Archive for May, 2010

Poverty economists: Should they put more skin in the game?

May 19, 2010

Ravi Kanbur of Cornell Univ writes this excellent piece on Poverty professionals/ economists. (HT: Chris Blattman Blog)

He laments how analysing poverty has become a great career path. Though he does not say it but economists still don’t know how to solve the poverty problem. So, it worsens the stated problem. It is all quite ironical.



Linking fiscal deficits with current account deficits

May 18, 2010

A team of economists have prepared this interesting paper linking the twin deficits:

On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.2–0.3 percentage point of GDP. This association is as strong in emerging and low-income countries as it is in advanced economies; and significantly higher when output is above potential.

It has a nice discussion on how the two are linked:


Is global savings glut consistent with permanent income hypothesis?

May 18, 2010

Yi Wen of St Louis Fed discusses the topic in this short note.

What does permanent income hypothesis say?


Losing faith in ability of economics…..

May 18, 2010

Nick Rowe of Worthwhile Canadian Initiative Blog  has written a really scary post. We have heard number of economists of whether economics has failed in this crisis or not. Whichever side economists were in the earlier debate, there was atleast hope and faith. Economists were hopeful and had faith that if policymakers followed their ideas all would be well.

You had likes of Krugman who said how economists got it so wrong questioning all economics ideas in the last 30 years. His suggestion was monetary policy will not help and let government help restore economy. Then you had likes of John Taylor who said the crisis is because of policymakers/govt and it is best if we return to old times of minimal govt intervention. Then there are so many economists who have defended their turf and

Now the faith on their policy prescriptions seems to be dying as well. Rowe says:


Narayana Kocherlakota Reviews state of macroeconomics

May 17, 2010

We have some more stuff again. But this one is very good and from a policymaker.

Narayana Kocherlakota, President of Minneapolis Fed writes an excellent analysis reviewing macro models, the changes since 1970s and the limitations.


Trichet defends ECB independence

May 17, 2010

John Taylor is one of the leading economists criticising Fed in this crisis.

Now he has  kickstarted criticising ECB as well. He said ECB agreeing to buy govt and pvt sector bonds leads to questions over ECB independence. In his blog he says other articles have come up as well:


A futures exchange for movie receipts!

May 15, 2010

I came across this interesting concept via Knowledge at Wharton.

The movie industry fared well during the current recession, generating record receipts of more than $10 billion in 2009. In fact, demand for movies typically increases during economic downturns even while the demand for most other goods and services falls.

For investors, movies represent a potentially attractive investment. The correlation between annual box office receipts and the Standard & Poor 500 Index is slightly negative, meaning that film investments can still do well while the rest of your portfolio suffers. Moreover, a good blockbuster like Avatar might also produce revenues that are multiples of its costs. There are not many available asset classes that exhibit these sorts of tradeoffs.

So, wouldn’t it be great if you could invest in a new film that you thought could be a real blockbuster?


Questioning role of media, analysts, economists etc in the European debt crisis

May 15, 2010

Lorenzo Bini Smaghi of ECB does it again. He has been questioning many a things about this crisis. and in particular US response to it.  

In this speech he rips apart the various comments media/economists made about Europe bailout. He questions the incentives and many a conflict of interest in the financial industry.

 He says the crisis is in its third stage. First phase started in Aug 2007, second after Lehman fallout in Sep 2008 and now the third phase of European economies.


Niall Ferguson on Fiscal Crises and Imperial Collapses

May 15, 2010

Niall Ferguson of Harvard University gives a real pessimistic outlook (PPT here) on the state of fiscal debt in advanced economies.

What are the ways out of a debt crisis? He says there are six:


Interesting Links

May 14, 2010


  • Tyler Cowen’s superb interview (HT Cowen’s blog)
  • Philip Lowe reviews economic outlook of Australia. It is important as RBA is the only central bank which has raised interest rates 6 times in 7 meetings
  • A Blue Bond Proposal for managing EU fiscal crisis. I donlt think financial engineetring should be tried. Stick to basics first.
  • Three Europe based economists discuss the Europe bailout
  • Profile of Ireland economy going bad 

Learning from Bank of Japan’s exit policies

May 14, 2010

Some might say it is too early to talk about exit policies now. But anyways, we can keep the lessons for future references.

Murtaza Syed and Hiromi Yamaoka write a paper on BoJ’s exit policy five years ago:


Modelling Repo Runs

May 14, 2010

Great Depression led to many a bank runs which led to governments developing deposit insurance. This recession has led to run on investment banks or repo runs. For those who don’t understand this here it goes.  


