is so much talk of
market, liberalisation and high growth. We should know the other side in that. To be a balanced citizen, you should know the two sides. In everything, you can choose something,
you can have your political bias and if you are intellectually honest, you can say, this is the bias I have. It is true that I am probably much more worried and interested about the poor
than most people who appear on the TV these days. But that is ones’ personal choice. You can certainly say, this is what I think. But certainly stock markets is not the main part of the
Another attempt to question economics teaching particularly in Indian context..
It has been five years since the iconic Lehman failed. The above question will be asked for a long time to come as it became great recession post this event.
William R. Cline and Joseph E. Gagnon of PIIE make an attempt to answer the question. They say Fed simply followed the advice given by Bagehot nearly 150 years ago: Provide support to financial firms to only those which have adequate collateral:
A really interesting paper connecting political systems to financial systems. It is written by Hans Degryse (KU Leuven, Tilburg University and CEPR), Thomas Lambert (Université catholique de Louvain and Université Lille 2 ) and Armin Schwienbacher (Université Lille Nord de France – SKEMA Business School).
They say countries which get voting rights also end up banking systems before other countries. Countries which delay voting rights lead to development of capital markets:
An interesting interview of Justin Lin. ex-chief econ of World Bank.
Justin Lin talks to Viv Davies about his new book, ‘Against the Consensus: Reflections on the Great Recession’. Lin presents his thoughts on the cause of the crisis and argues that conventional theories provide inadequate solutions, suggesting that the crisis originated in global imbalances arising from the wealth effect of excess liquidity created by US financial deregulation and loose monetary policy.They discuss Lin’s recommendation for a Global Marshall Plan and a new supranational global reserve currency. Lin also presents his views on industrial policy.
It is in a mp3 file as of now..
Robert Shiller in his recent column at PS. He says he hears talks of bubbles everywhere:
You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year. But talk of bubbles keeps reappearing – new or continuing housing bubbles in many countries, a new global stock-market bubble, a long-term bond-market bubble in the United States and other countries, an oil-price bubble, a gold bubble, and so on.
Add India’s housing bubble as well which refuses to burst..
He says bubbles are different from the usual soap bubbles we think about:
One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.
It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.
Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.
Christoper Noyer of Bank of France reviews reviews the criticism around financial sector.
Firstly, is finance really a dictatorship? This question isn’t new: already Petronius, in Roman times, at the start of our modern era, asked: “What use are laws when money is king?” The question seems rhetorical, and you can sense in its resignation that the Latin writer (who, incidentally, was born in the nearby city of Marseille) was already worried about the difficulties of establishing the primacy of politics over finance.
Like most policymakers, he thinks there is much criticism on financial sector but it does play a useful role in the economy. Yes there were excesses but there have been measures to control the excesses..
Nice paper by Horace W.H. Yeung (School of Law, University of Leicester) and Flora Xiao Huang (University of Hull – Law School).
LaPorta et al started this debate showing how legal systems matter to financial development. They showed countries with Common law (Anglo Saxon) were better at securing property rights than Civil law countries. As property rights are crucial for financial development, countries with common law (or those that inherited from their colonial masters) had better developed financial systems particularly market based systems. Others have contested this view on several grounds.
The authors test this hypothesis on HongKong and find it to be a mixed bag: