Archive for February 18th, 2008

Mishkin explains the various monetary policy tools

February 18, 2008

Mishkin in his recent speech explains the various monetary policy tools at Fed’s disposal in case of financial disruptions.

There are three tools for supporting liquidity in the system and one for the macroeconomic risks.

The 3 tools for liquidity are:
1. Open Market Operations
2. Overnight lending through the discount window
3. The new Term Auction Facility

The tool for macroeconomic risk is:
Changing the federal funds rate target to respond to macroeconomic risk.

It is a nice speech explaining the difference between each tool and the way they are used. I however, don’t really agree to this macroeconomic risk version of Mishkin. I had argued earlieras well that this differentiation between valuation risk and macroeconomic risk is nothing but retorting to jargons. 

A conference on Great Moderation

February 18, 2008

San Fransisco Fed organised a conference on Great Moderation. The conference is titled as Recent Trends In Economic Volatility: Sources And Implications” and has some exciting papers on the subject. 

The summary of the conference is here. The conclusion of the broad findings is:

While there is broad agreement that aggregate economic volatility has declined over the last 25 years, the relative roles of economywide factors, such as changes in monetary policy and technological change, remain topics of dispute. Also in dispute is the extent to which this decline in aggregate volatility is mirrored in microeconomic variables, such as income and employment. Reductions in aggregate and firm-level volatility do not necessarily translate into a reduction in volatility at the individual level. Rather, some studies argue that household consumption and individual earnings have become more volatile in recent decades, not less. The linkages between the disparate trends in volatility at the aggregate level and at the individual level remain important areas of economic research.

Using Behavioral economics to influence policy

February 18, 2008

I have been posting quite regularly on this subject of using findings of BE/BF for public policy. Like this one on using BE for regulation, poverty and monetary policy.

I came across this superb paper on the same from 11 co-authors. The authors are frustrated as so far BE has not influenced policy as much:

The failure of psychology and behavioral economics to influence public policy is particularly painful and frustrating in light of the success of its sibling, economics, as the basis for policy recommendations. It is not that economics has nothing to offer policy – economics indeed provides policy-makers with vital tools. Rather, the success of economics clearly demonstrates that policy-makers are looking to academic fields for guidance in setting their policies, and given this general willingness to accept advice, it is unfortunate that behavioral scientists are not providing their own perspectives.

The authors look forward to answering three questions in this paper:

1) What kind of behavioral science is important for policy?
2) What are some possible directions for behavioral policy research?
3) What are some possible approaches to get policy-makers to listen to behavioral scientists.

They say it is a different thing to practice BE as in academics and altogether different to apply it in policies. The main problem is much of findings of BE depends on the situation. A person may respond to an incentive completely differently depending upon the situation.  So, how do you make a policy which addresses all those changes.

They suggest Beh economists need to become experts in areas (like savings, poverty etc) so that they can capture those changes while applying to policy.

They suggest the principles should be applied first in areas where there will be little changes and benefits can be realised immediately. Then BE principles should be used to improve existing policy where the benefits have been well documented like increase in savings etc.

Then the main point- how do you make policymakers listen to you? They suggest start small and first work with communities and showcase the results and then move up. Working small has its advantages as stakes are lower and changes can be made much quicker.

Read the paper for further details.

Assorted Links

February 18, 2008

1. Recession fears loom but economic indicators are still veruy much mixed. Econbrowser has a nice analysis

2. Ajay Shah pointsto SEBI’s tasks ahead. He also says things not looking good on fiscal front. He also continues pressing for a rate cut now.

3. WSJ Blog points to a CBO update which revises its GDP estimates for 2008 upwards from 1.7% to 1.9%. Reason: monetary and fiscal policy push. Econbrowser also covers the same

4. Krugman on the macroeconomic problem in US.

5. Mankiw points to a new article which says fiscal stimulus is like giving a drink to an alcoholic. ……Well, so is the recent interest rate cuts. I don’t see how the two are different.

6. EPSA Blog pointsto a new India book by Arvind Panagriya.

7. WSJ Blog points to a new paper on Great Depression. It is amazing how much research is still done on this subject.

8. JRV comparesSEBI and SEC XBRL tools.

9. TTR commentson NISM- SEBI promoted institute on securities markets.

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