Archive for January 12th, 2010

A new 2 pillar strategy for ECB

January 12, 2010

ECB’s two pillar strategy and the officers of ECB’s defense for the same is well-known. The two pillars are Monetary pillar and Economics pillar. Here is an interesting anecdote on how ECB got the two pillars strategy.

Daniel Gros and Paul De Grauwe suggest it is time for a change in the two pillar strategy.

The ECB has been arguing in the past that since there is no trade-off between price stability and financial stability, the pursuit of price stability is the best a central bank can do to also maintain financial stability.

We argue that there is a potential trade-off between price stability and financial stability. In order to make this trade-off less constraining we propose that the two-pillar strategy of the ECB should be reformed. In this new two-pillar strategy, the ECB should pursue two objectives, i.e. price stability and financial stability. In this new strategy the interest rate should be used to achieve the inflation objective, while other instruments (minimum reserve requirements and macro prudential control) should be used to achieve financial stability.


Mumbai has water problems and Navi Mumbai has swimming pools!

January 12, 2010

The chronic water problems in city of Mumbai are no more news. What is news is how worse the problem is going to be this year or in coming future. This year because of the poor monsoons Mumbai’s municipality body BMC has decided  to cut water supplies this year. But the problem is not limited to this year and is going to continue in future.

Now I don’t know one bit about the water supply and distribution in Mumbai. But what irks me is to see what is going around in its nearby cousin town – Navi Mumbai.

Now, in Navi Mumbai most new construction residential houses you get to see have swimming pools. You ask brokers/builders about why have swimming pools given the water crisis in Mumbai and you are laughed off. They say there is no water problem in Navi Mumbai and they can afford to have swimming pools.

I have nothing against swimming but clearly it is a luxury given the water crisis Mumbai has.

First, If Navi Mumbai has water surplus, why can’t it be transferred to Mumbai. It will not solve the water deficit of Mumbai but still could fill up atleast something.

Second point is how long does it to take to get into a water crisis. As it is quite a few societies in Navi Mumbai already have water problems. So surplus water from other Navi Mumbai regions should be first transferred to deficit Navi Mumbai regions.

Third, what happens to swimming pools? Someone was telling me that BMC allows one swimming pool for a large residential building complex (say 10 buildings etc). So we can have same kinds of rules for Navi Mumbai as well.

Fourth, it would make housing more affordable. The builders charge you for club houses which has swimming pools, sauna, gym etc.

I don’t think we are taking the water crisis situation seriously. It needs a lot of strict urban planning.

How and why of economies faring in this crisis

January 12, 2010

IMF economists have written a paper looking at the cross-country differences of crisis impact and reasons for the differences. 

We provide one of the first attempts at explaining the differences in the crisis impact across developing countries and emerging markets.

Using cross-country regressions to explain the factors driving growth forecast revisions after the eruption of the global crisis, we find that a small set of variables explain a large share of the variation in growth revisions.Countries with more leveraged domestic financial systems and more rapid credit growth tended to suffer larger downward revisions to their growth outlooks.

For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with countries exporting more advanced manufacturing goods more affected than those exporting food. Exchange-rate flexibility clearly helped in buffering the impact of the shock.  There is also some —weaker—evidence that countries with a stronger fiscal position prior to the crisis were hit less severely. We find little evidence for the importance of other policy variables.

 A nice short paper. Though more of such papers would come in future looking more in detail on whys and hows of the crisis impact. 



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