Archive for February, 2010

Finance Minister’s budget speeches from 1947-48 onwards

February 22, 2010

I came across this amazing link on India Budget website. It has finance minister’s budget speeches from 1947-48 onwards. Have just downloaded the first speech in 1947-48, 1991-92 Manmohan Singh’s speech on the crisis in 1991 etc. A treasure of sorts really. And all the speeches have been converted into very good quality pdfs. Not like the typical archives we get to see.

These speeches could be used to generate great pieces of research on Indian economy.  Romer & R0mer have looked at various Economic Reports of President to identify the shift/ideas of economic thinking in economic policy. They have used this approach to show how policymaking in 1970s lost touch with economics and as a result we had very bad 1970s (Great inflation etc).

Same methodology could be applied to understand shifts in Indian economy policy circles by using these budget speeches. It would not be as comprehensive a study as Romer’s but could give you some ideas as budget speech is a very important document in India.

For instance, we keep arguing when India actually started to reform and liberalise. Was it in 1980s or in 1990s? Some say 1980s but others says in 1980s reforms were not consistent and too small. The real push came in 1990s after the crisis. There is research work which looks at data to point when growth kicked off etc.

Now, can we use these speeches to identify whether a shift actually happened in 1980s? Or is it just economists’ imagination? And then we keep saying from 1947 to 1980s we had a hindu rate of growth around 3.5%.  Do the budget speeches indicate this status quo as well? And then breaking it like Romer into decades….how policy thinking differed in various decades – 1950s 60s, 70s, etc?

It will be a very good exercise to do. Will help us understand Indian economy and its history better.

IMF says capital controls could be a part of the toolkit!

February 22, 2010

Apart from policymakers from UK, policymakers from IMF have also been busy introspecting. And they are coming out with ideas which one would expect least from IMF. First it was allowing fiscal policy to ease recessions, then looking at how financial cycle could worse economic outcomes via various papers and then raising inflation targets.

And now this new staff paper saying capital controls could be tried! This is as big a turnaround as Gene Fama saying financial markets are not efficient (though he continues to defend).  IMF has been advocating capital account liberalisation for sometime now and capital controls was always condemned.

IMF Survey Magazine has a summary. It says the surge in capital flows could lead to both macroeconomic issues or financial stability issues.


Liquidity has diminishing marginal returns as well

February 22, 2010

Lord Adair Turner spoke at the 14th C. D. Deshmukh Memorial Lecture on 15th Feb 2010. By now, the speech has been covered quite a bit. But still I couldn’t stop myself from saying a bit. The speech title is so timely “After the Crises: Assessing the Costs and Benefits of Financial Liberalisation”.  The crisis has made FSA chief look at the costs and not surprisingly, finds the costs to be equally high as benefits.

I have read many speeches/policy papers etc on the crisis (and many more to go). This is by far the most honest admission by a policymaker on what went wrong in this crisis. Policymakers have listed various factors for the crisis but hardly anyone has  done introspection on his own views/organisation. I am sure they have, but hardly share it.  Infact, most continue to defend their frameworks (ECB, Bank of Japan and even Fed). Some even add how their framework could be applied by others. However, if we look at the economic decline, we see near similar story everywhere.

He admits how policymakers had taken the neoclassical theory to its heart. In academia you still had people looking at other theories but policymakers were all for neoclassical economics.


Did recession end between June 2009 and August 2009?

February 20, 2010

Oscar Jorda of FRBSF writes a short paper which says:

The beginnings and ends of recessions are officially dated about 12 months after the fact. A common rule of thumb declares recessions as two quarters of consecutive negative GDP growth, but this is very inaccurate. A better option is to apply medical diagnostic evaluation methods to the business conditions indexes of the Chicago and Philadelphia Federal Reserve Banks, which suggests the recent recession ended in July or August 2009. 

The two indices links: Chicago Fed National Activity Index  and Philadelphia Fed’s Aruoba-Diebold-Scotti Business Conditions Index.

We have seen many people suggesting recession ended in mid-2009. But this is one of the first research papers I have come across which says when it ended. And it also informs of two indices which could be used as alternative predictors for recession dating.

Knock Knock Knocking on Central Bank’s door

February 20, 2010

Bob Dylan sang – Knock Knock Knocking on heaven’s door. Thomas Hoenig of Kansas Fed just says – Knocking on the Central Bank’s Door.

