Archive for November, 2009

Central Bank Communications – working?

November 19, 2009

FRBSF economists Puneet Chehal and Bharat Trehan have a nice short paper on Central Bank communications in this crisis.

Bank of Canada has promised to keep its interest rate low till second quarter of 2010 but Fed just says for an extended period. Hence BoC is more specific but Fed is vague. Does explicitiy help BoC? Not really.

As part of their efforts to promote economic recovery, some central banks have announced they will not raise policy rates for specified time periods. Other central banks have not been as explicit, though they have provided guidance. A comparison of the effects of the Bank of Canada’s conditional promise to hold rates steady through the second quarter of 2010 with the Federal Reserve’s less explicit guidance finds no evidence that market participants make distinctions between these statements.

However, the reasons are not that BoC is less credible but because inflation outlook has changed.

The Bank of Canada’s commitment to leave rates unchanged did affect interest rates initially, but the effect does not appear to have persisted. Market participants expect the Bank to raise rates as the economy strengthens. This doesn’t necessarily mean the Bank is not credible. It has stressed that its commitment is conditioned on the inflation outlook. At the same time, U.S. and Canadian forward rates are closely correlated on either side of the commitment’s expiration date. So we find little to suggest that the announcement of a fixed end date has significantly affected expectations of future monetary policy in Canada. It seems that market participants see little difference between the U.S. phrase “extended period” and Canada’s conditional commitment to keep rates fixed for a specified period.

Hmmm… Interesting stuff.


CDS Volumes decline in H1 2009

November 19, 2009

BIS Semi-Annual Report on OTC Derivatives for H1 2009 released last week. The detailed stats are available here. It didn’t get any real coverage in the blogosphere. The report indicates CDS volumes have declined in H1 2009. Key findings:

  • notional amounts of all types of OTC contracts rebounded somewhat to stand at $605 trillion at the end of June 2009, 10% above the level six months before,
  • gross market values decreased by 21% to $25 trillion,
  • gross credit exposures fell by 18% from an end-2008 peak of $4.5 trillion to $3.7 trillion,
  • notional amounts of CDS contracts continued to decline, albeit at a slower pace than in the second half of 2008 and
  • CDS gross market values shrank by 42%, following an increase of 60% during the previous six-month period.
  • The gross market value may have declined but is still at a staggering USD 25 trillion market. The notional amount is at USD 605 trillion. If it was not for this crisis it could have been a USD 800 trillion plus market. All this size without any regulation, without any oversight. Amazing.

    To fix poverty, fix instituions and to fix institutions fix government

    November 19, 2009

    Daron Acemoglu has a  superb article summarising the research and his vast volume of work on growth and development.

    Global Financial Crisis and India

    November 19, 2009

    Deepak Mohanty of RBI has given a useful speech on the global crisis and the impact and policies followed in India. Most of it is known but is still useful as a quick snapshot.

    Fiscal Multipliers in Depressions

    November 18, 2009

    Barry Eichengreen et al have another paper which is bound to fuel controversy in the fiscal multiplier debate. Voxeu summary is here.

    The Great Depression of the ‘Thirties and the Great Credit Crisis of the “Noughties had similar causes but elicited strikingly different policy responses.  It may still be too early to assess the effectiveness of current policy responses, but it is possible to analyze monetary and fiscal policies in the 1930s as a “natural experiment” or “counterfactual” capable of shedding light on the impact of recent policies.

    We employ vector autoregressions, instrumental variables, and qualitative evidence for a panel of 27 countries in the period 1925-1939.  The results suggest that monetary and fiscal stimulus was effective – that where it did not make a difference it was not tried. 

    The results also shed light on the debate over fiscal multipliers in episodes of financial crisis.  They are consistent with multipliers at the higher end of those estimated in the recent literature, consistent with the idea that the impact of fiscal stimulus will be greater when banking system are dysfunctional and monetary policy is constrained by the zero bound.

    The authors find the fiscal multiplier at about 2.  Voxeu summarises the findings as:

    They show that where fiscal policy was tried, it was effective.

    Our estimates of its short-run effects are at the upper end of those estimated recently with modern data; the multiplier is as large as 2 in the first year, before declining significantly in subsequent years. (Figure 1 shows this in the case of the panel VAR estimates with the conventional ordering assumptions.) This is, in fact, what one should expect if one believes that the effectiveness of fiscal policy is greatest when interest rates are at the zero bound, leading to little crowding out of private spending. It is what one should expect when households are credit constrained by a dysfunctional banking system.

