Overconfidence should be a part of every forecast/prescription

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:

Aslund was one of the strongest proponents of shock therapy, which he called ‘the only cure’ (1992a). He predicted that the Russian Gross Domestic Product (GDP) might drop by ‘at least 20 percent’ as a result of the therapy before taking off again (1992b),

 

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.

I think all such reports/prescriptions should now have a measure of over-confidence. High-time the field becomes more accoutable and humble.

 

 

 

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Assorted Links

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 raises stagflation concerns

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.

Understanding the rise in Crude Oil Prices

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.

Overconfidence is in human genes

The title of the post may suggest I have drifted to biology etc. But actually overconfidence is one of the central issues in behavioral economics.

The central idea is whenever you pose questions to people which is based on subjective probability, you will find people are really overconfident. For instance, suppose you ask all mutual fund managers how confident they are they will beat the benchmark index, you will get answers nearing 100%. And you know that can’t be true as only few fund managers will be able to do it. One can understand that their job is based on the assumption that they will be able to beat the index, but still they should be aware of reality as well

Now, one may ask how does this matter? Well, it matters as people take decisions based on overconfidence and mess up outcomes. For instance in the case of fund managers they will end up taking higher risks.

Coming back to the title of the post, you keep coming across these various television serials based on epics like Ramayana, Mahabharata on various TV channels. The versions are redone every now and then. Then there are separate serials on individual characters like Lord Krishna, Ravana etc.

I come across one common thing- all are so overcnfident about their abilities in physical strength and warfare. Most characters have received blessings from different Gods and based on these blessings, believe no one can harm them. Most are also aware that there is one thing that can cause their/them death/harm but discount its happening substantially (black-swan anyone!!).

So, I would guess overconfidence is in our genes and will continue to muddle our decision making.

PS.

I misssed pointing to some research on overconfidence. There is plenty:

• This paper discusses overconfidence in details
• Overconfident CEOs
• Overcofidence in spreadsheets
• Economists themselves are overonfident!!

The sudden flip of Indian economy trackers

I have been noticing recently that many economists/analysts have suddenly flipped their arguments. Just till April Monetary Policy 2008 many said RBI should cut interest rates as economy is slowing and inflation is moderating. Another group said the only way RBI can manage inflation is by letting rupee appreciate.

And now, same people are backing RBI’s recent interest rate moves to manage inflation and say growth can take a backseat.  Though, they keep stressing on the role of exchange rate.

They might say times have changed but I don’t think they have changed as much. And anyways economists look at forecasts and they suggested inflation is expected to go up. The prices of commodities and oil have been increasing for a while and they had to show in the inflation numbers. The few numbers that showed moderation in inflation was basically a statistical exercise and the index was never really declining.

As, far as moderating growth is concerned it was only the industrial sector. But it is well known that the IIP index is due for renovation as it does not reflect the reality. And then looking at housing prices and demand for various consumption items increasing (as per media coverage) , it was a case for high growth, high demand  and high inflation.

And then this media hype and coverage over possible slowdown is more worrisome than the actual numbers. I understand the concern over inflation but growth? Even if we grow at 7.5%-8% given world economic conditions, it is very impressive.  

PS

I was thinking about how can we limit all this flipping. A useful way could be to show on the channels what the person said previously. So, the person will be more conscious of his/her views. Right now it is just too random. I am not saying views shouldn’t change, but by showing their previous comments, they would then also explain the reasons.

This is already happening albeit in another way. You have various stock analysts who are supposed to disclose whether they have any of the stocks they are commenting on. This leads to some clarity and we know (hopefully) that they are not advising the stocks they own.

In a simialr manner, we can get more clarity on the recent flippings.

 

 

A review of India’s fiscal reforms and challenges ahead

Amidst all the economics and inflation chaos, Dr. Reddy gave a superb speech at NIPFP. Dr. Reddy takes you through the various challenges and how certain policies were developed.

It is great to see a Central bank governor to speak so forthright on the fiscal issues.

In the period subsequent to 2003, the central government’s fiscal position has been improving, though there are several underlying fiscal pressures that are not entirely evident in the numbers, as will be explained later. The states’ fiscal positions have also improved significantly during this period and their revenue deficits are close to being virtually eliminated. However, as in the case of the Centre, there are some underlying pressures that are not reflected in the fiscal numbers of the States.

