Euro crisis – Analysing from Optimal Currency Area perspective

I have been trying to read up on old literature on euroarea issues. Especially the opinion of Europe based economists. I am surprised to find quite a few critiques of Eurozone and EMU even in early days.

Assorted Links

• There is a new paper (free older version here) which says consumer subsidies don’t improve nutrition. IFMR Blog comments on the paper
• Cowen points to an unusual football match between Barbados and Greneda 🙂
• Krugman criticises Kevin Warsh. Also a quick criticism of freshwater economics
• Do Hungry People Take Bigger Financial Risks?
• Ireland’s fiscal austerity has led to painful lessons
• Benchmarking financial sector development
• Using behavioral economics to plan vacations better

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Linking international trade and finance theories

As this crisis started, there was introspection from some economists (though some still did not change their views which was disappointing). The central view that came forward was macro-models did not have finance and finance models did not take into account macro developments. So, both macroeconomists and financial economists did not understand the linkages and underestimated the crisis.

Expeditionary Economics: Should US military be educated in economics?

Carl Schramm of Kauffman foundation writes an intriguing piece. It was an article written for foreign affairs. As that is paid, the author provides a free version but cannot extract from the piece. So, it will be a small post.

Assorted Links

• Securitisation in microfinance sector picking up (via IFMR Blog)
• TTR says India is likely to achieve 9% growth this year itself. He also points to several IIT/IIMs being set up
• Gulzar on the two-handed economist. It is a professional hazard and we see it in all issues right now.
• Kartik Athreya takes on economics bloggers. He says bloggers make economics look very easy. Tyler Cowen responds and points to comments of others as well. Let’s leave the debate to experts
• Worthwhile Blog on knowledge in blogging. I think bloggers have contributed to understanding and compiling thoughts on economics. It is great to get views of Krugman, Cowen, Mankiw etc so regularly. It has opened up flow of economic exponentially
• Krugmans recent talk on Inequality And Crises
• WSJ Blog points BIS Warns Central Banks Against Keeping Rates Low for Too Long
• Paul Romer on how new rules have helped shape up Delhi Metro project. Excellent and different as always. Again a reminder to Kartik Athreya that blogging is great. Getting to read Paul Romer would have been so difficult otherwise.
• PSD Blog points to Taleb’s views on Keynesian stimulus.  During his talk, he advised Bank economists to give up on regression analysis and take on jobs as taxi drivers.
• Economix points to a study on Stock Markets and the World Cup

 

ECB Research Bulletin – Wage Dynamics, fiscal stimulus working and risk in monetary policy

ECB’s recent research bulletin looks at all these three issues. It covers research on these issues:

Wage dynamics in Europe: some new findings By Ana Lamo and Frank Smets
The response of wages to the sharp contraction in economic activity during the recent crisis has been very subdued in the euro area. The research summarised in this article uncovers some features of wage setting in Europe that contribute to the aggregate degree of wage rigidity.

When does fiscal stimulus work? By Günter Coenen, Juha Kilponen and Mathias Trabandt
Expansionary fiscal policies have been used extensively during the financial and economic crisis with the aim of boosting overall economic activity. Building on insights from structural macroeconomic models, this article highlights key factors that are important for successful fiscal stimulus programmes

Risk, Uncertainty and monetary policy By Geert Bekaert and Marie Hoerova
This article documents a strong co-movement between a measure of stock market risk (the VIX) and monetary policy. It analyses which of two components of the VIX, risk aversion or uncertainty, are primary drivers of this co-movement. The main findings are that an easing of monetary policy leads to  a decrease in risk aversion in the medium run while higher uncertainty leads to a laxer monetary policy.

Very useful literature survey from a European perspective. Especially the first case on wages. In Europe labor market what has happened is either people have lost jobs or hours at work have declined. However wages have not declined. Why?

