Archive for July, 2009

Oil Market in previous US recessions

July 23, 2009

Bank of Canada economists Olivier Gervais and Ilan Kolet have written a useful paper on oil cycles. It tells you about the oil markets in 1973 and 1979 oil shocks  and compares the trends with 2007 crisis. The charts are quite interesting. In 1979, the demand fell much sharper but prices have corrected much more in this crisis. Why should this be?

What is particularly interesting is the relation between current oil prices and investment levels. They say current depressed prices have led to lower production and lower incentives to undertake more investments in oil sector.

The dramatic reduction in global demand, and the decline in the spot price of crude oil in the second half of last year, may have significant implications for the future supply of oil. Investments in conventional methods of extraction have been constrained, since easily accessible oil reserves are typically concentrated in countries with geopolitical uncertainty and/or state-run oil companies. Moreover, nearly half of all global oil production, and roughly 75 per cent of proven reserves, are accounted for by the Organization of the Petroleum Exporting Countries (OPEC).

In this paper, the authors assess the implications of recent developments for the future supply of oil. They find that (i) the OPEC cuts announced in December 2008 could provide important support for prices in the coming year, and (ii) low prices have depressed, and may continue to depress, oil infrastructure investment, and thus could amplify existing supply constraints.

The conclusion is:

The recent drop in oil prices has already had an impact on investment in the oil sector. A growing number of investment projects are suffering from delays and cancellations. The weak investment outlook will likely result in further declines in non-OPEC oil production and could put upward pressure on prices. Furthermore, the magnitude of the recent OPEC supply cuts far exceeds the expected declines in oil demand in 2009, which suggests that the cuts are an explicit attempt to increase crude oil prices. At the end of the recession, global demand for oil is expected to increase, and non-OPEC investment projects may not have enough of an impact on the oil supply to offset robust demand. Even if the situation appears to resemble that of 1981, where oil prices remained low for a long period, we expect that the increase in emerging-market demand, coupled with the tepid supply response, could result in oil prices reaching $80–$100/bbl by 2011.

Hmmm. Only USD 80-100 by 2011. The way prices have risen it seems we will touch this range much sooner.

Interest Rate dilemma for Indian policymakers

July 22, 2009

My earlier paper looked at the dilemma mainly from a US perspective. The new paper looks at the dilemma from an Indian perspective.

Let me know of your comments.

Built up, super built up or plain loot?

July 22, 2009

This post is about the state of housing market in Mumbai and it is the third option right away. ME has been a big critique of the way housing market functions in Mumbai (and as others point out the trend is same in other places as well). It is  a market highly distorted towards the sellers and brokers with customers having no choice but to get looted as everyone wants to buy a house.

I had earlier pointed out to the economics of house in Mumbai. I thought things might improve after the ongoing crisis where realtors were the most effected. As the crisis situation has eased the builders show that they have not only refused to learn the lessons but have even decided to distort markets further.

Okthe main problem one sees in buying an apartment is this concept of built-up/super built-up (i call it plain loot). Under this, the builders say the flat size is say 1000 sq ft but is based on super built-up area. It means out of 1000 sq ft, you would get around 650 sq ft carpet area (if super built up is 35%) and rest 350 sq ft is for elevator, stairs, terrace, play-area etc. After all builders have incurred costs not just on apartment but other things as well and people should pay up for the remaining facilities as well.

Fair enough. But how much built-up? 25%, 35%, 45%?? How much?? It differs from building to building. You ask 2 sellers how much is the built-up and you get 3 different answers (and we just blame the economists and accountants for the same). What is worse is that when you see the final papers you realise the built up is much more than what you thought was already very high. When you protest, you are told if you are spending so much how does a little more matter? Some even say, if you think this way you will never be able to buy a apartment here!! Most want you to pay all the built-up minus carpet area difference in unaccounted money and we aren’t talking about a few thousands here.

The old buildings which perhaps had much lesser built-up, the sellers in the same expect same kind of charges. Why can’t we have some kind of standards across housing buildings?