In managing our nation’s debt going forward, it strikes me that we have only three options. First, the worst choice for our long-term stability, but perhaps the easiest option in the face of short-term political pressures: We can knock on the central bank’s door and request or demand that it “print” money to buy the swelling amounts of government debt. Second, perhaps more tolerable politically, although damaging to our economy: We can do nothing so long as domestic and foreign markets are willing to fund our borrowing needs at inevitably higher interest rates. Or third, the most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level.

I recognize that this last option involves hard choices and short-term pain. However, in my view it is the responsible path to sustainable economic growth with price stability.

Hoenig has been raising numerous concerns over US economy in the previous speeches as well. This is another one on fixing the US fiscal problems. In the end he says:

The only difference between countries that experience a fiscal crisis and those that don’t is the foresight to take corrective action before circumstance and markets harshly impose it upon them. In time, significant and permanent fiscal reforms must occur in the United States. I much prefer this be done well before anyone feels an irresistible impulse to knock on this central bank’s door.

Pretty harsh words.


Here is another central banker, Alex Weber  referring to Bob Dylan’s very apt song for economists- times are changing. So before the crisis, we say times are changing. Then as crisis strikes (to prevent meltdown) and even after the crisis (to prevent fiscal crisis), we sing knock knocking on central bank’s door.  🙂

Elizabeth Duke reviews her first year at Fed

February 20, 2010

Elizabeth Duke, Fed Governor, reviews her first year at the central bank . She calls it unusual and exigent.

The Federal Reserve has been entrusted with special authority to act in unusual and exigent circumstances. Webster’s dictionary defines unusual as “not usual, uncommon, rare.” It defines exigent as “requiring immediate aid or action.” I sincerely hope that financial panics such as the one we just experienced remain rare and uncommon.

Very useful overview of various Fed policies in this crisis. She like Bernanke (and many others) considers AIG support as the most difficult decision. Though she adds given the circumstances, she would still vote to give support to AIG. She even defends usage of Section 13 (3) to prevent another depression. Overall she is proud of the way Fed handled this crisis

The speech gives you hints of pressure Fed officials faced in this crisis. Though, it would have been nice if she had also gioven her views on how Fed plans to manage the huge moral hazard they have created.

Work with DEA on G-20 research issues

February 20, 2010

In case you work for a research organisation, your organisation could partner with Dept of Economic Affairs for working on G-20 issues.

As an important member of the G-20, India has to bring to the table its own assessment of the crisis and the evolving situation and offer its own considered views on global economic cooperation. India has not been a contributor to the global imbalances or to the failures on the financial regulation which are at the root of the crisis. In fact, Indian banking remained relatively unscathed from the excesses of global banking through sound regulation. India’s strong economic position in the midst of the global crisis makes placed to influence and contribute towards reshaping of the world economic and financial order by a research support system pertaining to global financial and economic issues. The DEA proposes to develop such a system by partnering with one or more research organizations (called the Partnering Research Organisation/s- in short the PRO/s).

The research should be able to negotiating positions for India on these issues. It should, the issues posed for research:

  • Clearer understanding of Global Current Status (especially with reference to G 20 countries) and India’s Current Domestic status and standing on these issues.

  • Indian Perspectives and egotiating positions on these issues for the G 20 deliberations

  • Issues important to other countries and groupings.

  • Issues that should be raised by India

Read the concept note for details. 

Let your research organisation know. It could be good learning and networking with DEA.


Clarification of South African Reserve Bank’s mandate

February 19, 2010

South Africa’s finance ministry has sent a letter to the central bank’s governor clarifying the bank’s mandate/objective amidst the crisis.

South African Reserve Bank is an inflation targeting central bank. It may have been looking at financial stability but all from outside. The finance minsitry asks the central bank to look at financial markets closely and look at micro, macro pruential regulation and supervision with a greater focus. More such letters should follow now.  

Overall a general letter. But it also reminds you of the relationship between finance ministry and central bank. Latter is an agent of the government but has to still be seen as independent body.

Interesting developments in central banking.

How exchange rates impact economy?

February 19, 2010

Riksbank Deputy Governor Karolina Ekholm gives a insightful speech on this topic:

She shows via examples how exchange rate changes leads to changes in inflation. It is via the import basket channel. If exchange rate depreciates imports become expensive, If imports form bulk of the inflation basket, it would lead to a rise in inflation.