    Monetary policy is not ineffective in zero interest rates:

    This result is notable, given the presumption, widespread in the literature, that monetary policy is ineffective in near-zero-interest-rate (liquidity trap) conditions. On the contrary, in the 1930s it appears that accommodating monetary policy helped, by transforming deflationary expectations (Temin and Wigmore 1990) and by helping to mend broken banking systems (Bernanke and James 1991). Given the prevalence of both problems circa 2008, we suspect that the results carry over.


    The paper is different as looks at fiscal multiplier from 27 countries. The Great Depression was not limited to US but spread across economies. However most studies look at US and conclude whether fiscal multiplier worked or not. Eichengreen et al look at fiscal multiplier across 27 economies with each in recession. So this is more like a global fiscal multiplier when several economies are trapped in a recession.

    Therefore settings of this paper apply more closely to today’s times. In this recession we see many countries in a recession and many adopting fiscal policies. Then we also have near ZIRP in many countries. The authiors say:

    The IMF estimated in October that world output would contract by 1.1% in 2009. In its October World Economic Outlook it estimated that the G-20 would implement crisis related fiscal stimulus equivalent to 2 per cent of GDP during 2009. It also estimated that worldwide government fiscal balances would deteriorate by the equivalent of 4.6 per cent of world GDP (comparing 2009 with 2008). OECD (2009b) has estimated that OECD governments are embarking on an expenditure stimulus equivalent to 1.7 per cent of GDP during 2008-10, and on a total fiscal stimulus of 3.4 per cent over the same period. Fiscal stimuli of this size, and fiscal multipliers of the size we have estimated in this paper, together suggest that the world economy would have contracted by a great deal more than 1.1 per cent in 2009 if we had seen the same passive policy response that characterised the years after 1929. 

    What would Barro et al say to these findings? Let us wait for the answers. Exciting stuff. Fiscal Policy is surely getting a lot of research coverage. Krugman finds it difficult to understand why we cannot understand these depression basics.

    Recession of 1937 – a preview

    November 18, 2009

    François Velde of Chicago Fed has written an insightful paper on the Recession of 1937. The recession of 1929 and 1937 made the entire crisis as Great Depression.


    Velde explores the reasons why the crisis of 1937 occurred. There are wide views:


    The recession of 1937 has been cited as a cautionary tale about the dangers of premature policy tightening on the way out of a deep downturn. In contrast, some authors have downplayed the role of monetary policy suggested by Friedman and Schwartz (1963). In particular, Cole and Ohanian (1999) dismiss the role  of reserve requirements in the 1937 recession for two reasons. One is timing: “we would expect to see output fall shortly after” the changes in reserve requirements; but, they write, industrial production peaked in August 1937, 12 months after the first change (Cole and Ohanian, 1999, p. 10). The other is that interest rates did not increase: Commercial loan rates remained in the same range, and rates on corporate bonds “were roughly unchanged between 1936 and 1938” (Cole and Ohanian, 1999, p. 10).



    What does he find?


    I find that monetary policy and fiscal policy do not explain the timing of the downturn but do account well for its severity and most of the recovery. Wages explain little of the downturn and none of the recovery.


    Read the paper for another peek into economic history. It mostly has something different and new to offer.



    Mobile Banking lessons from Kenya

    November 17, 2009

    Mwangi Kimenyi of Brookings and Njuguna Ndung’u Governor of Central Bank of Kenya have a very insightful paper on how Kenya has used mobile phones to increase banking inclusion. The number of people having bank accounts and using banking services has exploded after combining banking with mobile phones.

    In Kenya, the last three years have seen dramatic changes in the financial sector landscape. First, commercial banks recognized that lowering barriers to entry (no requirements of minimum balances in opening bank accounts) can increase retail accounts. Second, banks realized that lowering costs of transacting across other bank accounts attracts more customers to open accounts.

    Technological innovations have now made it possible to extend financial services to millions of poor people at relatively low cost. A case in point is mobile telephone money transfer services that allow mobile phone users to make financial transactions or transfers across the country conveniently and at low cost. Kenya’s mobile payment service, known as M-PESA, provided by the main mobile phone company, Safaricom in conjunction with Vodafone, represents a good example of how low-cost approaches that use modern technology can effectively expand the financial services frontier.

