Archive for December, 2011

How inequality is basically a race between education and technology..

December 22, 2011

A superb interview of Daron Acemoglu of MIT. He picks 5 books on the subject (4 books and one paper actually).

His first pick is a book called  The Race between Education and Technology By Claudia Goldin and Lawrence Katz. The books explains how does inequality arise:


Rupee Depreciation: Probable Causes and Outlook

December 21, 2011

This is the title of my new paper. It has been a while since I wrote last one. This one has been work in progress for a while.

I have reviewed Rupee movement since 1991 and looked at the recent depreciation from a historical perspective. Let me know your comments and suggestions..

How is India faring in Millennium Development Goals?

December 21, 2011

Sudipto Mundle of NIPFP reviews the developments so far.

He looks at development in each of the 8 goals:


Is 400,000 a magic number for jobless claims?

December 20, 2011

Every week US department of labor releases this econ data called initial  jobless claims with a one week lag.


Why Grand urban economics theories end up being just fads..

December 20, 2011

A superb research article by Mario Polese (of Centre Urbanisation Culture Société at Montreal’s Institut National de la Recherche Scientifique). He says none of the previous grand theories of urbanisation have actually led to great cities (and most theories in other economics areas).

He says the histoery of local economic development is full of fads:


Is Daniel Kahneman the most important social scientist of his generation?

December 19, 2011

Daniel Kahneman is the flavor of the econ season as he has just released his new book – Thinking, Fast and Slow, A dear friend suggests it is a must read as it covers almost anything and everything on how human mind thinks and acts..

There are two superb profiles of the man who introduced behavioral economics to the world (alongwith Amos Tversky).

First is a profile by Michael Lewis nicely titled as King of Human Error (TGS titles it as  Great Man Kahneman). And second is this by Evan R. Goldstein is managing editor of The Chronicle Review. I learnt via this article that the name prospect theory is meaningless. Kahneman and Tversky wanted something distinctive and easy to remember. It surely has sruck in minds.

Chronicle also points to this astonishing graph which shows reach of Prospect theory. Its broad idea that people are sisk averse when they make profits and risk seekers when losing has found applications in many fields – medicine, law, political science etc. So far, there have been 8000 references in different journals and chapters across many disciplines. That is truly massive.


Asset Allocation and Risk Management in a Bimodal World

December 19, 2011

Vineer Bhansali of PIMCO writes this superb note on financial portfolios.

In finance, we assume a normal distribution of any asset price series with one peak (unimodal) and tail risks really limited and seen as a black swan event. The reality is financial time series have fatter tails implying risks have a bigger probability  of happening and hitting portfolios. Moreover, in today’s times you could actually have two peaks (called bimodal) highlighting probability of multiple equilibrium (one can look at both Eurozone crisis and US recovery for instance).

In such a scenario, building asset portfolios based on unimodal is nots just risky but dangerous as well as one might be taking higher exposures to risky assets than required:


Break up of monetary unions – A short note (including India-Pakistan in 1947)

December 19, 2011

Prof JR Varma has a superb post on the topic. Apart from providing short history on previous currency union break-ups, he links to some useful papers on the break-ups as well.

He covers following break-ups:

  • Argentina 2001-02
  • Ruble zone early 1990s
  • Pakistan/Bangladesh 1971
  • India/Pakistan 1947-48
  • Austro Hungarian Empire 1919

Very interesting. For instance Indo-Pak currency union break up in 1947:


Large Fiscal Consolidation Attempts in the Past and Implications for Policymakers Today

December 16, 2011

IMF economists discuss the findings from their recent book on the subject in this IMF bulletin. Not surprisingly, most such adjustments are made on the revenue side. very little and few countries manage cuts in expenditure side..

Apart from this there is discussion on 2 more issues – Booms and Busts and  Did Export Diversification Soften the Impact of the Global Financial Crisis?

IMF bulletins are always a useful read..

Evolution of Fed’s dual mandate

December 16, 2011

Aaron Steelman of Richmond Fed writes this superb history of Fed’s dual mandate.

It is very interesting to note how this mandate has shifted between inflation to employment from time to time.

Fed got its mandate in 1975 but discussions on Fed’s mandate started around 1945 post Great Depression. At that time it was more on employment and econs felt it did not have anything on inflation:


Understanding diversity and unity of India through a Cricketer’s lens

December 16, 2011

What a speech from rahul Dravid. he surely is Prof in making and has a career post cricket as a professional speaker/team builder etc.

His speech is at the 2011 Bradman  Oration and dons many a hats – historian, economist, political scientist and of course various issues hitting cricket . I am just wondering who has written the speech and hoping Dravid has contributed greatly to it.

First Indo-Australia historical relations:


Thinking of US as a giant CDO (collateralized debt obligation)…

December 15, 2011

This blog dreads this term CDO..

But anyways here is JR Varma with a nice analogy. He points top a new paper by Hyun Song Shin delivered as the Mundell-Fleming lecture. The paper shows how European banks essentially constitute the US shadow banking system.

