Nice speech from Dr KC Chakrabarty of RBI.
He gets to basics of banking and how the banking system has evolved over the years:
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:
A brilliant speech by Dr KC Chakrabarty.
It gives you the basics of Development Financial Institutions (DFI) from a corporate finance angle. How are DFIs different from Commercial Banks? CBs get retail deposits whereas DFIs rely on things like bonds etc. On assets side, the credit given by CBs is based on collateral but for DFIs it is based on project viability:
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:
Not a long time ago, we were lectured on how mon stability is all that matters to financial stability. It was seen as a necessary and sufficient condition for some and necessary condition for most. The logic was not difficult to beat as it took a while for central bankers to tame the inflation beast and hence they kept emphasizing on the idea. And then things like great moderation etc made them overconfident and stretched the idea even more.
Now, the tide has turned. So much so, the speech titles have just become reverse like this one from NY Fed chief – Bill Dudley. He titles it as - Why financial stability is a necessary prerequisite for an effective monetary policy? The speech is given during Andrew Crockett First Memorial Lecture given by Prof. Rajan.
So why do we need to have Fin Stab is necessary for effective mon policy?
It is really nice to read such research from Raghu Rajan. He should stay away from FinMin speeches and actually talk like he did earlier and does it here.
He speaks on the topic at the First Andrew Crockett memorial lecture. Raghu Rajan has always been a critique of using the easy liquidity policies and Keynesian policies to resolve the crisis. He is more in the camp of need for structural policies for structural crisis.
He begins quoting Crockett who alongwith BIS officials did not buy the idea that mon stability leads to financial stability. Like Minsky they argued, the bubble is around the corner and c-bank should look at financial stability and macrofinancial/ macroprudential risks. He then discusses the causes of the crisis an the policies to mitigate the crisis. Finally he looks at the theories behind the policies taken and unintended consequences of the unconv. policies.
In the end:
He says there are two lessons for econ researchers:
For policymakers, there are 3 insights:
1) Short-term interest rates are not enough.
2) High debt levels are a drag on growth.
3) Market discipline is not enough.
Well, Prof Mankiw’s blog and research followers know he was a math guy first and then moved into econ.
Here is a more elaborate version of what actually happened. He realised he is not good enough in Math as others are and then moved into economics based on what someone in college told him about the subject.
This is part of a commencement lecture he gave recently at a school. He discusses the key moments in his life. He draws four lessons from his life experiences:
Blogging has been really poor recently and is totally against the wishes of the blogger. ME hopes to resolve the issues in a few days and blog much more over the coming days. I keep wondering whether our econ models which sing wide praises on labor mobility know the hassles involved in the same. More on this later.
Anyways, whatever little I can lay my hands on am sharing with people. Came across this interview/profile of Carmen Reinhart, the econ much in focus. It is in IMF’s quarterly publication – F&D whose theme is another hot topic – women empowerment.
Interesting to note that Reinhart wanted to be into fashion. Like most top econs, she too came into eco by chance:
Had Miami Dade College offered a concentration in fashion design, Carmen Reinhart might never have become an economist.
Reinhart—the world’s most-cited female economist and coauthor of one of the most important economic books of the past decade—studied fashion merchandising instead.
“I like art a great deal, and I like drawing. And I thought that, well, I really didn’t go to the right school to become a fashion designer. So, let me see whether I like fashion merchandising.”
“Fashion merchandising is how to become a buyer. It has really little to do with any kind of design . . . the artistic part of it.” She was convinced she’d made a poor choice.
But the merchandising curriculum required her to take a course on the principles of economics. Her instructor, “a crazy old Marxist,” paired a standard textbook with Douglas F. Dowd’s critique of U.S. capitalism, The Twisted Dream. “And I found it fascinating . . . . I didn’t make a decision, ‘Oh, I’m going to become an economist.’ No, I made the decision that I was going to take more economics courses and see how I liked them. And I did.”
Nice bit. Discusses her work on crisis and long association with Ken Rogoff.
