Archive for September, 2011

Indo-Nepal Remittance System – Measures to enhance usage

September 30, 2011

I was not aware of this remittance facility started by RBI and Nepal Central bank for migrant workers of Nepalese origin working in India to remit savings back to Nepal.

RBI points despite the facility there are very few takers. There is lack of information both at banks and customer’s level. RBI points to some errors being conducted which leads to rejection by banks to remit. The note says that banks should take efforts to educate Nepalese migrants about this facility so that they could remit savings in a cost0efficient manner.

Lack of banking channels for remittance could in turn be leading to informal channels of remitting finance to Nepal. I am wondering what are those..

Interesting stuff. Makes for a nice case study and a random evaluation experiment..


What if Swiss National Bank has negative equity…

September 30, 2011

I knew this was coming. After some huge intervention by SNB recently in forex markets, people were speculating on what would happen if SNB ends up incurring losses on its forex operations.

What is SNB doing currently? To defend its CHF/EUR peg at 1.2, it is buying foreign currency and selling CHF. This is leading to rise in its forex reserves. They have risen from some USD 280 bn in July to USD 316 bn in Aug. The forex reserves are more Euro-heavy. SNB has been shifting its forex assets from USD to EUR. EUR depreciated in 2010 leading to losses for SNB. And EUR is under pressure now. So, it can clearly happen again. In that case, SNB might have negative equity and need more.

SNB’s Vice-Chairman Thomas Jordan gives a superb speech on the topic:


In the EU, the instinct is always to fudge..

September 30, 2011

This is a superb interview of Henry Farrell . Farrell is a political science prof so you get that perspective on EMU and its crisis.

He says EU leader just fudge and make it look to outside world that the crisis is solved. But in reality it is just that a fudge..


Can there be a free lunch for America?

September 30, 2011

 of UCB has this nice piece in Project Syndicate.

He says long term interest rates are so low in US that government can issue more long term bonds and use the proceeds to invest in infra projects. The projects will then help the ailing economy. Shiller made the same point that govt should actually be taking advantage of record low rates and raise more resources.


Does improvement in Doing Business rankings lead to higher FDI?

September 29, 2011

One would think so. But  Dinuk Jayasuriya of WB says the relation is not as robust.


Tectonic plates of global economic power are shifting

September 29, 2011

This is a very powerful speech by Robert Zoellick, President World Bank. (HT: Justin Lin Blog)

He says the world is at a critical inflection point where developing countries are going to form a larger share of the world economy. However, the institutions as we have it today has not really adjusted to this change. There is a need to adjust to this new reality and give developing a larger share in world affairs.

He goes back to BWoods when the three hallmark instis were created but for different times:


Why savings rate increased in China despite falling real rates?

September 29, 2011

Malhar Nabar of IMF looks at this interesting puzzle on Chinese household behavior.

Real interest rates have declined in China during 1996-09 but household savings (HH) as a % of GDP has risen from 19% in 1996 to 30% on 2009. This is a puzzle as one would assume as rates decline savings decline and consumption rises. This is the reason for rate cuts during the 2007 crisis (and previous crisis). In China you get a different behavior of savings rate actually rising.



Reviewing India Economy – Progress and Prospects

September 28, 2011

A nice speech by Deepak Mohanty of RBI. A nice snapshot of the progress so far (focusing on 1990s crisis and progress from then) and challenges ahead.

In the end he says:

Envisioning India’s emergence as a major economic power in the world, Dr. Manmohan Singh in his Union Budget 1991-92 speech that launched wide ranging economic reforms had quoted Victor Hugo’s saying, “no power on earth can stop an idea whose time has come”. Ever since, there has been no looking back as India launched wide ranging structural reforms and has made significant economic progress over the past two decades. India’s industrial environment has become more competitive and open, infrastructural gaps have been sought to be bridged through public-private initiatives with both domestic and foreign sources of funding, current account has become fully convertible while capital account is virtually free for non-residents.

The policy environment has become more enabling with rule-based commitment on fiscal policy and considerable instrument independence for operation of monetary policy. As statutory preemptions were reduced and interest rates were deregulated, banks gained operational autonomy for commercial lending. As a result, India’s per capita income, which had taken four decades to double by 1991, doubled thereafter in 15 years and is likely to double again in 10 years by 2017-18. If India could maintain the current pace of growth it will lift millions out of poverty and enrich the global economy. While India has come a long way, maintaining the current pace would itself be challenging and require continued reform efforts.

Why NY Mayor’s attempts to ease New York traffic have only made things worse

September 28, 2011

A nice article from Herbert London of  Hudson Institute. He points to certain initiatives by NY Mayor Bloomberg to ease traffic congestion in NY have not worked.

He first wanted to impose congestion taxes but were opposed:


Chicago Economics on Trial

September 28, 2011

A nice interview of Robert Lucas.