The paper shows how Europe has financed the sub-prime bubble :


Making Monetary Policy Using a Mandate Dashboard

December 15, 2011

Narayana Kocherlakota of Minneapolis Fed provides an interesting way to present monetary policy decisions and outcomes in this  speech.

He says we need to make policies based on the economic outlook. How do we simplify our economic outlook? He says we could use a dashboard:

What economic conditions are relevant? Again, I think that it’s useful to think of a car driver who is trying to maintain his speed. To know how much (or how little) acceleration to provide, the driver would certainly like to know his current speed. As well, he would like to know how future road conditions—like hills—are likely to affect his future speed. The FOMC’s problem is quite similar. Just like the driver needs to know his current speed, the FOMC needs an accurate measure of current inflation and unemployment. Just as the driver needs an estimate of his future speed, based on anticipated road conditions, the FOMC should have an assessment of the future levels of inflation and unemployment.

I find it helpful to summarize the relevant information in what I term a mandate dashboard. The dashboard provides real-time readings on current and expected inflation and unemployment. Here’s what the dashboard looked like in the FOMC meeting earlier this month.

Table 1: Mandate Dashboard

Large Image

I’ll explain the dashboard starting with the inflation side. The first cell from the left is current inflation. The second cell is what inflation is projected to be in one year’s time. Finally, the third cell contains a forecast for inflation in two years’ time. The unemployment side is similar. The first cell from the left represents current unemployment. The second cell represents a forecast for unemployment in one year’s time, and the third cell is a forecast for unemployment in two years’ time.

The dashboard is based on Fed’s dual mandate. Given this how do we form the policy outlook?

Given this mandate dashboard, how should the level of accommodation evolve over time in response to changes in dashboard readings? There are many subtleties associated with providing a general answer to this question, including the key trade-off that I mentioned earlier between the two mandates. But there are two relatively common and important instances in which the mandate dashboard becomes straightforward to use in a qualitative way. Suppose inflation and expected inflation rise and unemployment and expected unemployment fall, as is often true in a recovery. Then, regardless of how it weights the two mandates, the FOMC should reduce the level of accommodation. In contrast, suppose inflation and expected inflation go down and unemployment and expected unemployment go up, as is often true when the economy slows. Then, regardless of how it weights the two mandates, the FOMC should increase the level of accommodation. 

Based on this Fed’s policies are inconsistent. In Nov-2009, forecasts for 2012 were bleak. The actual numbers in 2012 are better than forecasts and instead of lowering accommodation, Fed has increased it:

I became president of the Federal Reserve Bank of Minneapolis in October 2009. I attended my first FOMC meeting in November 2009, as a nonvoter. So, when I think about current monetary policy, I find it natural to look back at the position of the mandate dashboard at my first meeting:

Table 4: Current and Past Dashboards

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The dashboard points out that economic conditions were quite grim at that meeting. The Committee expected low inflation, and ongoing disinflation, over 2010 and 2011. Unemployment was expected to average well above 9 percent over 2010 and 2011.

The situation two years later, while hardly ideal, has improved markedly. Hence, I would say that the evolution of the dashboard readings suggests that monetary policy should be less accommodative now than it was in November 2009. But in fact, through choices dating back to last November, the Committee has made monetary policy considerably more accommodative. 

Well, unemployment numbers are worse than expected. But he is looking more closely at the inflation outlook:

How should an outside observer interpret this inconsistency between the evolution of the mandate dashboard’s readings and the Committee’s actions? Earlier in my speech, I set forth what I see as a key trade-off involved in the making of monetary policy. There is a benefit to adding monetary accommodation: It reduces unemployment. There is a cost to adding monetary accommodation: It increases the risk of inflation running above the Committee’s objective of 2 percent for multiple years. The FOMC’s actions in 2011 suggest that the Committee is now more concerned about high unemployment, and correspondingly less concerned about the possibility of higher-than-target inflation. 

In particular, the Committee’s actions in 2011 suggest that it is now more willing to tolerate higher-than-target inflation than it was in 2009. If this possible drift in inflation tolerance were to persist, or were expected to persist, it could give rise to a damaging increase in inflationary expectations. Undoing such an increase in inflationary expectations, as Americans discovered in the early 1980s, requires drastic policy steps that have extremely painful consequences for employment. It is exactly in this sense that I have said in earlier speeches that the Committee’s actions in 2011 served to weaken the Committee’s credibility.

Well, depends on how you look at it. Chicago Fed chief Evans looks more closely at unemployment and has been dissenting lately asking Fed to ease policies further. He says if inflation around 5 is untolerable (as target is around 2%), so is unemployment at 9% where the normal rate should be around 6%.

However, this dashboard approach is useful way of looking at things. Could be tried to understand things..

Meanwhile Gulzar points to this NYT article which says Fed is looking at forecasting its interest rate outlook..