Despite considerable improvement in the fiscal scenario, both at the centre and in the states, India’s combined fiscal deficit (centre and state), as a percentage of GDP, still continues to be one of the highest in the world.

He then covers how various fiscal reforms were introduced. He then reviews challenges ahead:

• reduce the CRR and the SLR stipulations, as we go along
• an issue that has come to the fore in the recent period pertains to higher volatility in government’s cash balances maintained with the RBI, which impacts the liquidity conditions in the financial markets
• magnitude of the combined fiscal deficit of the centre and the states is close to half of the households’ financial savings, which is the largest component of domestic savings. 
• India is still a bank-dominated system and about 70 per cent of our banks (in terms of business) are owned by the government. So for mon policy to work effectively it has to be in sync with fiscal policy. The single largest source of borrowing for the government being the government-owned banks themselves, this conflict is rather apparent
• one of the factors imparting rigidity to the interest rate structure in India is the administered interest rates, particularly on small savings instruments
• effective co-ordination between the fiscal policy and monetary policy is important.  a more aggregate level, in the context of our capacity to respond to global developments, if we have a counter-cyclical policy approach, not only the monetary policy but also the fiscal policy should be counter-cyclical. If the fiscal policy continues to be uni-directional, as we have in our case, with persisting deficits, then the fiscal policy is not in a position to produce a reasonable counter-cyclical impact

He then discusses fiscal policy and its relation with financial markets and external sector.

Nice speech.

Assorted Links

1. WSJ Blog points Is Kohn looking to outsource inflation management fight?

2. MR points to a blog written by eco superstars-Gary Becker, Ed Glaeser, Richard Posner, Bill Easterly etc. Another blog in the reading kitty!

3. ISB points infra deficit could derail India growth. This has been known since ages. There are two puzzles – why India keeps growing  despite all the policy issues and two, why nothing dramatic happens in infra.

4. TTR points recent concerns over growth outlook is a media-hype. Even I think so with every news channel going berserk over it.

5. Blattman points to a paper asking does professor quality matter?

6. WSJ Blog points to a study which says big govt does not mean more inflation

7. Mankiw at his humorous best

8. James Hamilton once again on speculation

Are Monetary policy institutions converging?

I had asked earlier it will be interesting to see how institutional frameworks in monetary policy  shape up. My hypothesis was though the objective was single- price stability, the way various central banks manage it (their institutional structure) differs widely.

I had pointedto a William White paper on the subject who makes a broad comment confirming my hypothesis.

This recent paper by Corrine Ho of BIS looks at the hypothesis more specifically:

Just as monetary policy at the strategic level has undergone significant changes over the years, so has its day-to-day implementation. This paper documents the key features of 17 central banks’ monetary operating frameworks as of early 2007 and discusses their major developments over the preceding decade. It finds that while some common themes and practices can be identified, there is no unique “best” way to implement monetary policy. Moreover, central banks everywhere – even in industrial economies – have continued to refine their operating frameworks and procedures and to innovate where necessary, responding to changing needs in changing times.

So, like I said there is no one unique way.  The paper is a very good overview of the way various central banks manage their monetary policy.

I liked the way they differentiate certain banks interest rate target- Some Central Banks just give their stance and make changes using a market determined rates like Fed. Others use own rates to signal a rate change like RBI.

Apart from this, a very useful paper to understand various monetary policy frameworks and underlying institutions.

US was discovered because of speculation

I came across this interesting noteon speculative bubbles from  Kevin J. Lansing of San Francisco Fed. The note discusses some historical links between speculative bubbles, technological innovation, and capital misallocation.

What caught my eye was this para in the end:

Regarding the merits of speculation, Meeker (1922, p. 419), the economist of the New York Stock Exchange, wrote: “Of all the peoples in history, the American people can least afford to condemn speculation….The discovery of America was made possible by a loan based on the collateral of Queen Isabella’s crown jewels, and at interest, beside which even the call rates of 1919-1920 look coy and bashful. Financing an unknown foreigner to sail the unknown deep in three cockleshell boats in the hope of discovering a mythical Zipangu [land of gold] cannot, by the widest exercise of language, be called a ‘conservative investment.'”

(Note: Wikipedia entry provides more details on Queen Isabella)

So, US was discovered because of speculation. Not bad!