Then she looks at how exchange rate impacts overall economy. Exchange rate depreciation leads to higher exports but it works with a lag. Usually trade deficit worsens after exchange rate depreciation and improves gradually.

She also looks at exchange rate forecasting explaining concepts of nominal & real exchange rates, interest rate parity and purchasing power parity.  We can kind of predict exchange rates looking at current account and GDP growth rates but only over a long term.

Read the whole thing. Highly insightful. Makes a primer on exchange rates right away. One can keep this speech for future references. It is a topic central banks touch very rarely.

Further explanation for whether microfinance works?

February 19, 2010

I had written a while ago on the new controversy in microfinance research. Recent research shows that microfinance has not really helped individuals where it is most expected.

Two studies, both by Poverty Action Lab researchers have been in heavy controversy since they have been published. First – The miracle of microfinance? Evidence from a randomized evaluation by Abhijit Banerjee,  Esther Duflo,  Rachel Glennerster and Cynthia Kinnan (May, 2009). Second by Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila by Dean Karlan (July, 2009). First based in India, second in Philipines. Both studies show limited impact of microfinance on people’s lives.

The first study was done on a microfinance organisation’s clients – Spandana based in Hyderabad. Abhijeet Banerjee had explained in this article that results will take time to show.

IDF Blog points to Esther Duflo further discussing the results:

Before discussing audience reactions, I’d like to mention Professor Duflo’s dismissal of existential concerns for the sector. She said that it would be a complete mistake to take the results of the Spandana study to mean that microfinance isn’t working. Instead, she felt the study reified the original assumptions and hopes for microfinance, considering its primary function as a financial product. The study found that micro-credit leads to the creation of new businesses, and that for entrepreneurially inclined households, micro-credit leads to the trimming of non-durables and temptation goods from the household budget as the purchase of business/household durables increases. This is great news! And while the study does not show impacts on health, education or empowerment indicators, it does not mean that micro-credit could not effect these areas in the longer term (the study only looked at 18-24 months after the first loan cycle).

 It means simply that if you, as a development practitioner or donor, want to impact empowerment and health outcomes within a year, micro-credit is probably not the most effective channel. This seems intuitive, with the gamut of empowerment/health-oriented development interventions out there, but it still might be a tough pill to swallow for advocates of microfinance who hoped that the holistic transformation of a household would take effect immediately.

Read the whole thing. I don’t understand the fuss really. All know it takes a longer time for any development policy to show desired impact on health, education etc. Even if you see some immediate impact, one usually waits to see whether the results hold in long- term.

Why should it be different for microcredit where the purpose of credit is multidimensional. A person has different needs from the other and is likely to use the money where priority is higher. In most cases, it is usually to pay off debts or to use it for furthering business. Health etc would only follow. 

My concerns with microcredit is not really these results. But it is the proliferation of microcredit firms and it being seen as the best panacea to remove poverty. It is kind of becoming a fad. You see various kinds of seminars on everything on microfinance – human resources for microfinance, Operational framework for microfinance, Microfiance Strategies for removing poverty etc etc.  There were talks that microfinance is becoming a risky sector but was shot down by microfinance industry leaders. They said this sector is very different, payment of loans is very high etc. Well, one must not take anything for granted. We all said the same thing for finance just a while back. The same euphoria has caught up with microfinance.

There have been such fads earlier as well but none worked. Removing poverty is very complex and fads don’t work. You need a mix of policies which will change depending on the location and context. But somewhere down the line we don’t learn lessons from history.

The real challenge for J-Pal/IFMR researchers is not to educate people on their various research studies. The real challenge is to deglamourise microcredit/microfinance and tell all it is just one of the tools to alleviate poverty.


There was a conference by IFMR which looked at translating research into practice. We need more of these with some reality checks.

Inflating US debt will not help

February 19, 2010

Some time back there was a discussion of this paper by Aizenman et al on whether US can inflate its debt.

The authors point to 3 factors that increase/decrease the willingness to inflate:


Is maintaing forex reserves enough?

February 18, 2010

Joshua Aizenman of UCSD has written a useful paper on Korean economy’s experience in this crisis. 