When examining the determinants of wage stickiness, the WDN evidence suggests that collective bargaining institutions, employment protection legislation (EPL) and product market competition are important factors shaping the response of wages, employment and prices to economic developments. In particular, higher-level bargaining, stringent EPL and a lack of goods market competition lead to higher real wage rigidity and a stronger employment response to shocks.

Historical perspective on Congressional Budget Office

Hungary has set up an independent fiscal council to look and evaluate the country’s fiscal situation. 

Assorted Links

• Gulzar says says fiscal situation is better in major European economies and can look at continuing expansionary policies. Also see the perilous global debt problem
• Explaining Chinese currency multiple names (HT Tyler Cowen)
• WSJ Blog points to a speech from an earlier ECB policymaker who criticises Thatcher-Reagan Reforms for this crisis.
• Krugman’s recent article says there are chances of a third depression.
• Mankiw points to his latest article on fiscal stimulus issues
• Chinn points to a new voxeu e-book on global imbalances
• Hamilton on indentifying business cycles
• Mostly Economics ranked as the seventh best blog as per onlineschools.org ranking   Thanks to all the readers and visitors of this blog.

Assorted Links

• Gulzar on Calculating a bank tax
• Krugman says in the long run we are still dead
• His recent article on Chinese exchange rate policy
• WSJ Blog points to OECD chief interview. He says Europe should have plan b in case money has to be pumped for bank stress tests
• Worthwhile Blog points US is far away from its exit policy
• Economix Blog points that educated women are increasingly opting for motherhood

Literature Review of financial liberalisation, growth and structural reforms, monetary policy and asset prices

IMF’s recent quarterly bulletin has excellent literature reviews on the 3 topics: 

How South Korea is gearing up?

I finished reading this very interesting Knowledge @ Wharton special edition on Korea.

Assorted Links

• On seeing the stats page of this blog, I realised many searches on the India Rupee Design contest. Five people were shortlisted but designs were not made public. I did a search and found the 5 designs have been made public. They are here. All look similar to me.
• Gulzar summarizes the debate on exit from monetary accommodation. As usual very detailed and useful
• WSJ blog points World Trade Volumes Dropped in April. A BIS Paper is discussed in UK Parliament
• JohnTaylor looks at Why Poland was the only EU Country to Avoid Recession?
• IMF Blog has a post from Olivier Blanchard and Carlo Cottarelli on Ten Commandments for Fiscal Adjustment in Advanced Economies

Analysing Swiss National Bank’s balance sheet

Pick up of balance sheet analysis of central banks is one big positive from the crisis. It is a very interesting field but has been ignored till Fed intervened massively and expanded its balance sheet, followed by others.

SNB balance sheet has also expanded three times from pre-crisis levels. Philipp Hildebrand, Chairman of SNB discusses this in his speech. The balance sheet has expanded on two counts – one buying Swiss govt bonds and two buying foreign exchange.

Art of central bankers dissenting: BoE vs Fed

Bank of England released minutes of its MPC meeting held on 10 June 2010. Andrew Sentance, an external member dissented and wanted BoE to raise Ban rate by 25 bps.

Now BoE has this interesting way of presenting its minutes. In US, dissent is mentioned explicitly and also the dissenters also presents his reasons for the same. Like Kansas Fed President Thomas Hoenig again dissented in the June FOMC meeting. The statement said:

Assorted Links

• Meghna Patel discusses the impact of 3G and Broadband Wireless Access (BWA) Spectrum Auction on money and bond market
• Fed continues with its easy policies. WSJ Blog compares  the June statement with April’s statement
• Krugman responds to Wolfgang Franz’s criticism. Franx is German government’s economic advisory panel. This is very well put. One does not understand why Europe policymakers keep saying that crisis is mainly because of US.
• Krugman says that “economics profession has spent the last three decades systematically destroying the hard-won knowledge of macroeconomics.” 
• IFMR Blog points to a study which looks at whether ethnicity influences the choices that small business owners makes. I had the pleasure to attend the initial findings of the paper in Chennai. It was a lot of fun.
• WSJ Blog points to a report which says Financial Conditions continue to tighten Sharply
• Worthwhile Blog points US fixed rate mortgages aren’t fixed rate mortgages; they are weird, stupid, and dangerous
• Celina Jacobson sends me an email pointing to “50 Important Financial Tips for Young Adults”.
• Rodrik on some development fallacies that never die
• Chinn points to new OECD factbook
• PFM Blog points to experience of independent fiscal institutions
• Washington not happy with China’s exchange rate changes. They think measures did not go far enough

Why are fisheries declining?