Assorted Links

1. WSJ Blog points to economist’s reaction on the Fed pause. Fisher was the lone dissenter this time

2. WSJ Blog points that we need to include soybeans which are used for biodiesel when we talk about impact of bio-fuel

3. Ajay Shah on recent RBI monetary measures

4. ICB points to impending FCCB mess in India. I am wondering what are their advisers who helped them raise these bonds are saying on this issue.

5. This time Cowen visits speculation. James Hamilton also ponders

6. Rodrik says how do we tame financial globalisation

7. PSD Blog points to the latest Transparency International report which focuses on corruption in water

RBI tightens rates further to curb inflation

RBI raised its rates further in wake of rising inflation. It has taken two rate actions:

1. Repo rate increased from 8.00% to 8.50%.

2. CRR increased by 50 bps from 8.25% to 8.75% in 2 stages. From July 5, 2008 – 8.50% and from July 19, 2008 – 8.75%

 The inflation scenario:

	2008	2007
WPI	11.05	4.28
WPI minus fuel	9.61	5.92
WPI minus fuel and food	10.33	6.33
CPI-Industrial Workers	7.81	6.67
CPI-Urban non manual employees	6.99	7.74
CPI-Agricultural Labour	9.11	8.22
CPI-Rural labour	8.84	7.9

(Note: The period of inflation figures differs, See the press release.

The surprsing part is prices have increased substanbtially at wholesale level but at consumer level, not as dframatic.  This could have been true if prices were not being passed to the consumers. The companies might not do so as they may be wary of competition. However, this is not true as most prices are being passed on to the consumers. Some companies have not raised prices but have lowered quantity  offered for the same pricew. The net effect is same- higher spend by consumers for one unit of input. So clearly, it is not being reflected properly in consumer preice indices.

As I have said on numerous counts, Consumer price index has to be revamped urgently. However, it is not asn easy task, Dr. Pronab Sen’s (Chief Chief Statistician of India) recent interviews indicate (see this).

RBI points all indicators of money supply have been growing at a much faster rate than indicated:

	2008	2007	Target
M3	21.4	21	16.5-17.0
Reserve Money	28.5	24.6
Deposits	23.2		17
Non-food credit	26.2		20

(Note: Target as per Annual Monetary Policy 2008-09)

I don’t know what is this talk of slowdown in growth. All the money numbers indicate high growth.

I also checked 1995 interest rates as at that time inflation had touched 11%. We have surely matured as interest rates (lending, deposit, G-sec yields) were much higher then. So, despite the similar kinds of inflation numbers, interest rates haven’t touched similar levels. But again, that is not a point of comfort as we know markets can always surprise you. So, expect more actions if inflation doesn’t come down.

PS.
Finance Ministry has also issued a statement on the repo rate hike trying to calm the conditions.  

Assorted Links

1. WSJ Blog points to its expectations in ongoing FOMC meeting

2. WSJ Blog points to an OECD study which says foreign investments are going to shrink.

3. Nudges has a fantastic post on how framing can help increase fuel efficiency.

4. Krugman revisits speculation. He also has written a short paper on the subject. Meanwhile, Arnold Kling says Krugman mis-speaks. Mankiw also points to some articles

5. Ajay Shah on capital controls

6. Blattman points people are lamenting that the brightest only end up in financial services. Finally someone is talking.

7. PSD Blog points rich are getting richer.

Who is the happiest economist?

I came to know of this paper from Tyler Cowen (where else but Marginal Revolution). It was originally pointed by Will Willkinson and has been discussed at Economist blog as well.

The paper is from three economists – Benno Torgler, Nemanja Antić and Uwe Dulleck. They take pictures of 12 economists ( 4 nobel winners, 4 top and 4 happiness researchers) and show them to the sample asking them:

“Taking all things together, would you say this person is: (1) very happy, (2) quite happy, (3) not very happy, (4) not at all happy?”

They then take the profile of the samplers to understand who is happier and popular among certain categories. Findings:

The advice for young academics is: if you seek happiness, become a macro-economist and research happiness; a Nobel Prize does not make you happier; if you want to be popular with the ladies, take lessons from Edmund Phelps, Bruno Frey and Richard Easterlin; if you are looking for the ability to age like a red wine, Joseph Stiglitz and Jean Tirole have the trick, but not Richard Easterlin.

I think this paper will be most liked by Ned Phelps. Though he has produced papers which have changed the way we understand macroeconomics, he might consider this one as tops. Read this fun paper for more details.