In this paper we explore lessons from the current global liquidity crisis pertaining to the prudential supervision role of central bank in an open economy. The crisis validates the need for external debt management policy in emerging markets. Hoarding international reserves (IR) is a potent self-insurance mechanism. However, it is associated with relatively high costs and is also less efficient in absence of assertive external debt management policies. In the presence of firesale externalities associated with deleveraging, optimal external borrowing-tax-cum-IRhoarding-subsidy reduces the cost as well as the scale of hoarding IR.

 In nut shell he says despite having large forex reserves, Korean economy could not prevent exchange rate pressures. Why? Because it had large short term external debt.

Less than ten years after the 1997-8 East Asian crisis, Korea’s IR/GDP ratio seemed more than adequate by conventional yardsticks. Indeed, observers have been raising questions about the growing costs of stockpiling these reserves. It was asserted that the level of IR in EMs, including Korea, potentially exceed the social optimum [see Jeanne and Ranciere (2005)].

 Having said this, the sense of blissful abundance of IR in Korea evaporated following the sizable increase in Korea’s external debt during 2005-2008. The Korean external short term debt/GDP ratio increased from 7.5% in 2004 to 20% in 2008, while the overall external debt/GDP ratio increased during that period from 23% to 50%, without any significant change in IR/GDP. ‘

 This drastic increase has been attributed to several factors, including exposure to short term inflows of Less than ten years after the 1997-8 East Asian crisis, Korea’s IR/GDP ratio seemed more than adequate by conventional yardsticks. Indeed, observers have been raising questions about the growing costs of stockpiling these reserves. It was asserted that the level of IR in EMs, including Korea, potentially exceed the social optimum [see Jeanne and Ranciere (2005)].

 The forex reserves which were seen as insurance mechanism were considered inadequate. Moreover, emerging economies central banks were scared not to let the reserves slip below a certain %. They were afraid that markets would take that as a negative signal and lead to further speculation. In Korea’s case till swap line with Fed was not set., things looked bad.


Interesting lessons for emerging economies. You need to watch everything and be on toes. The external debt indicators should always be looked at.

How Eugene Fama became an economist?

February 18, 2010
Eugene Fama has written a short autobiography (HT: IGM Chicago Blog). Gives a very useful overview of his work so far.

Spot the fiscal deficit peacock!

February 18, 2010

Paul Krugman points to a Martin Wolf article. Wolf basically says that deficit hysteria is overblown and US is not Greece. Wolf in turn bases his article on Niall Ferguson who has been raising deficit concerns for a while.

In the end Wolf says:

So, yes, high-income countries face huge fiscal challenges. And yes, the crisis-hit countries start from grossly unsustainable fiscal positions. But the US is not Greece. Moreover, a massive fiscal tightening today would be a grave error. There is a huge risk – in my view, a certainty – that this would tip much of the world back into recession. The private sector must heal. That, not fiscal retrenchment, is the priority.

Hmm. We will only know in future how things shape up. Who could have thought US would be in such bad shape in 2007?

Anyways, now to the title of the post. Krugman points to this excellent article by Michael Linden of American Progress.  Linden tells you how to spot a deficit peacock. Unlike a deficit hawk who is serious about cutting deficits, peacock just talks fancy and is pretends to be a deficit hawk. Krugman says most are actually deficit peacocks.

Who is a deficit peacock?


Eleven lessons from Iceland

February 18, 2010

Thorvaldur Gylfason. Professor of Economics at University of Iceland has summarised 11 lessons to be learnt from Iceland.

A number of economists have discussed the consequences of Iceland’s troubles and suggested solutions (Buiter and Sibert 2008, Danielsson 2010), but a key question remains: How could this happen?

To make a long story short (for the longer story, see Gylfason et al. 2010), the absence of checks and balances that had led to an unbalanced division of power between the strong executive branch and the much weaker legislative and judicial branches came to haunt the country when unscrupulous politicians put the new banks in the hands of reckless owners who then found themselves in a position to expand their balance sheets as if there were no tomorrow – and no supervision. Politicians who privatise banks by delivering them on a silver plate to their friends are not very likely to subject the banks to stringent supervision or other such inconveniences.

Iceland’s predicament raises old questions about collective guilt and responsibility. Many wonder how taxpayers can be held responsible for the failures of private bankers. But taxpayers are also voters – many of them voted for the politicians who sided with the bankers, having abstained or voted for the opposition is clearly not a valid excuse. Guilty or not, many feel responsible as taxpayers, but not all.

Read the whole thing.