The School is famous for two main ideas – EMH and Rational expectations:


The Governance of a Fragile Eurozone

September 28, 2011

This paper from Paul De Grauwe is I think one of the best paper to understand Eurozone (EZ) crisis. (shorter version here though fonts are real tiny). It has been highly recommended with Krugman wishing he had written the paper (Though Paul Wenzel says he wrote the same De Grauwe thought in one line and is waiting to get praise) .

Grauwe points why countries in a monetary union are disadvantaged compared to a non-monetary union country. When times are good, the MU model works well otherwise it just falls flat on its face.

He compares UK to Spain and says though UK debt has been higher than Spain, interest rates in Spain are much higher than UK. Why is this so? It is because Spain is part of EMU and UK is out if it:


Recent unemployment trends in US..

September 28, 2011

Rob Valletta and Katherine Kuang of FRBSF analyse the recent rise in US unemployment rate and unemployment insurance claims.

Rising layoff rates during the spring of 2011 highlight renewed labor market weakness. Although job cuts among state and local governments have accelerated over the past few years, most of the recent increase occurred among private-sector employers. Following modest improvement in early summer, subsequent labor market performance has been uneven, indicating that labor market conditions remain fragile.

There is a nice graph which looks at unemployment insurance and recessions:


Monetary Policy Dilemmas: Some RBI Perspectives

September 27, 2011

Central Bankers should take a leaf from this recent Subbarao speech given at NYU. It has been written with remarkable clarity and simplicity.

He covers so many issues and within issues sub-issues that it is difficult to really summarise them all. The first half of the speech is defending RBI’s recent monetary policy under various heads. The second half is general issues facing central banks with RBI perspective on the same. He stresses that real world problems are too complex and difficult to fit or justify in textbooks. Moreover, there are no template answers to real life policy issues. It needs both analysis and judgement.

Defending RBI:


We might find out what caused this crisis after the next one…

September 27, 2011

Says Luis Zingales of U of Chicago.

He says US examined and detailed causes for the 9/11 attacks. This led to security measures which ensured no such attack so far.

However, we have had no such success with the 2007 crisis. The Dodd Frank Act does not address any of the crisis issues:


How Australia’s business cycle began to differ from US

September 27, 2011

A nice speech from Ric Battellino, Deputy Governor of the Reserve Bank of Australia.

He points that in 1980s and 1990s whenever US sneezed, Aussie economy caught a cold. This was puzzling as they did not have major trade linkages which was seen as a strong factor:

Through the 1980s and into the 1990s, developments in the Australian economy showed a close correlation with those in the US economy. It was particularly striking that the recessions of the early 1970s, early 1980s and early 1990s were highly synchronised between the two countries and had many similarities in their nature and origins. As a result, it was common in  the 1980s and 1990s to hear the phrase “when the US sneezes, Australia catches a cold”. 

Australian economists, including those in the Reserve Bank, spent a lot of time researching the question of why growth in the Australian economy was so highly correlated with that in the US. We were intrigued by the closeness of the relationship because the trade flows between the two economies were not particularly large. The United States has always been only a moderately important export destination for Australia.

However because of stronger financial and cultural ties, both had similar shocks:

 First, the economic shocks faced by the two countries in the lead up to the recessions of the 1980s and 1990s were similar, as were the policy responses. 

 Second, the financial and cultural links between the two countries have always been very strong. The United States is a large investor in Australia and many Australian companies have operations in the US. US economic news receives very wide coverage in the Australian media. This, in turn, has often promoted very similar movements in financial prices, business sentiment, and even household behaviour.

However it started to differ post 2000s. Aussies were not effected much by  both 2001 and 2007 recessions. He points to some reasons for this divergence:

  •  Both 2001 and 2007 were because of financial adventures gone bad. Aus avoided both esp tech bubble and was actually ridiculed for being an old economy.
  • As it was not impacted by 2001 recession, RBA was able to raise policy rates much quicker than Fed. So, it avoided the housing bubble as well.
  •  Australian Prudential Regulation Authority (APRA), the prudential supervisor, pressed the banks to maintain relatively high lending standards. This helped as well. There was limited subprime lending.
Apart from this he highlights role of China. Australia has moved its trade increasingly to China. They are a natural fit as Australia has huge natural resources and China has huge demand for them.

Arguably, Australia is one of the economies that most complements the Chinese economy. It is a large producer of food, energy, basic materials and education and tourism services – products and services for which China has a very strong demand – while the limited size and specialised nature of Australia’s manufacturing sector mean that the economy as a whole is not facing wide-scale competitive pressures from China. As evidence of this, over the past decade Australia has experienced a much larger rise in its terms of trade than all other major commodity exporters, apart from Chile.