    How does this translate into numbers?

     As a result of these changes, the number of bank accounts has increased from 2.3 million in 2006 to about 6.7 million in July 2009. Equally, deposits increased from Ksh 540bn (US$ 7.2bn) in 2006 to Kshs 950bn (US$12.6bn) in July 2009. This growth notwithstanding, many Kenyans still do not have access to financial services.

    The lessons from Kenya are:

    • Conducive Environment for the Private Sector
    • Private-Public Policy Dialogue
    • Balancing Access with Stability
    • Ensure a Contestable Market

    Read the fineprint for further details.

    Food security in South Asia

    November 17, 2009

    Surabhi Mittal  and Deepti Sethi of ICRIER have a very good paper giving an overview of food security issues in South Asian economies:

    Food security is defined as economic access to food along with food production and food availability. Agriculture in the SAR (South Asian Region) is caught in a low equilibrium trap with low productivity of staples, supply shortfalls, high prices, low returns to farmers and area diversification – all these factors can be a threat to food security. South Asia still has the highest number of people (423 millions) living on less than one dollar a day. The region has the highest concentration of undernourished (299 million) and poor people with about 40 per cent of the world’s hungry. Despite an annual 1.7 per cent reduction in the prevalence of undernourishment in the region in the past decade, the failure to reduce the absolute number of the undernourished remains a major cause for concern. Estimates by the Food and Agricultural Organisation (FAO) indicate that by 2010, Asia will still account for about one-half of the world’s undernourished population, of which two-thirds will be from South Asia.

    Though SAARC countries have established a food bank to meet the needs of food security in the region, it has not been operational even during times of crisis. This is despite the felt need of member nations to evolve mechanisms to make the SAARC Food Security Reserve operational.

    It is against this background that this study has been undertaken. Conducted in collaboration with think-tanks from South Asian countries, it aims to identify issues relating to food security, the policy initiatives taken to tackle these issues, evaluate these policies and suggest measures to overcome identified constraints in order to improve the food security situation in the region.

    It discusses the agrcultural growth and aspects of food security in each South Asian economy. Then it looks at safety net programmes in each of these economy. This compilation of the various safety net programmes is very useful.

    I didn’t know that there is a Food Bank in South Asia however it has not been used. The authors then point the need to work on this food bank and increase trade for addressing food security. It should also look at agricultural research as a solution to the food woes.

    A good crsip paper on food security issues.

    Economic lessons from the playground

    November 17, 2009

    Steve Almond has a superb article on how he used economics lessons to manage his children in the playground.


    Brooking update on IMF World Economic Outlook

    November 16, 2009

    I had posted a while back on How useful World Economic Outlook’s database is and can be used to draw so much analysis. It was done by Brookings based economists.

    I got an email from one of the authors Geoffrey Gertz informing about the updated version of the study.


    Transparency in Central Banks – A Norway perspective

    November 16, 2009

    Jan F. Qvigstad, Deputy Governor of Norgesbank (Norway’s Central Bank) has a very interesting speech (pdf here) on Central Bank Transparency. It is full of interesting tales that related to transparency.

     He begins saying transparency was unheard of 10 years ago.


    Guess where I found the discussion paper on India’s GST?

    November 16, 2009

    Since I have written this post providing a link to first discussion paper on India’s GST, I try to check various Govt websites to see if the paper is provided or not. I am always disappointed.

    Finally I found it. Guess where? It is at Press Information Bureau’s website and the paper is here. I have no issues with it. But not on Finance Minsitry, or on Finance Commission or those taxation websites.

    However, atleast we have it now somewhere.


    I was just quickly navigating the PIB website and found it to be a very rich source of Information. I have been using the website to track statements/press releases of various ministries. It also is the first website to give you official numbers about Inflation, Industrial production etc.

    Infact, this is perhaps the only website where you can get the fiscal stimulus details passed in 2009 via its press release archive section. 

    However, I realised it has some very useful links as well.

    It has a section called Old documents where one can see some very useful stuff released by various ministries. For instance check the flagship programme link. It tells you about various programmes taken by government for poverty alleviation, food securityy, employment etc. It also has statewise description.

    Then it is the website where one can get material on Economic Editors Conference. This is a very important conference as many ministers talk on their issues. It has useful backgrounders from the various ministries as well. For instance see the recently concluded conference here. Check out backgrounders from Agriculture, Finance and Commerce Ministries. Very useful stuff.