Meanwhile Krugman (he is profiled in the survey as a top economist) cries foul saying his picture is not correct and he is as happy as others.

RBI says Credit derivatives will have to wait

On 19 June 2008, RBI issued a press release saying credit derivatives will have to wait: (This was covered widely in media as well)

in view of certain adverse developments witnessed in different international financial markets, particularly the credit markets, resulting in considerable volatility in the recent past, such as mounting losses suffered by banks on account of sub-prime crisis, need for the central banks of those countries to inject liquidity into the system, as also the level of risk management systems and possible non-adherence to the regulatory guidelines on complex products such as credit derivatives, time is not considered opportune to introduce the credit derivatives in India, for the present.

I have been hinting all along the problems wth credit derivatives market (see few possts here). I also did some research on the most popular Credit derivative- Credit default swaps. The CDS market has expanded substantially with most trades in – multi-name , non-rated and longer term swaps. All these indicate increasing complexity. A simple CDS is difficult to price as it is based on probability of default (probability is not certainty) and with more complexity we never know what is going on. Just throw the model in the system and it gives you a price. And we know how these models are. The summary – increasing complexity.

The developed economies’ Central banks just saved another crisis. By intervening they didn’t let the financial firms collapse and no calls for honoring the CDS were made. If they were made, we would have seen another crisis.

I am sure this would have not made the “modern finance people” one bit happy.  No one doubts the usefulness, but we should realise all is not well with these derivative markets. Hardly anybody uses them for hedging and mostly it is used to earn premiums. And moreover, top financial firms have been seen to trade them with each other leading to large concentration risks. So, if one defaults, we really do not know how it will be settled.

This Mint article (from Mobis Philipose) suggests why not have exchange traded credit derivatives instead?  In my report I also mention that credit derivatives are an OTC product and not exchange traded. This is a good idea but somehow exchange traded derivatives have not picked up except for equities. Most of the other derivatives like interest rate, currency etc continues to flourish as OTC markets.

Hopefully, after this crisis we would see development of more exchange traded markets in these financial products as well.

Assorted Links

In case you need to assess US housing developments in the whole year, WSJ Blog points to Harvard University report

Krugman says if anyone mentions speculation again as one of the factors for the oil rise……

WSJ Blog points to a paper which suggest giving lottery tickets leads to more blood donation. It points to another paper which suggests don’t trust Mutual fund managers under 35

TTR points to an Indian reality

IDB says microfinance firms should also offer saving products.

IEB points to rising inflation in Asian economies.

ISB pointsto reasons for BMC failure in every monsoon

Nudges points to a paper testing human patience. It also pointsto how beh eco is impacting UK public policy

PSD Blog points offering private health insurance is going to be profitable

Central Bankers play test-match cricket under trying conditions

I was reading this piece from Tamal Bandyopadhyay:

In cricketing parlance, this is a not a dream pitch to bat on. With the inflation rate at a 13-year high, capital flows drying up and the rupee weakening against the dollar, the job of India’s chief money manager is not going to be easy.

It just struck me. When is it easy? Just a few months back we could reverse this entire thing with the same end

With the inflation rate expected to rise, capital flows rising, the rupee appreciating against the dollar and the economy moderating, the job of India’s chief money manager….

It is still not easy.

Though it was being felt that Central Banker’s job is not exciting and Mervyn King even remarked it as boring. Obviously all this was in backdrop of the Great Moderation when Central bankers felt that lower volatility in output and inflation was here to stay and central banks had little more to do.

We now know all this was nothing but true and Great Moderation is followed by Great Disruption with heightened volatility in output, inflation, financial markets etc. You name it and we have it.

I have a different analogy for Central banks and Cricket. The Central banks play a test-match in trying conditions – on slow turning wickets (Sub-continent, West Indies) where ball stays low and starts turning viciously on 4th/5th day, or in England where the ball swings substantially, or on pacy wickets like those in South Africa, Australia (Perth). First situation is Great Moderation, second and third are like today’s times where swing and pace conditions can unsettle both the sides. Those Central Bankers and Cricketers which can play under all conditions are dubbed as great/benchmarks/ideal, rest are simply known as players.

So far few Central Banks/Bankers were considered as greats, but as they moved from sub-continent to Australia their technique is being questioned. 🙂

Time for some Bogleisms

I have been a big fan of John Bogle as he shows the other side of developments in financial markets (read my earlier post here). He shows how costly and greedy this sector has become. His recent speech is on similar lines but looks at the recent buzzword- speculation.