A brilliant interview of a brilliant econ historian – Barry Eichengreen .
He is asked this very important q on what econ history means and what do econ historians do?
This probably brings us back full circle. We started with the uses and misuses of economic history and we’ve been talking about economic history throughout the conversation. I think it might be helpful to hear your perspective on what economic history and economic historians are. Why not just an economist who works in history or a historian who works on topics of economics? What does the term “economic history” mean, and what does the professional discipline of economic historian connote to you?
Eichengreen: As the name suggests, one is neither fish nor fowl; neither economist nor historian. This makes the economic historian a trespasser in other people’s disciplines, to invoke the phrase coined by the late Albert Hirschman. Historians reason by induction while economists are deductive. Economists reason from theory while historians reason from a mass of facts. Economic historians do both. Economists are in the business of simplifying; their strategic instrument is the simplifying assumption. The role of the economic historian is to say “Not so fast, there’s context here. Your model leaves out important aspects of the problem, not only economic but social, political, and institutional aspects – creating the danger of providing a misleading guide to policy.”
Hmm…I actually don’t understand why econ historians are not given their due. They have such interesting things to share. Later on this..
Is the crisis another missed opportunity to reemphasize the importance of history?
Sniderman: Do you think that, in training PhD economists, there’s a missed opportunity to stress the value and usefulness of economic history? Over the years, economics has become increasingly quantitative and math-focused. From the nature of the discussion we’ve had, it is clear that you don’t approach economic history as sort of a side interest of “Let’s study the history of things,” but rather a disciplined way of integrating economic theory into the context of historical episodes. Is that way of thinking about economic history appreciated as much as it could be?
Eichengreen: I should emphasize that the opportunity is not entirely missed. Some top PhD programs require an economic history course of their PhD students, the University of California, Berkeley, being one. The best way of demonstrating the value of economic history to an economist, I would argue, is by doing economic history. So when we teach economic history to PhD students in economics in Berkeley, we don’t spend much time talking about the value of history. Instead, we teach articles and address problems, and leave it to the students, as it were, to figure how this style of work might be applied to this own research. For every self-identifying economic historian we produce, we have several PhD students who have a historical chapter, or a historical essay, or a historical aspect to their dissertations. That’s a measure of success.
Well Sir, it is mostly missed. How many depts have opened upto history. Look am not saying we don’t need to do quant side of things and let us replace it with econ history . My contention is there is equal need for history as well. We need researchers in both disciplines. And who said history does not do quant. If one does get reasonable data there is nothing better than using quant tools to figure histiry. It helps you know more and test the history and ascertain whether history known so far was a myth or a fact.
Further, the allegation that econ history only looks at past. The interview nicely begins with this remark by the interviewer Mark Sniderman of Cleveland Fed:
To some, the term “economic historian” conjures up images of an academic whose only interests lie deep in the past; an armchair scholar who holds forth on days long ago but has no insights about the present. Barry Eichengreen provides a useful corrective to that stereotype. For, as much as Eichengreen has studied episodes in economic history, he seems more attuned to connecting the past to the present. At the same time, he is mindful that “lessons” have a way of taking on lives of their own. What’s taken as given among economic historians today may be wholly rejected in the future.
Well I ahve never really understood this allegation. Do people who work in so called present/future have anything useful to say on economic events. For instance, how many could figure the current crisis? Most did not even know how to respond to the crisis. It was the work of econ hostorians which prevented a second depression. One can suely argue whether any better steps could be taken but knowhow of history clearly played an important part. Yes there is confusion over which side of history should one look at to resolve current events. But that means more research in history and not less.
As Prof says in the first q we need to draw the right lessons:
Sniderman: It’s an honor to talk with you. You’re here at this conference to discuss the uses and misuses of economic history. Can you give us an example of how people inaccurately apply lessons from the past to the recent financial crisis?
Eichengreen: The honor is mine.
