Archive for January, 2013

Internship Programme (Unpaid) of the Economic Advisory Council to PM…

January 21, 2013

I just posted about  DEA’s (under FinMin) internship program (deadline is over).

There is another internship program by PM’s Economic Advisory Council. This one is unpaid though (wonder why). It allows applications to be submitted twice a year in Jan & Jul.

Jan deadline is 31-Jan. So pass on the word to those interested..

Financial liberalization in the Nordic countries in 1980s..

January 18, 2013

Nice paper by Seppo Honkapohja of Bank of Finalnd. Explains how and why Nordics did financial liberalisation and how it led to a crisis later on:

The financial liberalization in the four Nordic countries (Denmark, Finland, Norway, and Sweden) that took place mostly in the 1980s led to a major financial crisis in three of those countries. The crises in Finland, Norway, and Sweden are among the deepest financial crises in advanced market economies since World War II. Denmark experienced some banking problems but managed to avoid a systemic crisis. This paper reviews the process of liberalization and discusses the reasons why Finland, Norway, and Sweden drifted into financial and economic crises.

The particular coverage on how liberalisation was sequenced is interesting read..

Promoting Retail Investor Participation in India’s Government Bonds ..

January 18, 2013

Nice speech by RBI Dep Gov. HR Khan on the topic.

Explains why retail participation in G-sec, how G-sec is a decent asset class for retail investors and what RBI is doing to promote retail participation..

Linking rising inequality to declining vocabulary..

January 18, 2013

What an amazing article by E. D. Hirsch, Jr. He is professor emeritus of education and humanities at the University of Virginia.

He refers to several books/papers/media comments over rising inequality in US:

A number of notable recent books, including Joseph Stiglitz’s The Price of Inequality and Timothy Noah’s The Great Divergence, lay out in disheartening detail the growing inequality of income and opportunity in the United States, along with the decline of the middle class. The aristocracy of family so deplored by Jefferson seems upon us; the counter-aristocracy of merit that long defined America as the land of opportunity has receded.

These writers emphasize global, technological, and sociopolitical trends in their analyses.

He says there is another reason for decline in inequality – low vocabulary amidst students. Low vocab leads to poor SAT scores which then lead to problems in college admission.


Does monetarism retain relevance?

January 17, 2013

Nice essay on mon eco by Robert Hetzel of Richmond Fed:

Implicitly, central banks reject the propositions of monetarism. They do not characterize themselves as creators of money, but instead emphasize their role in influencing financial intermediation. They do not discuss monetary policy in terms of a rule, but instead use the language of discretion. They refer to the low level of interest rates to characterize monetary policy as stimulative despite low rates of growth of money and nominal gross domestic product. The question arises of whether monetarist ideas retain any relevance for central banks.

 He nicely explains the transition from Quant theory of money to inflation targeting…

Indian Govt’s flip-flop on Oil Subsidies

January 17, 2013

It is kind of proved. UPA’s new mandate is to just boost stock markets and create euphoria over nothing.

The markets suddenly caught a frenzy in the afternoon over deregulation of diesel. The Oil Minister followed by FM said the oil companies can raise diesel prices in a small way on their own. There were some reported differences over Oil Min saying small changes and FM saying marginal changes..Phew..

This was followed by statements that we cannot disrupt the oil subsidy suddenly.  FM even said that he is continuing to assume oil subsidy would continue as he does not know how much the prices have been raised. What do these statements mean? In or Out?


A proposal to save from climate policy changes – migrate to Greenland..

January 17, 2013

Klaus Desmet and Esteban Rossi-Hansberg have this super column in voxeu (based on their paper).

They say there are two commonly suggested ways to prevent global warming. mitigation and adaptation. They add migration to the list as well. People can move to cooler climates if temperatures rise across the globe. And it has happened in the past as well. So nothing new:


India’s inclusive political institutions and extractive economic institutions..

January 16, 2013

A hopeful paper on India’s economy and institutional development. It is by Ashima Goyal of IGIDR and is an interesting read.

