RBI’s Monetary Policy Q1 2012-13 – Review

Here is the review of RBI’s Q1 2012-13 monetary policy.

Pretty much in line with the expectations.

The only surprise was lowering SLR from 24% to 23%. Few reasons for the same given in the review.  In case of more ideas, please feel free to chip in..

 

How being called a capitalist has become a curse…

A superb article by Charles Murray of AEI.

He asks this interesting question. Capitalism has been one of the best things (he calls it the best) to have happened to mankind. Capitalists have been celebrated. Why then being called one is seen as a bad thing?

How Spain dumped a bad bank on the small investors..

The financial crisis moves on from one thing to the other. Here is a super story on how Bankia duped small investors into buying its IPO in 2011.

Bankia was formed via merger of seven regional (troubled) Cajas.

Economics of Punctuality

Here is another gem from Prof. Kaushik Basu and Jorgen Weibull. His earlier paper on choosing to paying taxi fare which was against rationality was superb as well.

In this paper he talks about punctuality. Just like his taxi paper I heard him talk about some of his research on punctuality as well. This made me dig into the paper which was quite a fun read as well. It is

In nut shell paper says punctual or non-punctual behavior is not because of cultural issues. It is simply an equilibrium response  to what time they are expected to arrive etc.

Advertisement

World’s top young economists discuss where economics is going

Link to the discussion is here.  The eight econs in the discussion are:

• Nicholas Bloom
• Raj Chetty
• Gauti Eggertsson
• Xavier Gabaix
• Gita Gopinath
• Peter Leeson
• Glen Weyl
• Justin Wolfers

Chetty, Gabaix, Leeson, argue for using behavioral econ to enrich their studies…Way to go…

Each one lists how to better state of econ…Nice read on forthcoming research from the top young minds

Conducting elections in the world’s largest plural society

The largest society is of course India.

This is just an amazing lecture by Dr. S. Y. Quraishi, Chief Election Commissioner of India (30-Jul-10 to 10=Jun-12). This was given in part of this annual lecture series – Nand & Jeet Khemka Distinguished Lecture Series.

I am not sure where to begin and end this lecture. Here is how ECI started:

RBI’s Monetary Policy Q1 2012-13: Expectations

RBI’s mon policy review for Q1 2012-13 is on 31-Jul-12.

Here is expectations report on the same.

Linking inflation persistence in India to fiscal policy credibility

An interesting paper by RBI econs – Pankaj Kumar and Pratik Mitra. 

They say tight monetary policy is ineffective if fiscal policy is easy. This is well-known. They expand this to show that inflation persistence in India is because of continued fiscal slippages.

In the recent past India has experienced high and persistent inflation. In response the Reserve Bank of India cumulatively raised the cash reserve ratio by 100 basis points and the policy rate (repo rate) by 375 basis points between January 2010 and October 2011. Despite these policy actions, the inflation rate however continues to remain stubbornly high. What explains our current inflation predicament?

This paper finds that large contemporary government deficits unaccompanied by concrete prospects for future government surpluses promote realistic doubts about whether monetary restraint must be abandoned sooner or later to help finance the deficit. The result will be a rise in inflationary expectations in spite of current money-supply restraint- a bout of unpleasant monetarist arithmetic. In sum, it is insufficient to announce and maintain restrictive monetary policies unless accompanied by a coordinated reduction in the budget deficits. Prudent anti-inflation policy includes containment of the deficit.

The authors could have used simpler language. It led to some confusion over first reading..

They say there is no single country where inflation has arisen in a fiscal sound country:

In fact, major inflation episodes around the world have ultimately resulted from fiscal problems and it is hard to think of a fiscally sound country that has ever experienced high and persistent inflation. So long as the government’s fiscal house is in order, people will naturally assume that the central bank should be able to stop a small uptick in inflation. Conversely, when the government’s finances are in disarray, inflation expectations can become “unanchored” very quickly. But this link between fiscal and monetary expectations is too often ignored by both policymakers and the popular press.⁴

The basic point is that fiscal deficits today must be paid for by taxes, money expansions or lower expenditure tomorrow (the government’s inter-temporal budget constraint). If one assumes any reasonable termination of the rising debt/GDP ratio, whether because of a limit on incentive damaging taxes, then money financing is eventually required in the absence of quite implausibly severe cuts in public expenditure. This means a rise in future inflation is worse than the moderation in current inflation from current money-supply restraint. This analysis was spread widely by Sargent and Wallace (1981) in their well known paper ‘Some unpleasant monetarist arithmetic’. From the government’s inter-temporal budget constraint, if the fiscal house is not in order in the present and the future, then this implies monetary restraint will be abandoned sooner or later to ensure solvency.

This would undermine credibility of the monetary regime as inflationary expectations would remain elevated. Hence the ‘unpleasant’ policy lesson that the budget deficit must also be cut back to make a monetarist inflation-control programme work. By implication contractionary monetary policy signalling the authorities’ wish to halt inflation may not be credible unless accompanied by a coordinated reduction in the budget deficits. Therefore, in order to establish counter-inflationary credibility it is not sufficient just for the monetary authority to be responsible. We need fiscal stance to be responsible too.

They nicely show via a graph  how inflation persistence has risen whenever deficits have risen. The proxy for policy credibility is basically fiscal. It would have been very interesting if a comment was made over RBI’s credibility over managing inflation as well. For instance. the average inflation since 1982 is 6.9% which is way higher than RBI’s comfort zone of 5-5.5%:

Price stability has been an important objective of monetary policy in India. In fact, India’s inflation performance compares favourably against other emerging market economies. The 1950s witnessed average inflation of less than 2 per cent, but with considerable variation in yearly inflation. During the 1960s, the average decadal inflation edged up to 6.3 per cent, on account of wars and unsatisfactory agricultural supply position. Like most other developed and developing countries the decade of 1970s was the most turbulent period when it comes to India’s inflation history. The average inflation was 9 per cent in that decade.