When the crisis started, the realtors started crying hoarse that demand has fallen, they have high excess capacity, sources of funding have dried etc and need support. Large part of the media weer sympathetic to their cause saying they employ large number of people and should be supported. However, media also added prices were too high and need to be lowered. Some builders started lowering base prices but actually raised prices elsewhere (parking charges, increased built-up area, floor rise charge (every floor rise you pay some amount extra) etc etc). Some started offering discount but it was a % (5%-10%) which was available even before the crisis.

Now as the crisis has eased, the base prices have also started to rise and the recent advertisements show the builders are actually doing us a favor by offering flats at what they think is very low prices.

And this is not the lone factor.  If you delay your EMI, you are charged a penalty but the builders can continue to delay their projects without any penalty. Some may never even complete their projects. All you can do is do a court case against them andloose more money in process. The quality of the construction is never known. You don’t know whetherthe builder has got all approvals from the concerned authority. You don’t know whether the building is on legalised land? We don’t have a list of brokers in the market who are authorised to serve this market.  I mean you name it and we have issues with this housing market.

And despite all the issues, no one really talks about them. All we get to know is whether share price of some realty form has declined or risen.  We have seen how bad housing market is linked to the real economy in this crisis. It is time we sort out this mess.

The other issues may take time but we can surely do something about this built-up/super built-up issue. You keep hearing carpet area regulation has been passed (builders to sell on carpet area) but no one complies with it. Even if the builders are charging a built-up we need some standard %. Is it too much to ask for? It will be great if media also takes up this issue with fervour instead of just looking at share prices and landbanks.

Liz Warren defends CFPA and Bernanke defends Fed

July 22, 2009

Two good articles in the web today. One is a blogpost by Elizabeth Warren on her brainchild – Consumer Financial Protection Agency. She says there are 3 myths wrt CFPA and addresses each of them.

MYTH #1:  CFPA Will Limit Consumer Choice and Hinder Innovation
MYTH #2:  The CFPA Will Add Another Layer of Regulation and Increase Regulatory Burden
MYTH #3:  Prudential and Consumer Regulation Cannot Be Separated

Then there is a oped by Bernanke in WSJ on Fed’s exit strategy. He looks pretty confident of exiting from various programs.

Both are a good read on the highly debated issues of current times.


Pushing Financial Inclusion in India

July 21, 2009

Dr KC Chakraborty after becoming Deputy Gov  at RBI gives his first presentation on financial inclusion. It gives a good overview on the status and issues on fin inclusion in India. It has some useful tables which can help in writing papers on fin inclusion status in India.

A welcome change from ppts from central bankers on crisis, recessions, policy responses etc.

A look at Swiss National Bank’s Monetary Policy Framework

July 21, 2009

I find reading through various central bank frameworks pretty interesting. There is so much diversity in their operations but goal is the same. I was reading this paper on Swiss National bank’s Mon Pol framework:

The practice of monetary policy has evolved a great deal since the early 1990s. This evolution was significantly influenced by rapid developments in the theory of monetary policy. A new consensus about ‘principles-based’ monetary policy appears to be emerging. It marries a firm long-term anchor for nominal stability, rooted in the original ideas behind inflation targeting, with short-term flexibility, based on a more discretionary and pragmatic approach to monetary policy. The SNB’s monetary policy framework – with a firm nominal anchor but with an emphasis on the need for flexibility – reflects, to a considerable degree, the emerging academic consensus about best-practice monetary policy. With its successful seven-year track record, it may serve as an interesting case study for a policy aiming at an intermediate position between full discretion and rigidly defined short-term inflation targeting.

A good paper on SNB mon pol framework. It is advocated as principles based framework.

I know these papers don’t really matter anymore. This crisis has really whitewashed it all. No matter how advanced/sophisticated what your mon pol framework was, this crisis has found it wanting. Infact the central bank targeted before the crisis for having a poor framework has emerged as the best-placed. But still, people wanting to know more about SNB mon pol framework can take a look.

Decoupling, recoupling and all that

July 21, 2009

Michael Dooley and Michael Hutchison have written a nice paper on the decoupling-recoupling rehypothesis:

We find that emerging markets appeared to be somewhat insulated from developments in U.S. financial markets from early 2007 to summer 2008. From that point on, however, emerging markets responded very strongly to the deteriorating situation in the U.S. financial system and real economy. Policy measures taken in emerging markets to insulate themselves from global financial developments proved inadequate in the face of the credit crunch and decline in international trade that followed the Lehman bankruptcy in September 2008.

