I wrote a paper understating inflation expectations and the recent trends in the expectations. Needless to say, inflation expectations have been rising everywhere.

However, this still continues to remain a mystery - Does inflation expectations lead to inflation or is it vice-versa? There is wide amount of literature which is inconclusive.

Let me know your comments

1. WSJ Blog points watchout for companies that have superstar CEOs. It also points to Fedspeak- Mishkin

2. WSJ Blog points GDP helps predict Olympic winners

3. JRV on SEC’s proposal on credit rating agencies

4. ICL points to a new website on takeover code

5. FIn Clip Blog on finance salaries

6. Econbrowser points rising oil prices are leading to lower demand for vehicles in US.

I always like the way Reserve Bank of New Zealand writes its statements, speeches, articles etc. They just have too much clarity and are written with utmost simplicity.

I came across this note by by Leni Hunter on the relationship between monetary and financial stability. It is an excellent note on how central banks should manage both the goals in a consistent way.

Highly recommended.

PS. I also gave this issue a thought here

Mostly Economics Blog has gone from one place to the other. From being included in top rankings of economics blogs, it has now become a member of Forbes network of Business and Finance Blogs. I have added more details on this page.

Mint ( the business newspaper) is easily one of the most exciting things to look forward to every morning. It has a fantastic coverage of daily news, great edit pieces and above all - all is in a very easy readable format.

It recently put up this survey asking media barons whether they would like more FDI in their sector. Mint provides more light on the need for the survey:

The sharp limits on foreign direct investment (FDI) in Indian news media has always been a controversial issue. Back in 2002, India did relax its stringent laws to allow 100% FDI in non-news media but imposed a 26% cap on such investment in news ventures. Until now, it has been widely assumed that it is the Indian government that is unwilling to relax FDI norms in news businesses despite media owners wanting more foreign investors….’

But, on her last day as India’s information and broadcasting secretary, Asha Swarup told Mint (www.livemint.com/swarup) that the government is not likely to raise the ceiling on FDI in news media because “there has been no real demand from the industry to raise the FDI cap in the sector”, adding: “We have all along said that we will be happy to take any step to facilitate the growth of the industry but the industry hasn’t demanded it.”

The survey had 12 major media barons. The results are:

6- in favour of FDI
4- not in favour
2- not known

Why I posted this development? Well, we often come across in most business newspapers commentaries from various people that India should open up its various sectors to foreign investment. You hardly come across articles which suggest otherwise. You might come across articles which say trade isn’t as beneficial but overall Milton Friedman wins hands down as far as views in newspapers are concerned.

So, it is always interesting to know how the media itself feels about opening up of its sector. Out of 12, 4 are not in favor. What I found more interesting was that out of those 4, one is a leading propounder of free markets/foreign investment  theory! I don’t remember reading one article in the paper which goes the other way for a long long time. Even if the media baron was giving his views, still it says a lot. I even found the reasoning absurd (atleast by its own standards).

Someone told me a while back, it is fashionable to talk about competition etc as long as it does not affect your own sector. I see it working somewhat in media as well.

1. WSJ Blog points Paulson discusses currencies with Trichet. It also points Bill Poole will advise a mutual fund company

2. Mankiw points to a Larry Summers’ article

3. Fin Rounds points to a paper on investor sentiment and stock returns

4. Lusardi summarises her work on financial education

5. PSD Blog points to a solution to manage inflation - let currencies float

6. DB Blog points why foreign investors get a bad name?

I had earlier pointed overconfidence seems to be in our genes. I had also referred to a paper by Erik Angner in the same post, which said economists are overconfident. On reading the paper, I found it so true. Though, it is in our genes, it is nice to see papers to understand how overconfidence affects each specie-type and this one looks at economists. (Infact, the paper also shows overconfidence being common in doctors, lawyers, physicists etc)

The paper actually focuses on a Swede Economist - Anders Aslundwho was the main advisor to Russian Government in 1991 which had embarked on a path to reforms. Aslund’s suggestions were:

but he promised that the therapy would work fast (1993a), and have positive social consequences

However, reality was different:

According to official World Bank statistics, Russia’s GDP in constant 1995 US dollars dropped by almost 40 percent between 1991 and 1998  This is twice Aslund’s estimate. Though GDP increased between 1998 and 2003, the last date of available World Bank statistics at the time of writing, GDP remains more than 16% below the 1991 level.

