Archive for November 27th, 2009

Investmentless recovery ahead?

November 27, 2009

Fatas-Mihov Blog post rarely but whenever they do, it is full of insights. The duo have written some super papers and make a mark in the blogposts as well.

In the recent post, they point that recoveries post-recessions in 1991 and 2001 were investmentless.

What is interesting in this chart is that the last two recoveries were also special when it comes to the behavior of investment. In fact, the behavior of investment seems to mimic what we see above in the employment chart. While during the 1975 and 1982 recoveries investment grew faster than GDP (so the ratio increased), during the 1991 and 2001 recessions, investment grew at the same pace as GDP (so the ratio is flat). And this is more of a surprise if we take into account the fact that real interest rates remained very low during these two recoveries (more so in 2001).
 
 
We know that investment is the most volatile component of GDP so the V-shape that we see in 1975 and 1982 is what we would normally expect. By definition, it has to be that other components of GDP played a stronger role (relative to previous recessions) in 1991 and 2001 (consumption, exports). What was the exact role of those components will (hopefully) be the subject of a future post in this blog. What is interesting so far is the similarity in the behavior of employment and investment across the most recent recessions.
 
I am waiting for subsequent posts but I think the recovery is going to be mainly driven by consumption and exports. Going by reading the various crisis episodes exports rebound the fast. And as stimulus measures target consumption, it should also be a part of the story.
However, I was pretty perplexed by this finding. If recovery is jobless and investmentless is it a recovery at all? We usually associate growth pick-ups with growth in jobs and investment. I mean I can understand both are low, but not contributing at all?
Just too bugging all this.
Addendum:
for more on jobless recovery, see previous posts

Boring Banking vs Exciting Banking

November 27, 2009

I was reading this recent speech by RBI Gov Dr Subbarao.

He says there are calls to make banks boring. He cites works of Krugman, Volcker, Mervyn King and Dr. Reddy who in their own way have advocated the call to make banks boring.

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Blogonomics makes an entry in world of Economics

November 27, 2009

Menzie Chinn of Econbrowser points that in wone of the economics workshops held at Bank of Canada, Blogonomics (Economics of Blogs) was discussed. This is like wow. Earlier, there was a pointer that blogposts helped in research paper writing and bloggers were invited to US Treasury. And now a panel discussion at Bank of Canada on blogonomics.

Chinn says:

Some questions posed by the panel chair were:

  • Why do you blog?
  • To what extent has your experience blogging matched your expectations going in? Has the response been surprising on any dimension? Has it taken up more (or less) of your time than you’d thought? Has the process of blogging had an unforeseen impact on your work and thinking?
  • What effect do you think the emergence of economics blogs such as your own has had on the economics profession? On academia? Policy? Markets? The public? Any specific examples you can share from your own blogging experience?
  • What is the most ‘trouble’ you’ve ever gotten into from something you’ve written on your blog?

Read Chinn’s views here.  My answers:

  • I blog as it helps me remember and keep track of the work and readings I do. It has been just an amazing tool that way.
  • For me blogging has been an amazing experience.  It has exceeded much beyond expectations. I never expected the kind of comments and rankings the blog got. I relaised I could write a bit. It has surely helped me review my thoughts. Whenever I write on my topic a quick search tells me what my thoughts were earlier on the issue
  • This question does not apply to me as my blog nowhere has impacted public policy  or on the economics profession or On academia or on Markets. It is afterall Mostly Harmless Economics 🙂 But yeah I get comments requesting for some information, data etc which if I have I try and give. So I guess there is some marginal impact on very  few people
  •  I have not got into any trouble but there have been some nasty comments sometime. If useful, I try and reason out. Otherwise I just plain delete it.

What about the other bloggers?

 

 

Finmin committee on Foreign Investment in India

November 27, 2009

Finance Ministry has floated a new committee to study foreign investment in India.

  • To review the existing policy on foreign inflows, other than Foreign Direct Investment (FDI), such as foreign portfolio investments by Foreign institutional investors (FIIs)/ Non Resident Indians (NRIs) and other foreign investments like Foreign Venture Capital Investor (FVCI) and Private equity entities and suggesting rationalisation of the same with a view to encourage foreign investment and reducing policy hurdles in this regard while maintaining the Know Your Customer (KYC) requirements. 
  • To identify challenges in meeting the financing needs of the lndian economy through the foreign investment. Foreign investment for this purpose to be understood broadly and can include investment in listed and unlisted equity, derivatives and debt including the markets for government bonds, corporate bonds and external commercial borrowings. 
  • To study the arrangements relating to the use of Participatory Notes and suggest any change in the policy if required from KYC and other point of view. 
  • To reexamine the rationale of taxation of transactions through the STT and stamp duty. 
  • To review the legal and regulatory framework of foreign investment in order to identify specific bottlenecks impeding the servicing of these financing needs. 
  • To suggest specific short, medium and long term legal, regulatory and other policy change; in respect to foreign investment keeping in view of the suggestions expert committee reports such as the Committee on Fuller Capital Account Convertibility, the Committee on Financial Sector Reforms and the High Powered Expert Committee on Making Mumbai an lnternational Financial Centre.

I don’t understand but there is no member from RBI. Why should this be? I think I already know the recommendations of the committee (don’t ask me why). There would be 2 scenarios:

  1. The committee would go all out on opening India’s shores to all kinds of capital, remove all restrictions, remove RBI’s supervision over financial markets, RBI should adopt inflation targeting framework, Mumbai should become an international finance centre (like Iceland, London) etc. It would be centred on how bad our financial system regulation is and we need to adopt these changes else we are doomed. It would add it is a mistake to think since we have largely avoided the financial crisis, that we don’t revamp the financial system. Let’s do it all real fast. The criticism would be mainly on RBI for keeping such a tight control on financial system.
  2. The committee report is going to be cautious about the volume of capital inflows in the country. India should invite capital flows but should but with some checks in place. It would say we should learn lessons from the ongoing crisis and not think all capital flows are necessarily good. It would instead suggest incremental changes.

Some people would ask, so what is different and what is new? This is the nature of all committee reports w.r.t. capital flows. Well, nothing is new. But this is how things usually are.

If the second version goes through, it is likely to be followed by dissent notes from a few members who would vote for the first version. The dissent notes are going to be highlighted by the media as somehow most people in media feel the first version is the only model.  

So let’s see how it goes. It is going to be tabled in 4 months from now. I hope I am all  wrong about this one. And we see some progress.


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