All this is well-known by now. But it is still a good read.

Understanding Fiscal Space

July 21, 2009

We keep saying India does not have fiscal space to continue to spend more. But what does it exactly mean? Peter Heller of IMF has written a paper to explain the same. He says:

A number of factors have provoked the question of whether “fiscal space” can be created, in the context of IMF-supported programs, for spending on investments and social programs that are perceived as particularly meritorious…….

Yet the concept of “fiscal space” remains fuzzy—the term is now frequently used in current policy debates but without clarity as to its meaning. In what follows, I will provide a definition of this term, including its linkage to the concept of fiscal sustainability; describe alternative ways in which fiscal space can be created; indicate what approaches do not create fiscal space; note how the IMF can support appropriate efforts to create fiscal space; and, finally, discuss the relationship between the concept of fiscal space and that of absorptive capacity.

Read the paper for details.

Crisis of Economic Thought

July 20, 2009

It is the title of my new paper (revised). Economist has a series of articles on the same – general one, macroeconomics, financial economics.

Markets and economies would recover at some point of time. Equity markets are already going berserk. This crisis is truly a crisis of economic thinking and so many hallowed ideas have just been shattered.

Interview of Nandan Nilekani

July 20, 2009

Knowledge at Wharton has a good interview of Nandan Nilekani. Great insights on India’s demography dividend (he says there are two curves of the dividend), inequality (we need to close the gap fast and dont have much time)), the barriers to India’s growth (lack of – Education, English and Roads), balance between markets and regulation, Satyam (it was a fraud and has not damaged Indian corporate image) etc etc.

The best part is why he wrote the book on India:

India Knowledge@Wharton:Normally when corporate CEOs write books, they tend to write either about their biggest deals or about their perspective on management theory or philosophy. You wrote a book about India. Why?

Nandan Nilekani:Well, you know, I wanted to do something different. My role in the last several years has been going around the world and projecting India in global forums and all that, and I was not able to answer a lot of questions that people would ask me. They would ask me, “Why is it that you have such beautiful campuses like Infosys and such large slums? Why is it that there are so many billionaires and so many poor people? Why is it that you have all the educated people in technology and the world’s largest illiterate population? Why is it that you guys seem to coexist in the 17th Century and the 21st Century at the same time?” When asked questions like these, I was not able to give very convincing answers, so I felt the need to get down to the bottom of, “Why are we the way we are?”

The other important thing, I felt, was that India had a very small window of opportunity. It had this huge demographic dividend and this young population, but that demographic dividend could well become a demographic disaster if we did not make the right investments in our human capital. I felt that window of opportunity was passing by, so I thought it would be good to write it down and say, “Hey guys, we have this beautiful opportunity, let us not mess [it up].”

Also I found that a lot books on India were written from a particular perspective, an economist’s view or a sociologist’s view. I felt that to really give India its due you had to take a much more holistic look at it — which is why I looked at the country from all these angles. I interviewed 126 people, and it is a sort of a composite of all that.

India- a place full of contradictions.

Rethinking on Inflation targeting framework

July 20, 2009

Adam Posenone of the leading thinkers on Inflation Targeting (and host of other eco topics) has given a must read interview on ITF.

When did the theoretical work begin on inflation targeting specifically?

A. The theoretical work was done almost contemporaneously with the practical work. That was what was so interesting. The theoretical work on inflation targeting was led by Lars Svensson, who used to teach at Princeton and is now the deputy governor of the Swedish Central Bank, and Carl Walsh, who teaches at the University of California–Santa Cruz. The theoretical work all came out in the late 1980s, early 1990s, and the first actual inflation targeter was the Reserve Bank of New Zealand in 1989, followed by the Bank of Canada in 1991 and then the Bank of England in 1992. So it all took place in a very short period of time.