    Great resource on Indian economy. Just that you need to navigate it with a little patience.


    Krugman on US vs Germany

    November 14, 2009

    Paul Krugman has an interesting article on the policies used by US and Germany. US uses GDP boosting policies and Germany uses unemployment policies. The same were followed in the recession. The result is both seem to be out of recessions GDP wise but unemployment is not a problem in Germany but it is in US. And US policymakers need to fix this rising unemployment fast.

    Should America be trying anything along these lines? In a recent interview in The Washington Post, Lawrence Summers, the Obama administration’s highest-ranking economist, was dismissive: “It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.” True. But we are not, in fact, expanding the total amount of work — and Congress doesn’t seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn’t we be considering other measures, if only as a stopgap?

    Now, the usual objection to European-style employment policies is that they’re bad for long-run growth — that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.

    What should be done?

    Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

    The point is that we need to start doing something more than, and different from, what we’re already doing. And the experience of other countries suggests that it’s time for a policy that explicitly and directly targets job creation.

    Interesting comparison between Germany and US.

    Eichengreen says Asian Central Banks move fast

    November 14, 2009

    Barry Eichengreen in this article on Eurointelligence says that developed economy’s central banks can wait but asian central banks should start hiking rates to dampen asset bubbles:

    Commentators are on firmer ground when they warn that dangerous asset bubbles are developing in emerging Asia and in China in particular.  And it is not only independent critics: the World Bank, in its recent semi-annual report on East Asia, warned darkly of unsustainable asset-market conditions.  Asset prices are frothy.  Property prices are booming, especially in the big cities.  All this is alarmingly reminiscent of the United States in 2006.

    The mechanism inflating these bubbles is exceptionally accommodating monetary policies.  Low interest rates in the advanced countries provide an incentive to borrow there and invest in higher-yielding assets in emerging markets

    No lessons being learnt:

    It is as if we have learned nothing from the experience of the last three years.  Central banks are still blowing bubbles.  Focusing narrowly on inflation, they continue to ignore their responsibility for financial stability.

    These worries are creating strong pressure for central banks to turn off the tap.  Australia and Norway have already moved in this direction.  There is growing pressure for others to follow. 

    He adds bubbles in Asia pose a serious threat and it is not Fed but Asian Central Banks that need to tighten the noose:

    Leaning against them is a task for Asia’s central banks and regulators, not for the Fed or the ECB.  With U.S. and European unemployment continuing to rise, accommodative monetary policies remain appropriate for the Fed and the ECB.  With financial markets still in the recovery ward, both central banks are right to pause before unwinding their accommodating policies. 

    It could pose problems as higher interest rates could mean more capital flows and appreciation of the currency:

    There is also the worry that if Asian central banks tighten, signaling that they are prepared to see their exchange rates rise, they will just attract more capital inflows from speculators betting that their currencies will strengthen.  Here regulators need to step in to prevent inflows from fueling more asset-market excesses.  In countries like China where they control the allocation of credit directly, regulators need to impose stricter ceilings on bank lending.  They need to tighten collateral requirements in property markets.  More governments might also consider taxes on financial capital inflows like those imposed in October by Brazil.

     The danger posed by Asia’s financial bubbles is real.  But it is important to take the right steps to combat it.  This is appropriately a task for emerging market central banks, not for the Fed or the ECB.  It is not helpful to amputate the patient’s right foot when it is the left foot that is infected.

    Hmm….Will Asian Central Banks act?

    What is a Beveridge Curve?

    November 13, 2009

    St Louis Fed Economists have this very useful short note on the same. They explain:

    Job openings (vacancies) and the number of unemployed workers tend to move in opposite directions over the business cycle. Expansions are usually associated with plentiful vacancies and a low number of unemployed workers. During recessions the unemployment pool swells while employers seek to fill fewer job openings.

    The inverse relationship between vacancies and unemployment is known as the Beveridge curve.

    This is pretty interesting relationship.

    The authors then track this relationship in previous crisis.

    • In the 1980s recession, the vacancies started to increase faster than decline in unemployment. The rise in vacancies then led to a fall in unemployment with a lag
    • However in both 1991 and 2001 recession vacancies hardly picked up  and unemployment persisted. This led to jobless recovery.

    What about this one?