She says India was blessed with inclusive political instis. But still could not grow as Acemoglu and Robinson suggested..


Kumbh Mela and Urban Economics

January 16, 2013

Mint alerted me to this super development. Harvard University’s four centres are interested in Kumbh mela being oprganised in Allahabad:


Do we need a multilateral investment agreement?

January 15, 2013

Anders Aslund of PIIE thinks so.

He says a new multilateral investment agreement shd be brought under WTO to help facilitate FDI:

A gaping hole in the current global economic architecture is the absence of a multilateral agreement on foreign direct investment (FDI). A multilateral investment agreement (MIA) was discussed extensively from 1970 to 1998 but never concluded. However, the need for such an agreement has increased in the last decade. FDI has grown substantially and now flows in both directions between developed and developing countries, with multinational corporations (MNCs) hailing from all parts of the world. The numerous bilateral investment treaties warrant an international standardized set of rules for FDI. With investment now clearly identified with MNCs and integrated with trade, the World Trade Organization has emerged as a natural home of an MIA.

Interesting bit. In an earlier post, I had pointed to a piece by Richard Baldwin. He said to reform WTO to include supply chains in the governance of trade. And now this one on including FDI within WTO…

May be these new agreements could lead to some recovery of WTO as an institution…It has lost its relevance in a big way..

Yesterday’s buyer is today’s tenant…

January 15, 2013

A nice short article on whether one should buy or rent a house in US. An earlier post looked at the same decision in NY (Manhattan) housing market. The analysis showed renting makes more sense in Manhattan. THough one wonders how many can buy a home in Manhattan!

Anyways, this short piece looks at the US housing market as a whole. Instead of figuring whether to buy or rent, it says people are looking more at renting these days:


Why do Americans prefer cockroaches to Congress?..

January 15, 2013

A nice question posed by Steven Mazie at A public poll by an agency shows people ranking Congree even worse than cockroaches, traffic jams etc.

Mazie wonders why:


A Psychological Perspective of Financial Panic

January 14, 2013

Nice paper by Anat Bracha and Elke U. Weber of Boston Fed.

They look at financial panics from a behavioral perspective:


Adam Posen’s interesting views on BoJ Independence and Japanese economy…

January 11, 2013

Adam Posen (earlier at BoE MPC and now back in PIIE) shares his views on the topic (Part – I and Part-II).

Interestingly he says, new Japanese PM Shinzo Abe asking BoJ to stimulate economy is justified:


RBI’s new WSS format…

January 11, 2013

In Dec-12, RBI mentioned that both RBI WSS and Monthly Bulletin is likely to change. Both were to become more crisp and analytical from Jan-13 onwards.

The January 2013 Bulletin will release an advance indicative calendar of articles to be published during the course of the calendar year 2013. The Bulletin articles will also be more focussed and analytical, putting forth the views of the Reserve Bank’s research staff on varied issues. This would contribute further towards enhancing transparency. The size of the weekly Statistical Supplement will get reduced to a 4-page statement from the current 8-page with a view to making it crisp and analytically more informative.

It has always been the endeavour of the Reserve Bank to disseminate the information in a timely manner as widely as possible. In this pursuit, the Reserve Bank of India Monthly Bulletin and the Weekly Statistical Supplement (WSS) have a long and chequered history. While the Bulletin made its first appearance in January 1947, the weekly statement preceded the Bulletin providing, among others, the weekly statement of affairs of the Reserve Bank of the preceding Friday. With the passage of time, both these publications have undergone major changes in substance and form in tune with time and state of the economy.

Both the new WSS and MB are out.

First changes in WSS:

  • WSS has been shortened to 4 pages (from 8 pages) and excel tables to 14 tables (from 22).
  • There is a bit of reorganisation of tables like Reserve Money which was Table 8 in earlier WSS is now Table 7 and so on.
  • Some Tables like Table 1 (RBI B/S) and Forex (Table 2) remain the same.
  • Some new tables have been added like RBI’s liquidity operations (Table 8). Some have been merged
  • Some tables have been deleted (like Table 22). Most unfortunate bit is deletion of Table 22 which gave you RBI’s secondary market buying of G-Sec along with OMO purchased via announcement route.