He actually calls it a triumph of speculation over investment.

We’ll begin by talking about the difference between investment and speculation. Investing, to me, is all about the long-term ownership of businesses, focused on the gradual accretion in intrinsic value that is derived from the ability of our corporations to produce the goods and services…..

Speculation is just the opposite. It represents the short-term—not long-term—holding of instruments—not business—focused (usually) on the belief that their prices—as distinct from intrinsic values—will rise

Over a long-term you should expect both returns to be identical. But we don’t see that happening as we have transaction costs. Hence, speculation will give lower returns than investments. So, we should expect people to invest their monies as an investment, and investment strategies to gain over speculation. However, we see the opposite:

 Consider that during most of my first 15 years in this industry (through about 1966), it was not that way. Fund turnover averaged about 16 percent per year—let’s call that “investing,” a six-year average holding period—and never varied significantly from that norm. But turnover moved steadily upward, and in the past decade, has averaged nearly 100 percent per year—let’s call that “speculation,” a one-year average holding period—exactly the opposite of my expectations when I joined this industry all those years ago.

Actually, Bogle assumes people are rational and invest over a long-term. But actually people are irrational and moreover predictably irrational.  People usually look to others and rely on professional advice, advertisements etc for investing.  The speculation has increased on both the sides- investors (demand) and financial firms (supply). Former speculate as they see better returns in some fund/stock (which have been achieved in the past) and latter to earn some extra return (alpha) to justify their fees, jobs etc.

However, all this shows doesn’t mean Bogle’s concern is overstated, but actually it is understated. If people are irrational , financial sector has to become  more responsible while selling the various products and services. There are huge costs and he should be aware of the returns ex-costs. In the last section Bogle touches on these aspects and questions the various financial innovations which in his words

The incredible rise—and fall—of so many derivative instruments in the present era should raise a red flag of caution regarding the value of financial innovation to investors. The flood of complexity—and its attendant high costs—seems to have overwhelmed simplicity—with its attendant low costs. One example: Collateralized debt obligation (CDOs) have wreaked havoc among our commercial banks and our investment banks, and credit default swaps (CDS) now total an astonishing $600 trillion—speculative derivatives of credit instruments that themselves total less than $20 trillion—an amount of speculation 25 times (!) that modest amount of (risky) underlying investment. We know almost nothing about the counterparties to this boatload of CDS that embody the excesses of our financial system—innovation designed to benefit those who create these instruments rather than those who own them.

(Emphasis is mine)

Another very good speech from Bogle. Worth a read.

Ending the post with his wonderful story:

There’s a wonderful story about an investment banker addressing his colleagues: “the bad news is that we’ve lost an enormous amount of money. The good news is that none of its ours.

🙂

Assorted Links

1. WSJ Blog points Malcolm Knight leaves BIS for Deutsche Bank. I will miss his speeches for sure.

2. Nudges has a superb post on the endowment effect involving Thaler

3. TTR points it is lucrative times for financial journalists

4. IDB points to some subprime lessons for microfin

5. MR points to a Calvo article that blames SWF as a facot rising commodity prices. Krugman diasgrees with Calvo view and says:.

On a happier note, it’s great to see top-flight economists weighing in on the crucial issues of the day. It’s kind of like the Asian financial crisis of 1997-1998, which was bad for the world but a sort of golden age for policy-relevant theory

6. Krugman also points to a study which says oil prices might reduce trade

7. DB Blog points to some mighty books that stirred excitement in development

Inflation at 11.05%, highest since 1995

Inflation based on WPI touched 11.05%, as per week ended 7 June 2008. This is the highest inflation since 6 May 1995. Infact, on doing further analysis, from 1995-2008, there have been 9 instances when inflation has been above 10% and 3 instances above 11% and all these are noted in April/May 1995.  

So, it is as high as that. Inflation has been surging worldwide and India is no different. However, unlike other countries India’s case is better. With developed countries, we are seeing high inflation and falling growth and it puts policymakers into a problem.  India has high growth (9%) and high inflation. This leads to easier choice for the policymakers as they need to focus on inflation. Growth would moderate, but it has to be accepted. Inflation impacts all, growth doesn’t impact all. 

The policymakers need to focus on inflation and is going to be the utmost priority.