Figure 1 shows all commodities WPI inflation since the early 1980s (summary statistics in Table 1). We have split our sample 1983:4 to 2011:1 into different segments with each segment corresponding to a statistically distinct mean of overall inflation compared with the adjoining segment. This periodisation of the data is based on the Bai and Perron (2003) test of multiple structural breaks at unknown dates where the optimal breakpoints are estimated from the data itself. For the period beginning April 1983 up to January 2012, average headline inflation measured in terms of year-on-year increase in all commodities wholesale price index (WPI) has been 6.9 per cent. While the primary (7.9 per cent) and fuel groups (9.0 per cent) have been the high and volatile components, the manufactured group (6.1 per cent) component has been low and stable.

Agreed much of this is to be blamed on fiscal. But where does RBI credibility stand currently?

Overall, a nice paper touching on an important issue..

Comparing Euro currency to a bumblebee

Mario Draghi, ECB chief created flutter yesterday with his speech. He remarked  ECB will do whatever to support Euro. This gave confidence. The exact words were:

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

In the beginning he refers this Euro project as bumblebee:

Will India become a Superpower?

Ramachandra Guha writes on this issue. Unlike the typical reports which just have an economic perspective, this one is a much more comprehensive review covering many areas. I was tempted to call it balanced but not sure having read very little on these areas.

Basically Guha points to seven reasons why India is unlikely to be a superpower:

Why can’t financial crisis be avoided?

A nice write-up by Alex Pollock of AEI.

He discusses why fin crisis cannot be avoided despite all the wisdom and smart people in finance:

With all of the knowledge and experience collected in financial markets and governments, why are we not able to avoid repeated disastrous mistakes like those that led to the US housing meltdown and the European sovereign debt crisis? It is because financial markets are governed by a recursive system of interconnected decisions, theories, strategies, predictions, actions, and expectations that lead to booms and busts. History shows that the complexity of these interactions makes it nearly impossible to predict accurately which way the markets will go. Regulators like the US Federal Reserve are themselves too enmeshed in the system to avoid its systemic risk. We must recognize the reality of uncertainty and the absence of any godlike regulatory guardians.

In the end he points to this interesting paper. It shows whatever policies were made in the past to avoid future crisis resulted into the current 2008 crisis:

In an insightful essay, Arnold Kling discusses how in the 1990s the regulators carefully, diligently, and reasonably studied the savings and loan disaster to learn from it. They drew three principal lessons: You had to expand the securitization of mortgages. You had to have mark-to-market accounting. And you had to have risk-based capital requirements. These were plausible, though arguable, conclusions. All three lessons were applied and implemented. And all contributed significantly to the inflation of the housing bubble and the subsequent crisis of the 2000s. “Each era of regulation seems to contribute to the next era of euphoria,” Kling concludes.[31] The buildup of systemic risk in the new situation from applying the lessons of the previous crisis was not apparent to most observers.

Finally, crisis are forever:

I am often asked, “Will we learn the lessons of the financial crisis?” “Yes, we will,” I answer. We learn the lessons after every crisis. But it does not stop the next one from happening.

In complex, densely recursive systems, uncertainty is an unavoidable fact of life. Yet those enmeshed in such systems still have to make decisions and act. Mistakes inevitably follow and will continue to do so.

Very interesting..

The Weimar Union…

A nice write-up on ongoing European crisis by Walter Laqueur.

How economists in India underestimated the importance of caste in 1960s?

I have been trying to diversify my reading and trying to read up on other social sciences (at a snail’s pace though).

I came across this super lecture by Prof. André Béteille a top-notch sociology professor at Delhi University. I only learnt of him lately which speaks about how little I know of Indian academia.

He speaks on this very interesting and issue pertaining to India – caste system. The lecture is part of annual lecture organised by Kolkata Port Trust (cannot locate lectures post 2008). Prof. Béteille says:

Is Australia a lucky economy?

Couple of frank speeches from Reserve Bank of Australia lately.

Here is another one where RBA Governor Glenn Stevens looks at recent claims that Australia is a lucky economy. It has huge natural resource base and benefited as Chinese growth continued post-crisis. With China slowing now, this good luck likely to end:

Impact of crisis on Icelanders health

A superb paper linking macro developments to individuals health  (cannot find free version).

It tries to estimate the impact of the crisis in Iceland on the health of citizens:

The new Consumer Financial Protection Bureau is both irrelevant and dangerous

An interesting contrarian point by Nicole Gelinas of City Journal.

Tale of two cities: Markets vs Government

Michael Barone of AEI has a nice post on tale of two cities – Fremont in California and Williston in North Dakota. Both have their own tales of development.

Fremont came to light because of Obama’s push for solar energy:

Should Indian democracy be considered a constitutional monarch?

Sadanand Dhume of AEI a huge critique of Indian polity currently writes this article.

He says India should be considered as a monarchy (Gandhi Family as the monarch). The integration will be seamless given the continued fascination with the family.

Why economics fails as a science?

Another super article on State of Economics in The Economist (HT: thebrowser.com).

It begins with failure to forecast growth post-Lehman crisis. Quicker recovery was expected. But it never came:

Which US Cities’ GDP larger than countries’ GDP?

We usually compare which India’s states have larger populations than other countries.

How about comparing US cities with other economies in terms of GDP.

Take the Quiz first and see the list here. NY Metro region ranks 13th in the list of world economies…