    What does this all imply about the possibility of another jobless recovery? It depends on the path of the adjustment back toward the upper-right corner in the chart. During the current recession, employment declines have been more dispersed. Only one-fourth of job losses have occurred in manufacturing; the sectors hit by the housing and financial crisis (construction and financial services sectors) shouldered more of the burden. Still unknown is the extent to which these sectors will recover and rehire workers or if these workers will be forced to look elsewhere for new jobs. The latter scenario would suggest the possibility of another jobless recovery.


    Here is another previous post on jobless recovery. This one looked at another useful paper by San Fransisco Fed Economists.

    Paul Volcker – Article and Interview

    November 13, 2009

    NYT has a nice article on Paul Volcker. In the end he says:

    He operates from his own offices in New York, communicating with administration officials and other members of the advisory board mainly by telephone. (He does not use e-mail, although his support staff does.) He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.

    So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.


    Minneapolis Fed has a detailed interview of Volcker. It is done by outgoing President of Minneapolis Fed – Gary Stern. I have just started to read this interview. Needless to say initial bit is loads of wisdom.

    Indian political system – why don’t we see the risks?

    November 13, 2009

    If we could have an index for assessing the political climate it would resemble a mirror image of the equity market index. Each time it touches a new low you think this is the end, it always surprises you with a lower dip. The sensex may still decline but there is no upwards trend in the Indian political index.


    RBI has released a few interesting reports

    November 13, 2009

    RBI has released very good reports in recent months.

    All are very useful and a must read. They are all on different and important topics.  I know that is a lot but atleast read the exec summary for some broad idea.

    I just finished reading the Prime Lending Report which is a very important reading. GIves you a good snapshot of what these lending rates are, history of lending rates in India and the issues with it. As they are non-transparent, the group has suggested a Base Rate which will be transparent and more forward-looking. A shift to Base Rate has ramifications for all of us. So it is to be read and understood properly. We don’t know whether it will replace BPLR system but it is important to be prepared.

    Then it has also released a vision report on payments system in India for 2009-12. Payments system is one of the least understood and documented part of the financial system. Central Banks role in keeping them healthy and robust is really a thankless job.

    Happy reading. 



    Mishkin’s idea of bubbles and lessons from economic history

    November 12, 2009

    I am pretty late on this. There is already a fair bit of criticism on the new Mishkin bubble article (see Eurointelligence, Caroline Baum, TT Ram Mohan etc etc).

    He says there are 2 kinds of bubbles. One credit boom bubble and second irrational exuberance bubble. First causes damages and needs to be looked at and second one just ignore it.


    Bernanke gets politics lessons

    November 12, 2009

    NYT has a superb article on how Bernanke is getting political lessons. Ron Paul, Texas Republican wants to audit the Fed and take control of Fed. Bernanke has been opposing the move in his speeches/testimonies (see this previous post for the debate).

    So the article explains how furious the politicians are and are asking Bernanke to explain the Fed moves in this crisis. How do they explain to the public that Fed gace USD 2 trillion to banks that led to the crisis at the first place. All these are politicians issues and Bernanke needs to explain and is finding it difficult. Reminds you of the excellent Blinder piece on the same.

    However, this bit doesn’t sound good:

    Voters had become suspicious and unnerved by the Fed because of its trillion-dollar efforts to bail out the financial system, Mr. Frank warned. If the Fed really wanted to survive the disgruntlement in both parties, he continued, Mr. Bernanke would have to step back and let him devise a compromise.

    Reluctantly, the Fed chairman agreed to reduce his own visibility on the issue and let Mr. Frank take the lead.

    It was just one example of how the Fed has been forced to scramble as its power comes under more fire than at any time in decades.

    On Tuesday, a new threat opened up: Senator Christopher J. Dodd, chairman of the Senate Banking Committee, declared that the Fed had been an “abysmal failure” at regulation. He introduced a bill that would strip virtually all of its power to regulate banks, including financial institution considered too big to fail.

    Read on the article for more details. Lots of senators asking questions on Fed and its role in the crisis.

    Now we all take central bank independence as given and understand its role. But how do you explain that too a politician? The moment he learns that the central bank has been created by the government he is going to be all the more perplexed by the independence issue. I mean Treasury/Finance Ministry guys would understand but there are all kinds of other ministries as well. A central bank has mighty powers as well which makes the issue worse.

    Bernanke is taking these lessons and I am sure doing well. The other central bankers could join in as well. Knowing monetary economics is surely the most important task, but knowing the political landscape is as important.

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