Effect of question wording on inflation expectations surveys

May 14, 2010

NY Fed economists have an interesting paper on the topic. Inflation expectations (and other economic activities) are measured by surveys (and also by market instruments)filled by households and others. They find that people respond to survey questions depending on how they are worded.  People respond differently when asked about expected prices vs expected inflation.


RBI’s Inflation Expectations Survey of Households

May 13, 2010

RBI mentions this inflation expectations survey in its monetary policy, but very little is known about it. There is hardly any discussion. Given how important inflation expectation is for a central bank and economy, it is surprising to see most people giving it a miss. And houselhold surveys are an important way to measure inflation expectations.

The survey is carried out in RBI bulletin. It should ideally be also published as a seperate publication so that people read it.  

The recent survey is for the period Jan 10-Mar 10. The survey has superb charts and tables to analyse emerging trends. The recent survey shows inflation expectations are picking up in households:


Subbarao on capital inflow issues

May 13, 2010

Swiss National Bank organised a high level conference with IMF on International Monetary System

Philipp Hildebrand Chairman of SNB Board gives opening remarks. IMF chief shares his views.

RBI Governor Subbarao speaks on capital inflows and the problems it poses for emerging economies (EME).


Primer on Central Banks foreign exchange swap lines

May 13, 2010

NY Fed economists Michael Fleming and Nicholas Klagge have a nice short note on the topic. The paer is highly timely as swap lines have been reintroduced. They wrote the paper in April 2010 and would not have expected reopening of these swap lines.How these swap lines work?

The swaps involved two transactions. At initiation, when a foreign central bank drew on its swap line, it sold a specified quantity of its currency to the Fed in exchange for dollars at the prevailing market exchange rate. At the same time, the Fed and the foreign central bank entered into an agreement that obligated the foreign central bank to buy back its currency at a future date at the same exchange rate. Because the exchange rate for the second transaction was set at the time of the fi rst, there was no exchange rate risk associated with the swaps.

The foreign central bank lent the borrowed dollars to institutions in its jurisdiction through a variety of methods, including variable rate and fi xed-rate auctions. In every case, the arrangement was between the foreign central bank and the institution receiving funds. The foreign central bank determined the eligibility of institutions and the acceptability of their collateral. And the foreign central bank remained obligated to return the dollars to the Fed and bore the credit risk for the loans it made.

At the conclusion of the swap, the foreign central bank paid the Fed an amount of interest on the dollars borrowed that was equal to the amount the central bank earned on its dollar lending operations. In contrast, the Fed did not pay interest on the foreign currency it acquired in the swap transaction, but committed to holding the currency at the foreign central bank instead of lending it or investing it. This arrangement avoided the reserve-management diffi culties that might arise at foreign central banks if the Fed were to invest its foreign currency holdings in the market

The authors also analyse whether swap lines worked in their first version. They look at three methods. Broad summary is:

Early evidence suggests that the swap lines were successful in smoothing disruptions in overseas dollar funding markets. Swap line announcements and operations were associated with improved  conditions in these markets: Although measures of dollar funding pressures remained high throughout the crisis period, they tended to moderate following large increases in dollars lent under the swap line program. Moreover, the sharp decline in swap line usage as the crisis ebbed suggests that the pricing of funds offered through swap lines gave institutions an incentive to return to private sources of funding as market conditions improved.

Obviously there will be more papers in future on swap lines – version 1 and version 2. It also opens up questions over International Monetary System which relies on USD as the reserve currency.

Interesting links

May 13, 2010

There is so much to read…..


Behavioralizing Finance

May 12, 2010

Hersh Shefrin of Santa Clara University writes a very long paper on the topic (HT: Fin Prof Blog):


Using UID for financial inclusion

May 12, 2010

Unique Identification Authority of India has kicked off operations. It launched its logo and we get to near news bytes on UID every day in papers. 

Now it has issued a nice working paper on how UID can be used for increasing financial inclusion. It says technology has helped banking but poor are still unbanked: 

With the poor, however, banks face a fundamental challenge that limits the success of technology and banking innovations. The lack of clear identity documentation for the poor creates difficulties in establishing their identity to banks. This has also limited the extent to which online and mobile banking can be leveraged to reach these communities.

Besides challenges of access and identity, a third limitation has been the cost of providing banking services to the poor who transact in smaller amounts, commonly referred to as micropayments. Banks consider such payments unattractive since transaction costs may be too high to bear.

