Archive for January 23rd, 2008

Does institutional structure in economies converge?

January 23, 2008

I just came across this paper by Richard Freeman of Harvrd University which made me sit up. Well to say institutions are important is now a cliche and their importance is in all facets of economics. So whether you talk about financial system or health care, having the right kind of institutions is really important.

There is wide literature showing institutional structure matters and how each country’s institutions have shaped up. However, very few actually compare the institutions across countries. This paper does exactly that in the field of labor economics.

Ideally, we should be expecting institutions across countries to converge and become more similar to the one that is the most successful. However, the paper shows that difference in institutions persist in labor markets in OECD countries.

It also reminded me of another economics field where we see divergence- Central Banking. The mandate of most Central Banks is to target inflation and the way they do it, differs  across countries. The independence of central bank, making monetary policies for their economies etc. is quite different from each other. The basic mandate itself may differ with some like Fed having dual mandate and  some like Bank of England only managing inflation. Even within inflation targeting central banks, there is wide difference in the way they approach inflation targeting.

It could be a research worth attempting to see whether the institutions involved in monetary stability are converging or not.

Assorted Links

January 23, 2008

1. Fed in a really surprise move lowered both fed funds rate and discount rate by 75 bps (difference between the two is here). I juts don’t know what is really going on in US. Fed and policymakers are surely seeing something which we are not and it must be really scary for FOMC to take such a step. This time there was one dissent- Bill Poole and one absentee- Mishkin.

I can understand the dissent as Poole “did not believe that current conditions justified policy action before the regularly scheduled meeting next week. ” However, I can’t understand this absent and no voting business .

2. WSJ Blog on economists’ reactions.

3. Economist Blog summarises what few economists have to say

4. Econbrowser has its usual useful analysis. Infact there are two pieces of analysis one and two. The first one says:

I believe the FOMC cast its vote today with those who declare that a recession has already begun.

5. TTR believes brain-drain isn’t as big as it is made out to be.

6. Parag Parikh says it is greed that did the damage to the investors.

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