Whenever I say “lessons,” please understand the word to be surrounded by quotation marks. My point is that “lessons” when drawn mechanically have considerable capacity to mislead. For example, one “lesson” from the literature on the Great Depression was how disruptive serious banking crises can be. That, in a nutshell, is why the Fed and its fellow regulators paid such close attention to the banking system in the run-up to the recent crisis. But that “lesson” of history was, in part, what allowed them to overlook what was happening in the shadow banking system, as our system of lightly regulated near-banks is known.
What did they miss it? One answer is that there was effectively no shadow banking system to speak of in the 1930s. We learned to pay close attention to what was going on in the banking system, narrowly defined. That bias may have been part of what led policymakers to miss what was going on in other parts of the financial system.
Another example, this one from Europe, is the “lesson” that there is necessarily such a thing as expansionary fiscal consolidation. Europeans, when arguing that such a thing exists, look to the experience of the Netherlands and Ireland in the 1980s, when those countries cut their budget deficits without experiencing extended recessions. Both countries were able to consolidate but continue to grow, leading contemporary observers to argue that the same should be true in Europe today. But reasoning from that historical case to today misleads because the circumstances at both the country and global level were very different. Ireland and the Netherlands were small. They were consolidating in a period when the world economy was growing. These facts allowed them to substitute external demand for domestic demand. In addition, unlike European countries today they had their own monetary policies, allowing them step down the exchange rate, enhancing the competitiveness of their exports at one fell swoop, and avoid extended recessions. But it does not follow from their experience that the same is necessarily possible today. Everyone in Europe is consolidating simultaneously. Most nations lack their own independent exchange rate and monetary policies. And the world economy is not growing robustly.
The larger question is whether it is productive to think in terms of “history lessons.” Economic theory has no lessons; instead, it simply offers a way of systematically structuring how we think about the world. The same is true of history.
Superb read. I so hope to see econ depts opening up to history and students applying as well..
An important speech by Mr Hiroshi Nakaso, Deputy Governor of the Bank of Japan. Apart from the topics listed in the title of the post, the speech discusses things like financial trilemma, role of monetary and financial stability policy of central banks etc.
He distinguishes the various LLRs:
The purpose of the LLR function is to prevent the manifestation of systemic risk, that is, the risk that a problem in one part of the financial system spreads to the whole system in a domino-like fashion. The classic description of systemic risk focuses on contagion, where a bank run could affect other domestic banks in the system through a decline in funding liquidity.
In contrast, the recent financial crisis revealed that, in the light of deepening financial markets and globalization, systemic risk can (a) be magnified through mutually reinforcing declines in funding and market liquidity; and (b) spill over across national borders and have a global dimension. Central banks’ LLR function has evolved in response, encompassing the roles of “market maker of last resort” (MMLR hereafter) and “global lender of last resort” (GLLR hereafter).
Hmm…MLLR was done via unconventional monetary policy and GLLR by swap lines:
He points to new issues regarding LLR:
The transmutation of the LLR function of central banks raises a set of new issues. In the following, focusing on MMLR and GLLR, I will discuss (a) the relationship between monetary and financial stability policies, (b) the limits to liquidity provision and support by governments, (c) the financial trilemma and cooperation among central banks, and (d) the relationship between foreign reserves policy and the GLLR function.
In financial trilemma, he points to this financial trilemma (Schoenmaker’s trilemma):
With regard to the stability of the financial system under deepening globalization, an important perspective is provided by Schoenmaker: the “financial trilemma” (Chart 5).2 That view holds that it is impossible to simultaneously achieve financial stability, financial integration (capital mobility), and national financial policy. Let me apply this framework to the LLR function.
If, against the background of deepening global financial integration, the LLR function of the central bank is confined to providing liquidity in the domestic currency – that is, its role is limited to national financial policy – stability of the global financial system cannot be achieved. Under a different combination, if financial stability is to be pursued with national financial policy (i.e., domestic currency LLR), financial integration – globalization – must be curbed through the regulation of capital flows. Alternatively, in order to attain financial stability under global financial integration, some sort of supra-national financial policy is necessary, including an international framework for financial regulation and supervision.