 The Unique Identification number (UID), which identifies individuals uniquely on the basis of their demographic information and biometrics will give individuals the means to clearly establish their identity to public and private agencies across the country. It will  also create an opportunity to address the existing limitations in financial inclusion. The UID can help poor residents easily establish their identity to banks. As a result, banks will be able to scale up their branch-less banking deployments and reach out to a wider population at lower cost.

 An efficient, cost effective payment solution is a dire necessity for promoting financial inclusion. The UID number and the accompanying authentication mechanism coupled with rudimentary technology application can provide the desired micropayment solution. This can bring low-cost access to financial services to everyone, a short distance from their homes.

 So UID along with technology will help the poor. The paper then goes on to detail how UID and its payment system could help facilitate financial inclusion. It will provide four benefits:

  • UID would be sufficient for KYC
  • It will allow banks to network with business correspondents
  • It will be a high volume low cost approach
  • It will allow electronic transactions

The paper explains how the micropayments will work under UID framework. There is not much to discuss as benefits are well-known. It makes following recommendations:

1. The UID-enabled micropayments plan calls for funding the initial fixed costs of infrastructure to help jumpstart financial inclusion with budgetary help from the relevant government ministries. The initial infrastructure costs may include:
(a) Funding for central payment switches and gateways
(b) Initial costs of microATMs in rural areas
(c) Funding the creation of a depository for no-frills accounts, if necessary

2. Funding of start-up costs for the UID and UID-enabled bank account by government or other agencies. This may include a small cash incentive for opening the account and an additional amount for the state as a Registrar to cover the costs of enrolment hardware and labour.

 3. The RBI already offers a Rs.50 incentive for no-frills accounts operated with biometric smartcards. This incentive may be extended to the UID-enabled bank account, which would also be a biometric-enabled no-frills bank account.

 4. Define the means to host no-frills accounts in conjunction with a consortium of banks, if necessary.

5. Define device standards and communication standards for transactions within the microATM network in consultation with IBA, NPCI and the larger ecosystem.

 6. Amend rules so that the UID is sufficient to get a no-frills UID-enabled bank account. This activity may be co-ordinated for pro-poor products across all regulators viz. RBI, PFRDA, IRDA, SEBI etc.

 7. Consider the balance enquiry printout from a microATM as sufficient substitute for a copy of the bank statement/passbook.

 8. All agencies and ministries that disburse subsidies should begin evaluating the process of converting their subsidies into electronic benefit transfers that can be directed to UID-enabled bank accounts. States should also be encouraged to adopt the UID-enabled micropayments network for distribution of social welfare benefits. The government may also bear the cost of transactions so that the beneficiaries receive the full amount of the benefit.

 UID could be either be a game changer (if done properly) or a place for huge protests/political lobbying. Mint says the protests have already begun:

 The inability to deliver goods and services is a key developmental failing in India. …….. 

Today, with the aid of technology, the country is at a threshold where this fat layer can be bypassed. Technology now allows individual recipients of aid to be identified and money routed directly into their bank accounts. A 16-digit unique identity number is to be created for each citizen who wants to avail these benefits by the Unique Identification Authority of India (UIDAI). 

Yet this simple expedient is today being vilified and the danger is that the project may never take off. As reported in Mint on Thursday, a coalition of 100-odd non-governmental organizations (NGOs) of the Leftist variety are ganging up to mount a legal challenge to the existence of UIDAI.  

Who are these NGOs and why are they so opposed to the UID project? What motivates them and what are the political forces behind the growing storm against UIDAI? 

One big argument against UID is that it violates the Right to Privacy. From this flow arguments such as the use of UIDAI data by intelligence and security agencies.  

Behind these surface arguments lies a big, unsaid fear: If the UID project succeeds, it will render Leftist politics pretty much irrelevant (more about this anon). If a poor person gets money that is due to him directly in his bank account, he will have no reason to plead with tyrannical local officials or grovel before his elected representatives. This scenario, which can get real in the near future, terrifies many.

 Sad developments but that is reality for you. Mint also has this video of Nandan Nilekani explaining all about UID.

Why countries overreport oil reserves?

May 12, 2010

Philip Sauré of Swiss National Bank writes a great paper on the topic. It is again a very different paper.  

He says experts are divided over the reporting of oil reserves. The economies that produce oil overreport the oil reserves and the thinktanks say the figures are highly overestimated: 


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