Archive for April 7th, 2010

Comparing Eurozone and US in this recession

April 7, 2010

Charles Wyplosz compares the two regions in this nice short paper.

This paper starts by laying down the facts of what led to the current European crisis in Section 2 and then attempts to disentangle the causes and effects in Section 3, in which the paper argues that Europe never had a chance to avoid contagion from the US. Trade and financial links—some of which operate through third countries, those in East Asia in particular—are simply too powerful. At the same time, domestic conditions were often critical in a number of countries where house prices had generated unsustainable booms, even though there is no European equivalent to subprime lending.

A comparison of the economic situation across the Atlantic cannot be complete without looking at policies. Section 4 looks at fiscal policies and provides currently available evidence that suggests eurozone governments have showed considerable restraint in using this instrument, something that may well be a consequence of the Stability and Growth Pact. While de facto suspended due to exceptional circumstances, the pact is bound to be reactivated when the situation improves. This may deter governments from undertaking active countercyclical policies. Section 5 examines monetary policy, showing that the European Central Bank (ECB) intervened promptly and massively to attempt to maintain liquidity in the money market. It is also argued that the ECB was more focused on (then high) inflation than on the (then largely unexpected) upcoming recession.

The last section offers some concluding remarks that may be interesting for East Asians. The quietness on the currency front—the raison d’être of the monetary union—is a remarkable achievement. It has not prevented markets from discriminating among countries, but this time through another channel: the markets for public bonds. Reasons why both the ECB and national governments have acted more prudently than most other developed countries are also discussed.

The author points things were not as bad in Eurozone. As in EU Households has limited exposure to financial markets, EU exports declined less etc.  So both financial and trade channels were limited. But still EU faced severe recession. The economies collapsed like US and in same cases more than US. Eurozone entered recession late but impact was as great. Why is this? The author looks at all possible channels but fails to find a convincing reason. He says more detailed analysis would be needed. In the end he offers some possible reasons which need to be looked at:

Finally, a puzzling question: With limited direct exposure of households to financial events and a limited impact of declining exports, why is the recession so severe? Policy reactions have been subdued and late, but this does not quite explain the rapid decline in consumption and productive investment. An intriguing possibility is that demand was reined in simply because households and firms became overly cautious, thus triggering a self-fulfilling prophecy. This has led a number of observers to recall Keynes’ views on animal spirits.

 Overall, a nice comparison of the two major economies in this crisis.

Measuring financial access…

April 7, 2010

Anita Sharma and Natalie Colatosti of IFMR Advocacy have written an insightful post on the topic. The authors share their experiences of attending a workshop by Amy Jensen Mowl of IFMR. Amy has been researching on the issue.

Measuring access to financial services is of vital significance. While addressing this issue, Amy emphasized the importance of data at addressing policy issues and evaluating impact of access within and across countries. In this context, she highlighted some of the pertinent questions that need to be addressed to impact the specific and unique needs of the poor. Some of the questions that she elaborated included how access to finance is important to the poor and who are excluded, which type of financial services should be available for maximum impact on poverty alleviation, what services are most important for them and what challenges they face while seeking them.

When measuring access, Amy discussed the need for both supply and demand side data. We can use supplier data (regulator surveys and bank surveys) and user data (enterprise survey and household survey) for this purpose. For example, regulator surveys (such as RBI surveys) provide reliable data, though with some limitations such as non-coverage of the informal sector. User data can be sourced from village level surveys, household surveys and enterprise surveys. While discussing the issue of generalizing data from one location in India, Amy acknowledged that while rich data are available (such as from the Centre for Monitoring the Indian Economy) they cannot be generalized.

While enlisting good quality data sources, Amy mentioned The Centre for Monitoring Indian Economy (CMIE), National Council of Applied Economic Research (NCAER), and National Sample Survey Organisation (NSSO) in India and Finscope survey, British Household Panel Survey and DFID’s Young Lives Programme (on childhood poverty) outside India.

While discussing the core and headline indicators, she described the four-fold classification of population groups in her survey:

  • Banked – households that have access to bank services
  • Formally included –  households that have access to banks, formal institutions and other financial institutions
  • Financially served – households that have access to banks, other formal institutions as well as informal sources (informal sources do not include borrowing from family and friends)
  • Financially excluded – individuals who do not fall under any of the three aforementioned categories

One needs to be aware of these concepts while reading research on financial access/inclusion etc.

Inflation expectations and monetary policy response in India

April 7, 2010

Michael Debabrata Patra and Partha Ray have written a paper on the topic:

This paper pursues a computationally intensive approach to generate future inflation, followed by an exploration of the determinants of inflation expectations by estimating a new Keynesian type Phillips curve that takes into account country-specific characteristics, the stance of monetary and fiscal policies, marginal costs and exogenous supply shocks. The empirical results indicate that high and climbing inflation could easily seep into people’s anticipation of future inflation and linger. There is a reputational bonus for monetary policy to act against inflation now rather than going for cold turkey when societal compulsions reach a critical mass.


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