GLLR realized through central bank cooperation might be regarded as an element of the safety net in the broad context of the third combination. There are many proposals for an international safety net other than central banks acting as GLLR. For example, one suggestion calls for the establishment by national central banks of credit lines in domestic currencies to the IMF – the IMF will then manage the money and provide liquidity to, and monitor the policies of, central banks in need of liquidity. Another scheme attempts to make use of SDRs. There is also a plan to collectively manage a pool of national foreign exchange reserves. All of these will require an agreement on cost allocation before they can become a reality.
He says central banks need to figure both - Mundell’s trilemma and Schoenmaker’s trilemma. In both capital mobility/financial integration is the common leg of the trilemma:
We must also pay attention to the fallacy of composition in the global financial system. In the context of ever-growing global financial integration with free capital flows, individual central banks, in their pursuit of maintaining the stability of their domestic economies, have the choice of either conducting an independent monetary policy or focusing on the exchange rate (i.e., maintaining a fixed exchange rate). Whatever choice individual central banks make for themselves, the effects of their policies do not necessarily add up globally to guarantee the stability of the global economy (Chart 9).
For example, if there are externalities to stabilization policies, such policies are likely to be synchronized across countries, which may amplify fluctuations in the world economy and destabilize the global financial system. The policy issues confronting central banks in this problem of “fallacy of composition” are probably more intractable than the trilemma described by Robert Mundell. Monetary policy in a globalized economy may also be affected by feedback loops in unexpected ways, since nationally granular foreign reserves policies (accumulation of precautionary reserves against capital flight) or national financial policies could amplify international capital flows or concentrate capital flows into economies with the laxest regulations. Such interactions between Mundell’s and Schoenmaker’s trilemmas would complicate the policy conundrum.
He says we shouldn’t say this time isn’t different and feel helpless:
“This time is different” has become synonymous with our follies. Nevertheless, we should not fall into the trap of defeatism. There are many things we can do to reduce the chances of another crisis. Although the bar is high for central banks in building up ideal and foolproof arrangements, we know that “even the longest journey begins with a single step” – a Japanese proverb equivalent to “Rome was not built in one day.” It is important to enhance coordination and cooperation among central banks and governments wherever possible, and such steps taken, however small, will enable us to eventually reach a goal that seems to be far away.
This trilemma thing is really interesting. Before crisis:
This choice was tested post-crisis.
Now if we include Rodrik’s political trilemma or Europe’s trilemma, capital mobility plays a central role. It will be an interesting exercise to have a more comprehensive understanding of capital flows and its role in both national and global economies..
Thanks to this super speech from BoI Governor Iganzio Visco, I came across this lecture from Amartya Sen. It was the inaugural Paolo Baffi lecture organised by Bank of Italy. It is a classic and should be made part of economics/finance reading list in college.
Prof Sen discuses what he does best – Philosophy. What is an absorbing read is linking it to ethics in finance. With much of finance in mess, this one helps connect critical on may ideas.
As PDF text cannot be extracted. Here are the key ideas:
Infact, most other Cato scholars do not even believe central banks can help deliver price stability. O’Driscoll atleast thinks they can but crticises them for failing to deliver price stability. The rest of the other functions/ideas on C-banks like lender of last resort, central banks must for market economies, central bank independence etc are just myths:
Social networks is quickly becoming an area of focus. The thinking and research on this has just begun.
Nemat Shafik, Deputy MD of IMF in this super speech discusses impact of social networks on policy in general and IMF thinking.
I would like to start by looking at the forces that shape the way we communicate today, before turning to what this means for institutions that are involved in shaping economic policy. I will end with a few examples that illustrate what these sweeping changes have meant in practice for the way we at the International Monetary Fund engage with our member countries to support economic reform.
She points how today’s hyper-connected world is shaking the way we communicated: