Archive for February, 2011

Does free trade and outsourcing always deliver?

February 22, 2011

The oldest issue in economics keeps burning.

Mankiw recently wrote an article urging US policymakers/public to take emerging markets as partners not rivals. He says the recent speech from Obama might indicate that China and EMEs are threats to US economy. They are not.

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How the recession impacted the museums?

February 21, 2011

Betty Joyce Nash of Richmond Fed has a nice write-up on the topic.

Museums are like public goods. Hence pricing them is a tricky business:

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What leads to economic recoveries?

February 21, 2011

Economists are full of advice and suggestions on what causes recessions. Little is known on what causes recoveries. Partly the reason is great moderations which fuelled a  false sense in many an econs that busts are over.

Richmond Fed has a short review of factors that lead to economic recoveries . There are following factors:

  • Monetary Policy – helped recover from most recessions as earlier recessions were brought by tight mon policy
  • Fiscal Policy – not much as mon policy was more helpful
  • Clean balance sheets – cleaner the better as recessions are increasingly becoming balance sheet driven. All three – households, corporate and government balance sheet matters
  • Confidence – very critical
  • Good shocks – like foreign investment, rise in immigration etc. Post 1990-91 recovery was weak. It required a shock from IT to push recovery (which then became bust soon)

Pst 1991 recession, recoveries have been slow and jobless. Why so?

Diagnosing the reasons behind the new shape of American recoveries — if, indeed, the last several recoveries represent a long-term change — remains a challenge for the economics discipline. Chicago’s Cochrane notes that it is an unsolved puzzle. “In the early 20th century, we had frequent deep recessions, but we bounced out of them quickly,” he says. “Now we seem to be bouncing out of them slower and slower.

Europe certainly got to a position in the 1970s and 1980s where it would get stuck without ever bouncing out, usually for various policy reasons. Maybe that’s what’s going on now in the United States, too. That would be depressing.” It surely would. On the other hand, anyone old enough to have survived the stagflation of the 1970s and the recessions of the early 1980s knows that thoughtful policy changes can bring a powerful recovery even in exceptionally tough times. Joe Palooka may be woozy, but the ring doctor hasn’t stopped the fight yet.

 

SPV for Management of Foodgrain Storage

February 21, 2011

GoI is just busy creating more and more layers of bureaucracy. Planning Commission created another evaluation office despite having one (criticised by Mint). Now is the turn of Ministry of Agriculture.

In a press release it says:

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Questions and answers on rising food prices

February 18, 2011

Valerie Guarnieri, WFP’s head of Programme answers 10 questions on rising food prices.

Hassan Zaman, Lead Economist of the World Bank’s Poverty Reduction and Equity Group, also does a Q&A on the food prices crisis.

HDFC debt fund for cancer cure — mixing finance with philanthrophy

February 18, 2011

HDFC Mutual Fund, mutual fund company of HDFC fund has launched an interesting mutual fund product – HDFC debt fund for cancer cure. The product mixes finance/mutual fund management with philanthropy.

The scheme idea is:

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How Swiss National Bank provided liquidity in this crisis?

February 18, 2011

Raphael Auer and Sébastien Kraenzlin of Swiss National Bank have this paper on the topic.In this, the authors look at how SNB’s liquidity facilities differed and helped in the crisis.

Unlike most central banks, even before the crisis SNB allowed foreign banks to borrow Swiss Frank (CHF) liquidity via its Repo system. Hence, in the crisis this facility helped. As CHF is used by many banks outside Swiss especially in Europe, there was a concern for CHF funds at the height of the crisis .

There were three broad strategies used by SNB:

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UK starts with its Financial Policy Committee

February 18, 2011

The Government and the Bank of England kickstarted (Govt. press release BoE press release) its innovative proposal of having a Financial Policy Committee along with MPC.  It is so far an interim FPC and will soon become a constitutional authority as well.  

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Kauffman Foundation’s leading economics bloggers survey- Q1 2011

February 18, 2011

Kaufman foundation released (pdf) the survey of leading economics bloggers. (Disclaimer: This blog is a participant in this survey)

The bloggers are more hopeful compared to previous survey:

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Indian Economy – Fortnightly Update

February 18, 2011

The latest edition is here. Following topics are covered:

  • WPI Inflation for Jan-11
  • IIP for Dec-10
  • Exports for Dec-10
  • CSO’s advance estimates for FY 2010-11

Comments/suggestions are always welcome

The paradox of active and passive mutual funds

February 17, 2011

K@W has an interesting note on this paradox.  

The paradox is if passive funds give better net returns (gross returns minus fees) why do active funds remain? And not just remain but active funds are more popular as well. There have been number of reasons for the same:

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Trying to nudge people into yoga training

February 17, 2011

At a conference, the organisers provided free yoga training in the morning to the attendees. However, there were very hardly any takers. The low attendance was surprising and the trainer was miffed.

I suggested to change the default strategy. Instead of letting people opt in for the yoga training let them opt-out of it. Hence, instead of mentioning yoga as just a free facility and asking people to attend, make it a part of the program schedule. So, in the program schedule mention yoga training upfront nudging people to attend it.

It was thrilling to think of it and suggest it. However, it is unlikely to be implemented for the administration issues. But it was satisfying to think on those lines…

What led to break-out of the Greece crisis….a monastery?

February 17, 2011

Most who had looked at Greece’s economic data before its crisis in 2010, would have said things are wrong and needs to be corrected. Though, even the best could not predict a crisis as deep as the one that happened. And even more intriguing was the deep interlinkages and spillovers effect it had on other Europe economies.

However, what brought the curtains down on Greece? What was the Minsky moment?

Michael Lewis has a superb article on Greece and he tracks the Minsky moment as a fallout of a monastery in Greece. Vatopaidi monastery in a very cleaver arrangement, swapped its land with some key land portfolios of the Greek Government. Once this was exposed, the government had to step down. This led to a new government which then looked at the fiscal numbers and declared the deficit was much higher leading to a meltdown.

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How fiscal austerity plans could lead to potential social unrest?

February 14, 2011

Joachim Voth of Universitat Pompeu Fabra writes this interesting paper.

In this paper he shows why governments are reluctant to press fiscal austerity. It is because they expect it could lead to social unrest. The authors builds on the paper based on experiences from 11 South American economies from 1973-95.

On May 1, 2010, the Greek Prime Minister George Papandreau announced a set of drastic austerity measures. May Day itself saw clashes between police and
demonstrators. On May 5, a general strike paralysed the country; armed demonstrators fought street battles with police. A bank burned down, and numerous
demonstrators and policemen were injured. By the standards of anti-gov ernment protests, the May 2010 incidents in Athens were mild. Many countries have seen severe rioting and political violence following budget cuts. In this paper, I examine the extent to which social unrest is clearly associated with fiscal austerity. Do riots, anti-government demonstrations, political assassinations, and attempts at revolutionary overthrow become more common if governments push through tax hikes and spending cuts?

I analyse this question for South America during the period 1937-1995. The continent’s notoriously volatile politics, combined with large swings in fiscal
conditions, make it a particularly appealing laboratory for exploring the link between fiscal adjustment and social instability. From the popular protests that led to the fall of the de la Rúa administration in Argentina to the ‘Caracazo’ in Venezuela, austerity measures have played a prominent role in numerous cases of
mass protest (Sonntag, Maingón, and Biardeau, 1992; Handelman and Sanders, 1981).

The findings are:

There is clear evidence that reductions in spending clearly and strongly increase the risk of unrest. While the share of strikes, assassinations, riots and demonstrations that can be explained by budget cuts is not very high, the relationship is robust for countries with both democratic and autocratic structures. All indicators of unrest except general strikes are significantly and negatively associated with government expenditure. There is some evidence that the effect of budget cuts in times of inflation is particularly pronounced, and that ‘normal times’ without rapid price increases only see a mild association between austerity and anarchy. Constraints on the executive do not matter for the strength of the link, but a regime’s durability – the length of time since the last significant changes in its political fabric – does: countries with a longer history of stability show a much weaker link between budget cuts and chaos. There is also clear evidence for a discontinuous increase in the effect of budget cuts. Extreme movements in measures of unrest are more readily explained by austerity measures than relatively mild upticks in upheaval.

Our results provide a rationale why governments often find it hard to cut expenditure. While unrest is a relatively low-probability event – even in our sample
of South American countries over the last 70 years – there is a non-zero probability that austerity will fan the flames of discontent, leading to violent anti-government protests. It may also offer a perspective on why public indebtedness differs so much around the globe, and even amongst countries with relatively similar levels of economic development (Alesina and Perotti, 1995).

There are some nice case studies of Brazil, Chile, Peru etc.

Nice different perspective. Links social unrest with macroeconomic  performance..

Incentivising further for getting free pulse polio drops

February 14, 2011

Pulse Polio drops are a free health service provided by the Indian Government all across the country. The program is funded by the central govt and administered at the state level. Then some states may have their own such programs for more speedy eradication. I may be wrong on this structure so people who know about it kindly let me know.  

On a visit to a local hospital in Pondicherry, I noted that parents/guardians are further incentivised to give polio drops. They give a glass/small kitchen item for bringing their children to the local hospital for the free polio drop! 

I have seen this polio drops in couple of places as well and it is without any incentive even in rural areas. I inquired this with some local people and they told me this is to create awareness. People are more interested in the freeby like a glass or something. Polio drops is just an add-on for them. There focus on healthcare is very poor and hence the additional incentive.

I found this very interesting. How difficult it is in India to provide these important services. Even free things are not understood by the people and requires incentives. Supply does not creates its own demand.Even free supply doesn’t.

Central Bank Lessons from the Global Crisis

February 13, 2011

This is the title of a new speech by Stanley Fisher, Governor Bank of Israel. He was in India to deliver the 3rd P. R. Brahmananda Memorial Lecture organised by RBI.

RBI Governor Dr. D. Subbarao, gave a welcoming address. Here is a snapshot of the lecture.

The lessons are:

  • Lesson 1: Reaching Zero Interest Lower Bound is Not the End of Expansionary Monetary Policy
  • Lesson 2: Critical Importance of having a Strong and Robust Financial System
  • Lesson 3: Need for Macroprudential Supervision
  • Lesson 4: Dealing with Bubbles
  • Lesson 5: Lender of the Last Resort, and Too Big to Fail
  • Lesson 6: Importance of Exchange Rate for a Small Open Economy
  • Lesson 7: Eternal Verities – Lessons from the IMF
  • Lesson 8: Target Inflation, Flexibly
  • Lesson 9: “Never say Never”

Much of the lessons have been suggested by many policymakers/econs. But a useful recap.

 

1% rise in India’s fiscal deficit = 0.25% rise in WPI inflation

February 11, 2011

Jeevan Kumar Khundrakpam and Sitikantha Pattanaik of RBI in this paper explore the relationship between fiscal deficit and inflation in India. The topic of the post comes from the paper’s central finding.

The authors frame this paper in the global financial crisis setting where the fiscal deficits have surged.  They say the initial impact of rise in FD on inflation was limited:

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South Asian economies – a depressing paradox

February 11, 2011

Ejaz Ghani of World Bank in this blogpost ponders why South Asian region remains so poor despite strong economic growth. He calls it a depressing paradox.

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Mixing economics analysis with sports

February 11, 2011

Tobias Moskowitz of Chicago Univ and  L. Jon Wertheim have written this book Scorecasting. in this book, they mix economic analysis with sports.

Economix does an interview discussing the book. In short, there are two amazing findings:

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Four questions related to Japan’s economy

February 10, 2011

Another excellent speech by BoJ chief- Masaaki Shirakawa.

He says he is asked 4 broad qs wrt Japanese economy in most meetings with press/policymakers:

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