Central Banking in Asian economies

July 17, 2009

I had pointed about this conferenceearlier. I was reading one of the papers presented by Andrew Filardo (of BIS) and Hans Genberg of HKMA. It says:

Central banks in Asia and the Pacific have overwhelmingly chosen inflation as the principal objective of monetary policy. Some central banks, but not all, have declared themselves to be inflation targeters, while others pursue their objective without referring to this particular label. Moreover, whether or not they refer to their strategy as inflation targeting, central banks in the region have chosen diverse approaches to achieving their inflation targets: for example with respect to how explicit the target is, the choice of inflation indicator, and the choice of instrument. All this suggests that the region is a good sample with which to examine the lessons from the experiences of central banks that have adopted formal inflation targeting and those with more eclectic approaches to targeting inflation.


A re-look at Industrial policy

July 17, 2009

I had mentioned about these 2 papers on Industrial Policy in my previous post. I finished reading them and are a must read for anybody interested in Growth economics.

The paper by Ha-Joon Chang is a reminder that industrial policy is not just about East Asian and South East Asian economies. It has been followed and implemented by other developed economies as well. And yes, there are both failures and successes with industrial policy. Instead of fighting over whether it works or not, we need to have a more constructive discussion on the same.

The other paper by James  Robinson says :

I make five main arguments. First, from a theoretical point of view there are good grounds for believing that industrial policy can play an important role in promoting development. Second, there certainly are examples where industrial policy has played this role. Third, for every such example there are others where industrial policy has been a failure and may even have impeded development (though the counter-factual is complicated). Fourth, the difference between these second and third cases rests in the politics of policy. Industrial policy has been successful when those with political power who have implemented the policy have either themselves directly wished for industrialization to succeed, or been forced to act in this way by the incentives generated by political institutions.

My fifth point, which is derivative from the first four, is that economists and international institutions have to change the way they think about “industrial policy”. To really promote industrialization in a society we need a positive theory of the political equilibrium of that society which leads to particular policy choices. To give policy advice that would foster industry, one has to understand this political equilibrium and either attempt to change it or work within the environment it generates. This is a very different way of thinking about what industrial policy means.

Unfortunately, as things stand, while we have a good normative theory of industrial policy we have a woefully inadequate positive theory which can help explain why industrial policy was adopted and apparently so successful in Taiwan, for example, and such a disaster in Ghana. It is towards building such a theory that research should focus and without it I argue that advocating industrial policy in the traditional sense as a solution to poor countries’ problems involves a quite large leap of faith.

Both papers are excellent, rich with country examples. Makes you rethink about industrial policy.

Has globalisation made inflation forecasting difficult?

July 16, 2009

Mark A. Wynne and Patrick Roy of Dallas Fed have written a short paper on this subject.

Their findings:

The structural change that poses a perennial challenge to forecasters has been turbocharged with the integration of China, India and other emerging giants into the global economy. We asked whether this surge in globalization over the past two decades has made it more difficult to forecast inflation.

We addressed the question from two angles. First, we looked for evidence of deterioration in our ability to forecast inflation as countries have become more integrated with each other. Second, we looked for evidence that forecast errors were greater on average in countries that rank higher on conventional globalization indicators.

U.S. inflation does appear to have become more difficult to forecast as we moved from the 1990s to the 2000s; however, the opposite seems true in almost every other country we looked at. Our prior belief, based on U.S. experience, that globalization has made inflation harder to forecast doesn’t appear to be borne out.

Nevertheless, we do find some evidence of greater difficulty in forecasting inflation in economies that are more open to international developments, although the relationships seem heavily influenced by outliers.

There was a lot of discussion before this crisis on impact of globalisation on inflation (see my paper for a short literature review). However, we hardly see any discussion/research on the same now a days.

Behavioral economics perspective on Consumer Consumer Financial Protection Agency

July 16, 2009

After House Committee on Financial Services heard views on CFPA, there was another hearing by Banking Senate Committee.

The testimonies are very interesting. It has behavioral economics perspective to it. You have Sendhil Mullainathan, Behavioral eco professor at Harvard. His testimonyis a must read for all ben eco followers. He tells you the ben eco perspective on regulation and how it should be applied to financial markets. His analogy of consumers problems in buying paints vs buying digicam and using it for financial markets is excellent. In sum, Information asymmetry in fin markets is high and complex products multiplies the asymmetry. A regulation which ring fences good products from bad ones is the key.