One year of of fiscal stimulus

February 18, 2010

Menzie Chinn reviews one year of fiscal stimulus. He looks at many studies and articles looking at growth, unemployment etc with and without stimulus. Majority of the studies show  stimulus worked….. barring works of John Taylor and Robert Barro.

So Chinn says:

So, in order to make their case, critics who argue that the stimulus package passed a year ago had no positive impact on GDP need to either (1) explain why the commercial forecasters are incorrect in their assessments, (2) why the CBO is similarly misguided, or (3) why their preferred models are superior to the alternative approaches in this context (demonstrating, along the way, their superior predictive power). Until that occurs, I’ll stick with the mainstream. (Caveat: I freely admit I have no access to the simulations from the Fed’s DSGEs, which would also be in what I consider “the mainstream”.)

The debate will continue for a very long time.

Reforming IMF’s exchange rate surveillance

February 17, 2010

Morris Goldstein of Peterson Institute gives a nice speech on reforming international monetary system. He particularly criticises IMF’s role in exchange rate surveillance and not asking China to undo its beggar thy neighbour exchange rate policies. 

Let me move next to the international monetary system. Here, I want to focus on one issue: what approaches are available to induce large, surplus economies to abandon now—and to avoid in the future—beggar-thy-neighbor exchange rate policies. I would argue that this is a highly relevant issue on at least three counts. 

First, one of the lessons that emerging economies will take away from this global financial and economic crisis is that the world is even a riskier place than they thought and that they need more “insurance” to cope with it—including much higher levels of international reserves. If there are no international rules or guidelines on how they acquire those additional reserves, some countries will be tempted to acquire them by maintaining highly undervalued real exchange rates. 

Second, if the budding global recovery is to be sustained, it will be necessary to engineer not only shifts in demand between the public and private sectors within countries, but also shifts in demand across countries. But if large economies now in surplus refuse to allow their real effective exchange rates to appreciate by any significant degree—or even worse, allow those rates to depreciate, external adjustment will be handicapped and prospects for a sustainable and balanced expansion will diminish

Last but not least, the past half dozen years have witnessed at least one highly significant case of beggar-thy-neighbor exchange rate policy and a marked failure of Fund surveillance to confront it effectively. I speak, of course, of Chinese exchange rate policy. Since I have written frequently and at length on this topic over the past half dozen years.

 Read the whole thing. He even suggest ways for IMF to get out of these policies. Very interesting and different stuff.


Salaries of chiefs of top global banks

February 17, 2010

A while ago, I had pointed to Central bankers’ salaries.

Here is a comparison of salaries of chiefs of leading banks in the world. It also plots the market capitalisation of banks on sides.  Chinese bankers are the lowest paid.

Just to compare central bankers with bankers. The highest paid central banker is Joseph Yam (HK) at $1.32 million. In Banks, you have Jamie Dimon of JP Morgan make $ 19.6 million. Barring Chinese bankers, all other global bankers make more than Joseph Yam.

Videos on Laffrer Curve

February 17, 2010

A visitor on this blog, provides links to videos 0n Laffer curve. Arthur Laffer showed in certain situations, a decrease in tax rates could result in an increase in tax revenues.

Thanks Orphe.

Curriculum on Great Depression

February 17, 2010

St. Louis Fed has developed this wonderful curriculum on Great Depression.

History holds many economic lessons.  The Great Depression, in particular, is an event that provides the opportunity to teach and learn a great deal about economics— whether you’re studying the economic reasons that the Depression took place, the factors that helped it come to an end or the impact on Americans who lived through it.  This curriculum is designed to provide teachers with economic lessons that they can share with their students to help them understand this significant experience in U.S. history.

Though, it has been designed for high school students, but could be used by even experts. The chapters are written very simply and in a workbook fashion. Helps one understand economics better.

  • Lesson 1 – Measuring the Great Depression
  • Lesson 2 – What Do People Say?
  • Lesson 3 – What Really Caused the Great Depression?
  • Lesson 4 – Dealing with the Great Depression
  • Lesson 5 – Turn Your Radio On
  • Lesson 6 – Could It Happen Again?

I do not know when it was designed but just answering the last lesson – yeah we almost had it again.

Apart from this you get:

  • a multiple choice pre- and post-test and answer key,
  • an evaluation form,
  • a reference list, and
  • a list of resources such as newsreels, photos, books and web sites
  • I have just started seeing them and all I can say is – wow, what learning.   Highly recommended

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