The European Debt Crisis – from a Danish Perspective

December 15, 2011

Title of a new speech from Denmark Central Bank chief. Before this some background.


Re-examining the causes of the Great Depression .- the Joseph Stiglitz version

December 14, 2011

Joseph Stiglitz takes us back to the most discussed event of macroeconomics – Great Depression.

He says we are drawing wrong lessons from Great Depression. Our analysis of its causes and what should be done in this crisis are wrong. He says the lessons that financial crisis caused great depression and hence we should save banks at whatever cost is plain wrong.


India’s food inflation: Is this time different?

December 14, 2011

A superb speech from Subir Gokarn of RBI. Though this issue of food inflation has been analysed to the pulp, there is always scope for more juice.

In this speech he shows how India has suffered from high food inflation for most periods since 1950s. The food inflation eased in 1990s fueling complacency and again rose in 2000s. The drivers  of food inflation have changed from cereals to protein and fruits & veggies now. So, though we may say this time is different, reality is it is not. Food inflation has been a result of sluggish supplies which have not kept pace with rising demand and population. So, may be the players/drivers of food inflation have changed the overall issue of high food inflation remains. Much like the case we see for financial crisis as shown by Rogoff-Reinhart.


IDBI Bank crosses 1 LAKH facebook fans…

December 14, 2011

I was surprised to receive this email from IDBI Bank which said it has reached 1oo,000 fans on its facebook page.

The message says (with the background of its elephant ad picture):

We thank you all for your support IDBI Bank now has 100000 facebook fans…and growing….

Add a special touch to our celebrations

Check out our Facebook page now

  • Know more about our products
  • Get info about the financial sector
  • Participate in exciting quiizzes and contests to win exclusive merchandise

Like us on Facebook and become a Fan now..

All I could do is smile.

Banks  now seem to be looking not just increasing its branch customers but also its facebook fans.. And that too coming from a public sector bank is like a real welcome surprise..

How banks like IDBI are using social networks to brand themselves is interesting to see. What could be more interesting is to understand the bank’s  facebook fans. Are they bank’s customers or have just clicked on Like IDBI facebook page as normal surfers?  This is important as brand connection will be higher for bank’s customers against casual surfers. Do people connect with IDBI Bank brand via its facebook page and vice-versa? Does facebook change the image of a public sector bank and is seen as a savvy, young-generation bank?


Celebrating 10 years of China’s entry into WTO..

December 13, 2011

On 11 Dec 2011, China completed its 10 years of WTO entry. Pascal Lamy, chief of WTO was there to mark the moment.

His comments:

Director-General Pascal Lamy, in a speech at a forum in Beijing on 11 December 2011 commemorating the 10th anniversary of China’s accession to the WTO, said: “On this tenth anniversary, and as we look forward for the next decade, I have two wishes that I would like to express. The first is that China’s involvement in the WTO helps us all in keeping this organization on the move towards more open and fairer trade. The second is that the WTO’s relevance for China keeps growing and helps this country to address its reform challenges. China has been and should remain important for the WTO. The WTO has been and should remain important for China.” 

Amazing to note this change in perception. I recall reading research/articles that how WTO entry will actually harm China as its producers will have to follow the WTO rules etc. But actually China has taken this issue head on and had made inroads into so many economies. It actually gave China more markets. Moreover, growth in countries like Australia and many others depends on the health of China’s trade sector.

However, concerns have come mainly from China’s undervaluation strategy. Hence claims to bring exchange rates into WTO ambit..

Analysisng history of central banks – institutional approach vs functional approach

December 13, 2011

Stefano Ugolini of Norges Bank writes a superb paper on the topic. Voxeu as always has a summary from Ugolini.

His broad point is not to look at central bank history from an institutional perspective. In this way we look at certain central banks like Fed, BoE etc and look at how they have evolved over the years. This way we miss some other organisations which worked as central banks in the past but do not exist today. The research focus instead should be from a functional  perspective where we list the functions of central banks and see which entities did them in the past.

He begins saying we ask wrong qs from economic history:


Importance of rhetoric in economics – Herman Daly vs. Jagdish Bhagwati

December 13, 2011

Just came across this paper by Fernando Estrada of Universidad Externado de Colombia. Economists have debated on the use of rhetoric to explain an economic point earlier as well. This one is more updated and current and is a nice read.

Estrada points rhetoric helps understand an economic debate and its nuances in a much better way. He picks on this debate on free trade and looks at two leading protagonists in the debate. Jagdish Bhagwati who believes trade is all good and  Herman Daly who opposes it saying trade is no good and focus should be on domestic policies . He points how the two have used rhetoric to make their points.

I am not really discussing this and leaving it to the reader to see the rhetoric. But still would want to point to Daly’s super criticism – Economists have become dangerous to the earth and its inhabitants.. 🙂 I am going to read more on Daly’s views for sure..

Well, thanks to blogs and internet we are seeing a lot of debate and rhetoric.  But yes more is welcome given such diverse views on state of economics..





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