Then we have Michael Barr who is with US Treasury but has also worked on behavioral economicsalong with Mullainathan.

Richard Blumenthal, Attorney General State of Connecticut, tells you about predatory financial practices in his state. It is quite funny to imagine such things happening in US. We in India/emerging economies these practices only happening in their countries.

Superb Stuff….

NREGA evaluation report for 20 districts

July 15, 2009

I am really confused over the state of India’s much hyped poverty alleviation program – NREGA. Some research work/media coverage provides clues but it is all too confusing. The govt says it has worked (for obvious reasons), some say it has stopped migration, some say it is highly inefficient etc etc. I usually get my fodder from either IDB or Urbanomics and Mint newspaper but am not able to draw any conclusions really. One major problem has been to draw lessons from all India experience.

Planning Commission has released a new study on NREGA which helps mitigate some confusion (only some). It uses a survey based approach done by Institute of Applied Manpower Research. The questionnaire covers  all the basic issues and objectives of NREGA. It covers 20 districts and has some interesting findings and brings out some regional differences. But report has too little literature and like NSS surveys has many tables etc. So apart from some reported findings, you might need to pore over the tables to draw more results (if interesting please let me know).

Happy reading.

Move over QE, CE, here is ECS

July 15, 2009

I know the title will put most people off, but I couldn’t help it. Let me set records straight –

  • QE is  Quantitative easing the till now most popular unconventional mon pol tool. It simply means buying Govt Bonds thereby expanding money supply. Mostly associated with Bank of Japan move to
  • Bernanke added CE or Credit Easing to unconventional mon pol toolbox. It means buying financial assets from credit markets to ease pressures in the same. The assets here could be corp bonds, mortgage backed securities, asset backed securities.

Now ECB Chief Trichet has added ECS or Enhanced Credit Support to the toolbox (or mon pol jargon). In his recent speech Trichet talks about ECS along with many other things –

  • History of ECB along with talk on Bundesbank and Banque de France. This is really good . I don’t know but I am seeing many revisits to history these days after complete ignorance earlier. I don’t know whether it is happening intentionally as economists/ policymakers realise their mistakes of ignoring history. But it is highly welcome.
  • The crisis (of course): Three multipliers led to the crisis- ill designed incentives, complex fin instruments, macro imbalances
  • Diff between US and EU- Euroarea bank dominated, hence focus on liquidity. Euroarea also has more SMEs, housing market not as big a problem in EU and US economy is more flexible than EU.
  • Hence the difference in ECB response.

In ECB’s response he explains ECS:

The ECB is engaged in policies that I have characterised as “enhanced credit support”. Let me explain this to you now. This approach focuses primarily on banks as they are the main source of credit in the euro area economy and seeks to provide enhanced support for credit provision through specific policies. Hence, one can make the following definition: enhanced credit support constitutes the special and primarily bank-based measures that are being taken to enhance the flow of credit above and beyond what could be achieved through policy interest rate reductions alone.

The ECS in turn are of two types:

  • Liquidity Management. It has 4blocks:
    • Provide liquidity
    • Expland collateral base
    • Extend maturities
    • Provide liquidity in foreign currencies
  • Buy covered bonds as announced recently- He explains that covered bonds are imp source of finance for EU Banks, hence the selection. He also explains they are not risky like the MBS, ABS etc and thus pose less risk.

He then responds to oft criticism that ECB did not do enough or as actively as Fed:

This brings me to the last point in my speech. The ECB’s enhanced credit support measures are designed in full respect of the euro area macroeconomic framework. Financial support measures potentially involving the significant transfer of credit risk from financial institutions to the taxpayer clearly fall within the realm of fiscal policy. Our decision to conduct outright purchases of covered bonds is fully consistent with this fundamental principle. While they are expected to be effective in supporting credit, these purchases do not burden the Eurosystem with excessive credit risk.