While it is clear that China now has a large influence on the Australian economy, that is not to say that US developments no longer matter. Clearly, they do. They continue to play an important role in shaping financial market behaviour, and household and business sentiment. The point, however, is that over the past 10 to 15 years these channels have not been powerful enough to dominate overall economic outcomes, being outweighed by the other influences I have mentioned.

Switzerland also benefitted from increasing reliance on China

He says China continues to grow and concerns over its slowdown have been proven wrong. Well we never really know. To rely on China for growth is a risky strategy as of now.

He says people are using experiences of 80s and 90s and suggesting RBA will lower rates as US economy decline will put pressure on Aus economy. They made the same mistake in 2003 when Aus economy recovered much quickly:

financial markets seem to have concluded that the risks are weighted towards the Australian economy weakening sharply and, taken literally, seem to be pricing in a reduction in official interest rates towards the unusually low levels reached after the global financial crisis. There are technical reasons why current market pricing may not be giving an accurate picture of interest rate expectations. Nonetheless, markets do seem to have reached a pessimistic assessment and this appears to be based mainly on the assumption that weakness in the US and Europe will flow through to Australia.

The present situation has some similarities to that in 2003. From late 2002 to the third quarter of 2003, financial markets were pricing in cuts in interest rates in Australia, largely on the back of concerns about the sluggishness of the US recovery at that time. In the event, however, that sluggishness in the United States did not flow through to the Australian economy and Australian interest rates did not fall.


Interesting stuff. I think economies should now be worrying over what if China sneezes or develops a bad cough? What are going to be the implications. Financial linkages may not be as strong but trade linkages are. We might again  be looking at economics of 1970s when trade linkages mattered more than financial linkages… Anything is possible in the current state of events…

Finn Kydland on his work and Ireland

September 27, 2011

I was going through this old interview of Finn Kydland, 2004 Laureate  alongwith Ed Prescott.

He nicely explains his work and why he got the Nobel Prize:


Argentina again headed for a crisis?

September 26, 2011

I hope not. Andres Velasco of Harvard writes well crisis signs are becoming visible:

Investors looking to do business in Argentina have long been issued similar warnings. This is the country that scholars study when they want to understand financial crises. The country’s largest such crisis, in 2001, brought down the local banking system and caused the Argentine government to default on its debts. The economy contracted by a whopping 18%, and the unemployment rate peaked above 22%.

After a period of calm that has now lasted a decade, dire economic warnings are back.  Forecasts for the world economy are turning pessimistic, and economists in export-dependent Argentina are finding much to worry about. Itau, Latin America’s largest bank, is predicting GDP growth in Argentina of only 3.2% next year, down sharply from 6% in 2011.

Inflation is another concern. With official figures widely discredited, private analysts estimate that consumer prices are rising at an annual rate of 25% or more.

Its energy policy has turned it from an exporter to importer:

Those are careful estimates by serious economists. But, then again, one should take all economic forecasts about Argentina with a grain of salt. In the decade since the last crisis, Argentine policymakers have broken almost every rule in the economic-policy playbook. Again and again, local and international economists have issued dire warnings about what would happen if it persisted in its heterodoxy. And yet Argentina has managed to grow fast, doubling per capita income since 2002.

Energy policy is a perfect example of a wrongheaded strategy. The Argentine government fixed gas prices, despite ongoing inflation. Gas became artificially cheap, consumers seldom bothered to turn the thermostat down, and producers stopped investing. As a result Argentina, once a thriving gas exporter, had to seek imports to overcome domestic shortages.

Since 2001, Argentina grew in backdrop of global great moderation. That has ended and again has shown the vulnerablity of Argentina’s policies…

Interesting times….If this comes true, how many times  will we cry for Argentina?

Profiling Kenneth Rogoff’s work

September 26, 2011

Rogoff just got the biennial Deutsche Bank award for Financial Economics 2011.

Vítor Constâncio, Vice-President of ECB gives a nice opening speech covering the work and contribution of Rogoff. He highlights Rogoff’s work on:


Operation Twist: 1961 vs. 2011

September 26, 2011

This is the title of my new paper. I have looked at Operation Twist -I and try and draw some lessons for second version.

Comments/suggestions are welcome

Trade as a confidence building measure at Line of Control (India and Pakistan)

September 26, 2011

Altaf Hussain Kira of IGIDR writes this superb paperon the topic. He nicely titles the paper as “Cross-LoC trade in Kashmir: From Line of Control to Line of Commerce”.

He points how the trade ties between India and Pakistan at Line of Control had stopped in 1947. They were resumed in Oct-08 as a confidence building measure. The paper attempts to find two things:

  • How has the trade in LoC developed since Oct-08? What are the obstacles etc.
  • As a follow-up to first, Does trade serve as a way to alleviate political pressures? Is it a useful confidence building measure (CBM)?
Basically two trade routes were opened (it is still a barter system):

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