Archive for September 17th, 2009

The ins and outs of International monetary system

September 17, 2009

Jeff Frankel has an interesting research note on the ins and outs of the international monetary  system post crisis.



The G7 The g-20
The corners hypothesis Intermediate exchange rate systems
Currency Manipulation Reserves
Inflation targeting Fighting asset bubbles
Exorbitant privelege of the dollar Multiple International Reserve assets

Read the note for further details.


Why was prospect theory named so?

September 17, 2009

Prospect theory is the foundation for much of behavioral economics/finance. It basically means people are risk averse when in profits and become risk seekers when in losses. The finding was remarkable as till then eco assumes people to  behave same given the two opposite positions.

IMF F&D magazine has a profile of Daniel Kahneman, the co-founder of the theory. He points why the name prospect theory was chosen:

Kahneman says little should be read into the theory’s name. “When we were ready to submit the work for publication, we deliberately chose a meaningless name for our theory: ‘prospect theory.’ We reasoned that if the theory ever became well known, having a distinctive label would be an advantage. This was probably wise.”


Apart from Kahneman’s initial days and how he moved into beh eco, it also covers issues on challenges it faces to become mainstream economics. Nice read.

Understanding Climate Change from an economics perspective

September 17, 2009

Michael Spence has written a very timely paper giving an economics policy perspective to the climate change and environmental issues.

This paper deals with global mitigation strategy. More specifically the main
purpose is to address the question of whether growth in the developing world is consistent with long-run climate change objectives. The answer I believe is yes.

The first part of this paper lays out time paths for emissions for countries in
various categories. These paths are consistent with countries’ growth objectives, incomes, and capacity to absorb mitigation costs. The intent is to show that while global emissions are likely to remain flat or even to rise as a result of the combined effect of mitigation undertaken by advanced countries and growth in the developing world, eventually reasonably safe global per capita levels can be reached on a 50‐year time horizon.

The second part of this paper discusses countries’ roles in relation to different categories and mechanisms that would support the achievement of safe emissions paths. These mechanisms create incentives and deal with the absorption of costs. In particular, the paper argues that a carbon credit trading system in the advanced countries, combined with an effective cross‐border mechanism and a “graduation” criterion for developing countries to join the advanced group, will create strong incentives, achieve a fair pattern of cost absorption, and support the dynamics described in part one. One point emerges clearly: the cross‐border mechanism (or international offsets) is essential in dealing with both the efficiency and the cost absorption/equity challenges of a global mitigation strategy.


How FOMC works?

September 17, 2009

I was reading this oldish speech by Lawrence Meyer, ex-Governor of Fed. It is a fun and insightful reading on how FOMC actually works and takes its decisions. It is not the usual speech on monetary policy, benefits etc. but on the real time decision making.  The lecture is superbly titled as Come with me to FOMC and does full justice to it.

This is so funny:

My concern about the public awareness of the FOMC was heightened recently during one of the weekly luncheons Governors host for a small group comprised of the staffs at the Board and Treasury. A very senior member of the Treasury staff, during our luncheon conversation, asked me if I knew what “FOMC” stood for. A strange question, I thought, coming from so knowledgeable a person. I replied that I thought I did, but, just to be sure, what did he believe it stood for? He replied “Fruit Of the Month Club.”

So I begin my lecture by noting that FOMC, for the purpose of this lecture, stands for the Federal Open Market Committee. This Committee, established in the Banking Act of 1935, came into existence on March 1, 1936. It consists of the seven Governors of the Federal Reserve Board and five presidents of the regional Federal Reserve Banks.

🙂 Well, if a senior Treasury staffer did not know the meaning of FOMC, one can just imagine the case with others. That is why reading this Alan Blinder speech is so important. We econs need to understand a few basics before working with the Govt.

Coming back to the speech, he explains the FOMC in such detail that one can actually feel like a FOMC member participating in a meeting. One can extend the dream a bit further and dream about dissenting with Bernanke 🙂

I am actually now looking for such speeches from other central bankers-  Come with me to BoE MPC, Come with me to Governing Council Meeting at ECB (this one will be very very interesting as you have 16 central bankers from the other economies participating), Come with me to BoJ MPC etc etc. Even knowing about RBI Mon Pol meeting would be very informative.

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