 More generally, I have already mentioned that different environments call for different actions, even if there is agreement among central banks about the ultimate objectives. This helps to explain why the ECB’s enhanced credit support measures, by contrast with the concepts of “credit easing” and “quantitative easing”, do not involve outright purchases of sovereign debt. On this feature, I would like to make three comments, stressing pragmatism, principles and preparations for exit.

 First, there is a pragmatic explanation. History matters to a prominent degree. In the United States, for example, in normal times outright purchases and sales of treasury bonds with short maturities belong to the routine toolkit of monetary policy implementation. Given that tradition, it may be a natural step, under non-standard circumstances, to adapt this procedure by significantly expanding the volume of purchases and focusing on governments bonds with longer maturities.

 The Eurosystem comes from a different tradition. For us, “reverse transactions” with banks – on the basis of repurchase agreements or collateralised loans – are the single most important – and in many respects exclusive – instrument in open market operations. Given that tradition, it has been a natural step to extend the maturity of our refinancing operations and make adjustments to the collateral requirements.

 Second, principles need to be stressed very firmly. For reasons known to all of us, the euro area has a clear separation of responsibilities. The ECB’s enhanced credit support fully respects this separation.

 Third, preparations for exit are important. The Governing Council will ensure that the measures taken are quickly unwound, and the liquidity provided is absorbed, once the macroeconomic environment improves. Long-term refinancing operations (like operations with shorter maturity) provide liquidity over a fixed time horizon and run off in a fully predictable way. By contrast, the unwinding of outright purchases typically requires an additional decision, namely whether to hold the securities to maturity – and if not, when to sell. The route taken by the Eurosystem limits such decisions to our covered bonds purchases and for the rest relies on built-in mechanisms for the re-absorption of liquidity.

He adds that having an exit strategy does not mean we are going to exit anytime soon. But having them in place is important.

Excellent speech from Trichet. A kind of speech which leaves you gasping with the amount of know-how and insights on so many issues.

Great stuff.

RBNZ celebrates 75 years as well

July 15, 2009

This is a happy coincidence. Along with RBI, RBNZ also celebrates its 75 years. It has released a short note on its history as well. It will be great if RBI also releases such short notes on its 75th anniversary as well educating public about its role and history.

RBNZ has been a pioneer of ITF and has been very well documented. However, I think its communications strategy is what fascinates me the most. It is plain English wherever possible. And this is followed commonly across their publications, speeches, research work etc.

Great going. Keep up the good work.

Adam Posen wisdom on Japan, Inflation targeting, 2007 crisis etc etc

July 15, 2009

Adam Posen’s selection for Bank of Engalnd MPC  generated quite a interest amidst economists and media (See Stephanie , Krugman, Ajay Shah etc).

To become a BoE MPC member the person has to answer questions posed by UK Treasury. Posen answered the questioned posed to him here. It is a must read as it is a great resource on his work, his key papers and how he sees his role in BoE MPC. I have read a bit of Posen and am amazed by his repertoire of research. It is pretty vast and all very well done.

His view on crisis:


Christina Romer Chatting now!!

July 15, 2009

It is not that I am keeping track of who is chatting and who is not. However, it is other links which point to some great developments happening everywhere.

I pointed out that Riksbank Dep Governor using webchat to explain about Riksbank and its moves. Now I discovered Christina Romer, Chair of Obama’s Council of Economic Advisers would be using the web-service as well (HT-  WSJ Econ Blog) . CEA has released a new report and Romer will discuss the report findings

The President’s Council of Economic Advisers released a report today on “Jobs of the Future (pdf)” outlining how the U.S. labor market is expected to grow over the next few years. The report includes information on likely shifts and changes in the labor market, skills and training that will likely be most relevant in growing occupations, the importance of worker flexibility, and how the construction and manufacturing sectors are expected to rebound as a result of the Recovery Act.

CEA Chair Christina Romer will participate in a live chat at 2:30 to discuss the report. She will be taking your questions about the future job market through our Facebook application and, so watch it live, share your questions, and participate in the conversation.

Exciting times really. Policymakers are really making efforts and using technology and other ways to communicate to the public. I had also pointed Charlie Bean taking a seven day tour to explain quantitative easing to UK public.

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