So, there will be a bit of changes in my guides to RBI’s WSS ( part I and part II). I haven’t made the changes though. Overall, logic will obviously remain the same.

In RBI’s new MB, they have given a  indicative calendar of articles to come in next issues. I initially thought we will get some more analytical and conceptual stuff. But these are just the articles RBI econs takes out every year. Nothing really different.

So, overall not really happy with the changes. WSS has deleted some crucial tables like Table 22. It was really useful as in 2012-13, RBI had bought nearly 35,000 Cr via secondary market. This was huge..

Not even sure how an indicative calendar of articles is really useful. RBI can actually take a leaf from other Central bank MBs which balance the usual articles with some conceptual and topical articles as well.

How RBA manages its forex reserve assets?

January 11, 2013

Christian Vallence of RBA has this nice article on the topic. Hope to get something from RBI econs as well on similar lines.

The Reserve Bank of Australia holds and manages the nation’s foreign exchange reserve assets in order to meet its policy objectives. While Australia’s foreign exchange reserves are relatively modest by international standards, they nonetheless constitute a sizeable portion of the Bank’s balance sheet, and variations in the Australian dollar value of these reserves are usually the most volatile component of the Bank’s profit and loss statement. This article discusses some of the key decisions faced by the Bank in holding and managing Australia’s foreign exchange reserves, including the appropriate size of reserve holdings, the way in which they are acquired, and risk management strategies. Each of these decisions involves a trade-off between policy capacity, and financial costs and risks to the Bank’s balance sheet.

How does RBA acquire Forex assets?

There are three methods through which a central bank can acquire reserves (either singularly or in combination): by borrowing foreign currency directly, for example, by issuing foreign currency securities (either in the name of the central bank or with the central government acting as an intermediary); borrowing foreign currency through the foreign exchange swap or cross-currency swap markets; or purchasing reserves outright, by selling the domestic currency in exchange for foreign currency. Borrowing foreign currency generates a hedged foreign exchange position, while outright holdings leave a central bank unhedged. The different methods have different implications for the capacity of the central bank to intervene and manage its balance sheet risk.

RBI buys/sells via both the ways – purchasing reserves outright and through swap markets. In 2005-08, it was mostly buying forex reserves via outright purchase (extract data from RBI’s DBIE site. It is there in Monthly Bulletin data in Time Series Publications).

In 2011-12 and 212-13, as rupee was depreciating it first sold forex reserves in outright spot market. That led to tight liquidity. Then RBI shifted position in swap market and has been slowly unwinding the swap position. From $14.5 bn in Jul-12, the swap position has come to $13.5 bn.

Coming back to the note. Each of the three have their costs and benefits.

The Reserve Bank of Australia accrues (and replenishes) the majority of its reserves by selling Australian dollars over time, and by reinvesting the earnings on its foreign assets. This generates a net ‘long’ or unhedged position in foreign currency.

The Bank considers the insurance characteristics of unhedged holdings to be superior to those of borrowed reserves as unhedged reserves carry little or no refinancing risk, as many of the Bank’s liabilities – most notably banknotes – are effectively perpetual. Conversely, foreign currency liabilities that fund borrowed reserves must be rolled over or repaid when they mature.[4] A central bank that has intervened with borrowed reserves has entered into a ‘short’ foreign currency position, and may find rolling over or repaying its liabilities more costly if the depreciation of the domestic currency persists beyond the central bank’s refinancing horizon. If a central bank instead holds unhedged reserves then it may be able to wait for the exchange rate to move higher before replenishing reserves that had previously been drawn down. A central bank that borrows to fund reserves may also need to maintain a higher level of (gross) reserves to guard against this refinancing risk.


Superb. Helps connect the dots.

The author talks about carrying cost of reserves, impact on B/S and so on.