WTO’s Annual Trade Report will be on the theme – “Trade in Natural Resources: Challenges in Global Governance”. So, WTO has this interesting e-forum to discuss the relationship between international trade and natural resources. In this interesting initiative, people are asked to discuss relevant issues on the topic in form of shirt articles. WTO then publishes them on its website.

I came across this interesting piece by Rashid Sumaila (Associate Professor, University of British Columbia Fisheries Centre) and Leslie Delagran (Economist, Oceana). The authors point that fisheries are decling and the reason is the government subsidies:

Rather than collecting rents from resource exploitation, governments have been actively subsidizing fishing, leading to even greater fishing effort and resource depletion. Subsidies that expand fishing capacity, including subsidies for vessel construction and modernization, operating costs (particularly fuel), construction of fishing ports and processing plants, payment for foreign access agreements and marketing support are estimated to total about $16 billion globally each year (Sumaila et al., in press).

This has been distorting the incentives and people aer just overexploiting the fisheries. This is even the case for private fisheries and not just for commons.

Impact of computers on human capital

Number of governments have taken initiatives to provide subsidies to poor people that help buy computers. The question is have computers helped children improve their performance?

Assorted Links

• There is news that Peter Orszag will leave OMB office in July. Simon Johnson proposes Paul Krugman for  Office of Management and Budget
• Gold Standard Blog on the bond bubble
• Cowen explains Germany’s fiscal policy
• WSJ Blog points to Fed’s new book – Teal Book. It will merge the green and blue book and hence the colour teal. Green book contains analysis of US economy and is prepared by Fed staff It is given to FOMC members 6 days before the monetary policy meeting. Blue Book looks at monetary alternatives ahead of the meeting.
• WSJ Blog points suburb population has slowed down

What explains the rise in volatility of food prices?

IMF economist Shaun Roache in this paper says:

The macroeconomic effects of large food price swings can be broad and far-reaching, including the balance of payments of importers and exporters, budgets, inflation, and poverty. For market participants and policymakers, managing low frequency volatility—i.e., the component of volatility that persists for longer than one harvest year—may be more challenging as uncertainty regarding its persistence is likely to be higher.

This paper measures the low frequency volatility of food commodity spot prices using the spline- GARCH approach. It finds that low frequency volatility is positively correlated across different commodities, suggesting an important role for common factors. It also identifies a number of determinants of low frequency volatility, two of which—the variation in U.S. inflation and the U.S. dollar exchange rate—explain a relatively large part of the rise in volatility since the mid-1990s. 

 Interesting approach. Breaking up volatility as low frequency and high frequency and seeing what explains latter. Am wondering could we use the same approach for calculating inflation as well? We usually exclude food and fuel from headline to get core. Could we instead just seperate high volatile food items from headline? This is particularly important for India (and other developing) where food forms bulk of the basket. We have these trimming inflation from Dallas and Cleveland Fed but they exclude hugh volatile items in general.

Assorted Links

• Gulzar asks Do private schools improve public schools? Yes they do
• WSJ Blog on Impact of Yuan appreciation on General Manufacturing. It also says Fed May Be More Cautious This Month
• Fin Prof Blog points to Dan Ariely’s new book. Also a new paper on Behavioral Real Estate
• China Central bank FAQs on Renminbi revaluation
• Monetary Authority of Singapore responds to Chinese announcement of Renminbi revaluation