Similarly, Aslund’s predictions about the positive effects of shock therapy do not appear borne out by subsequent events. For example, between 1991 and 1994 life expectancy in Russia dropped by as much as 4.7 years (6.2 years for men). Though the numbers have since picked up, the last available figure is still a full three years below that of 1991.

In sum, the confidence Aslund expressed in the truth of his judgments may well have exceeded their accuracy.

Moreover, Aslund was not happy with the reality so he devised his own measure of GDP and criticised the policymakers.

The author takes caution and says Aslund’s case is not a one-off case and points to statments by Jagdish Bhagwati, Stiglitz who criticised the development experts on similar grounds. Stiglitz said:

IMF experts believe they are brighter, more educated, and less politically motivated than the economists in the countries they visit. In fact, the economic leaders from those countries are pretty good – in many cases brighter or better-educated than the IMF staff, which frequently consists of third-rank students from first-rate universities.

He says economists are overconfident on such policy matters as these tasks like transition etc are in highly uncertain times and economists have to be confident of their advice.  And why don’t they correct their prognosis with time?

• First, they don’t receive adequate feedback as there is hardly a proper statistics system in these countries which says what is working .
• ]Second, we exaggerate the predictability of past events.
• There are no noticeable penalties on economists for expressing overconfidence. So, it continues.
• Selection bias- as economists are over-represented in a committee , the overall prescription is on similar lines. Moreover, confidence is mistaken for competence. so we usually have overconfidence all over the place

Consequences of overconfident policies are well known- misguided policies. Further, as forecasts and prescriptions fail economists advice is discounted or ignored. This gives the entire economics field a bad name.

He also says, this does not imply we don’t need economists (thank god) but we have to devise ways to limit overconfidence.  First, economists need to be made more accountable and should also predict how likely is it that this forecast doesn’t happen. Specific questions need to be asked on what is it that their performance has to be assessed (for e.g which measure of GDP, inflation??). Second, we need to keep official scores of either same economist or similar such predictions. I liked this line:

If you are a baseball player, you have to live with your batting average until the day that you die. If you are an economist, you can advice the government of Russia for years without being forced to critically examine your hit rate. In spite of the many practical problems associated with the proposal, there is no in principle reason why economics should be different from baseball in this regard.

This is an excellent paper and an answer to many a problems in economics. I had pointed earlier that Indian economy trackers are flipping  forecasts by every second and there is no accountability. My suggestions were also similar- track their score and if they have deviated from previous forecast ask for reasons.

I have analysed forecast experience in India, covered Fed experiences, Riksbank experience and see a lot of deviations from the actual. The best in the business find it difficult but still, the forecasting business continues with aplomb without any fear (of poor performance). The people simply move from one forecast to another, one prescription to another. The forecasts should include the above suggestions to  help people understand it is uncertain. Another area where you see overconfidence is the various 10 steps to boom reports.

1. WSJ Blog has a profile of the new Fed board nominee- Liz Duke

2. WSJ Blog points consumer sentiment is a helpful predictor

3. MR on what else- speculation

4. TTR pointsto governance issue at Ranbaxy

5. Mankiw points to Bob Shiller article who says recent fiscal stimulus is not enough.

6. I discovered a blog from Annamaria Lusardi, a professor at Dartmouth who has done some superb work on fin literacy.

Malcolm Knight, General Manager of the BIS, is resigning and I will be surely missing his speeches.

In this recent speech he raises numerous concerns over ailing world economy. The abstract is:

Continued financial deleveraging and asset price declines, persistent tensions in interbank markets and substantial and involuntary increases in banks’ balance sheets suggest increased restraint of new credits for productive activity. Hence, current financial conditions present significant downside risks to economic growth in the United States and other advanced economies.

The easing of monetary policy undertaken in a number of key jurisdictions in recent months to address continuing stress in the financial system and the weakening growth outlook has been accompanied by increases in actual and expected price inflation at the global level.

Recent trading and price developments in the oil market can be viewed as consequence and indicator of the recent pronounced loosening of monetary conditions.

We thus might be entering a period of stagflation with sharply rising expected and actual inflation combined with large downside risks to growth and employment.

 Superb speech full of fantastic graphs (which is a BIS speciality) . In just 7 pages it says all you need to know about the current world economy conditions.

I have put my thoughts on the rising oil prices in this paper. It mainly looks like a demand-supply imbalance but other factors like speculation, conflicts etc cannot be ruled out.

The next area of analysis is- if it is a demand-supply imbalance then how much should the prices roughly be? That is still not answered properly. It is only then we can know whether other factors are as much responsible.

Let me know your comments.