Though for RBA, one can apply the same ideas to RBI as well..

How Businesses can help Capitalism Repair Its Bruised Image…

January 10, 2013

Three suggestions from Lynn Forester de Rothschild, E.L. Rothschild  and Adam S. Posen of PIIE.

There is a sharp decline in believing capitalism is useful:


Regulation on Hugging Children and its impact…

January 10, 2013

Lately, Indian society is discussing the  issue of child abuse fervently. The issue has  been there for a while, just that it has picked steam post Delhi incident. We realise there are some deeper societal issues which needs to be resolved and child abuse is one.

Richard McKenzie and Kathryn Shelto discuss this fairly sensitive topic. They point to 1980s when movements  to restrict hugging children started in US:


Evaluation of teaching public policy programs in East Asia..

January 10, 2013

A nice paper by Xun Wu, Allen Yuhung Lai (both of Lee Kuan Yew School of Public Policy) and Do Lim Choi of Chungnam National University.

They evaluate public policy programs taught in East Asia. The demand for such programs has risen as countries have moved towards democracy and demand for better governance.


Economics of funeral homes and cemeteries

January 9, 2013

Cato’s Regulation Publication mostly brings  refreshing reads. The latest Winter issue brings this fascinating research article  on Funeral Homes and Cemeteries.   It is by David Harrington and Jaret Treber of Kenyon College. While reading this, Prof. Al Roth immediately comes to your mind as economics of goods and services in death markets gives a repugnant feeling..

There are two kinds of post-death services  – funeral homes and cemeteries. Now some US states allow these two to be merged and both services being offered under one roof. Some States have banned such combos (the idea of calling them as combos is interesting..) . The paper argues that states should lift bans on such combos as they provide more valuable and cheaper services:

Actually even earlier the funeral homes offered combos. Most were also furniture shops etc. No of people were lesser and there were less number of deaths.

In the 19th century, it was common for funeral homes to be more than just funeral homes. Many were also furniture stores or liveries. At the time, many towns had too few deaths to support stand-alone funeral homes. Hence, it was natural for the local cabinetmaker to also be the undertaker, keeping his woodworking shop busy making both cabinets and coffins. Similarly, many livery owners used their wagons to deliver freight or—draped in black cloth—to carry bodies to cemeteries.

During epidemics, the cabinetmakers of these combination firms were busy building coffins and having their wagons carry bodies to cemeteries. During happier times, these firms spent more time making cabinets and delivering freight. It is a morbid example of the “peak load” problem, the problem that producers face when their businesses experience surges and slumps in demand and they need to keep costly capital on hand to satisfy the surges. Today, electricity producers must be able to handle surges in demand when temperatures soar and people crank up the air conditioning. Then, funeral homes needed to handle surges in demand when epidemics heated up and families sent for the undertaker. 

This changed as cities grew and populations rose. Amd so did deaths. This led to so called combos:

Over the first half of the 20th century, funeral homes shed their partnerships with furniture stores and liveries as towns turned into cities and funeral directors handled more aspects of burial preparation. At the same time, commercial cemeteries became much more prevalent, both because many church and town cemeteries filled up and because consumers were willing to pay for graves and markers in newly created memorial and garden cemeteries.

Over time, funeral homes naturally gravitated toward combining with cemeteries rather than furniture stores or liveries. In 1934, Hubert Eaton built a funeral home within his Forest Lawn Memorial Park in Glendale, Calif., establishing the first
modern funeral home and cemetery combination. Today they are so common that funeral industry professionals commonly use the term “combination firms” to refer to the joint operation and/or ownership of cemeteries and funeral establishments. Some shorten the term even further, simply calling them “combos.” Similarly, a stand-alone funeral home now means one located outside of a cemetery, rather than being  independent of a livery or furniture store

The authors go on to discuss how these combos offer economies of scale and scope and make better sense. They do a cost benefit analysis and show there will be gains for the economy (as in lower costs) and more choices as well..

Interesting but difficult to read…

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