Archive for February, 2013

TARGET2 balances grew also +because of re-denomination risk..

February 20, 2013

I have tried to figure debate and controversy around  TARGET2 balances as much as possible. It is quite a read and learning about central banking.

I missed this paper by Stephen G CecchettiRobert N McCauley and Patrick McGuire of BIS. Don’t know how.. It is quite a read and simplifies TARGET2 balances and debate around it.

Basically econs point to two reasons for growing TARGET2 balances:

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Designing a Central Bank of Europe..

February 19, 2013

Harold James one of the leading eco historians, draws lessons from Federal Reserve history and offers suggestions  for ECB.

Do economists and policymakers know how to design a federal bank for Europe? Is there a template? This column explores the history of the US Federal Reserve, gleaning lessons for the future of the European banking system. Getting to grips with the historical and empirical details shows how different the two really are. Overall, evidence suggests that the mechanism of the TARGET system might well create demand for Europe to move further towards fiscal federalism. 

In early years, Regional Feds did their own thing:

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Profile of Stanley Fisher (Will he become Fed chief?)

February 19, 2013

Nice profile of Prof Stan Fisher who is set to retire as chief of Bank of Israel.

There are speculations that he might be asked to become chief of Fed. Bernanke’s term is set to be over in Jan-14 and people close to him suggest he is not interested in an extension. Interestingly, all  the major Central Bank chiefs have been students of Stan Fisher.  Bernanke, King, Draghi all studied at MIT under Prof. Fisher.

The article starts with nice quote from chief Bernanke:

Every August, central bankers from across the globe, who collectively pull the levers of the world economy, descend on Grand Teton National Park in Wyoming. They enjoy a symposium of big economic ideas and strenuous afternoon hikes. At one of their dinners a few years ago, Federal Reserve Chairman Ben S. Bernanke looked around at some fellow titans of finance.

“Do you know what everyone at this table has in common?” he mused. “They all had Stan Fischer as their thesis adviser.”

Nice light read..

5 or 5.5%? War over India’s GDP growth

February 19, 2013

I somehow missed commenting on this.

CSO recently shocked Indian economy followers by suggesting GDP growth for 2012-13 to be expected around 5%. The market expectations were 5.5%. A bit of background first before I get onto reactions.

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Internship at FinMin’s Dept of Expenditure..

February 19, 2013

I guess there is huge demand for Finmin’s internship programs. There is one by DEA (which has been there for a while), noted another one by Dept of Fin Services.

Now another one joins the race – Dept of Expenditure. This dept allows you to apply throughout the year. For Apr-May internships (which most of them are) final date is 15-Mar-12.

Pass on the word..

Good initiatives from FinMin depts

Questioning that India’s recent growth has been inclusive..

February 18, 2013

Sripad Motiram and Karthikeya Naraparaju of IGIDR question the inclusive growth in India.

They actually find the growth in both rural and urban as anti-poor:

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Making a strategy to get an “A” despite scoring a zero in the exam..(insights from Game Theory)

February 18, 2013

Good friend Niranjan  Rajadhyaksha pointed this  super post by Catherine Rampell (on NYT Economix Blog).

She points how  computer science students (not economics) at Johns Hopkins University gamed the grading system. They managed to secure an A despite all scoring zero:

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India’s widening Current Account Deficit: Do We Need to Worry?

February 18, 2013

India’s widening Current Account Deficit (CAD) has become the latest indicator of worry and pessimism. RBI pointed it as a serious issue and many questioned RBI raising policy rates despite widening CAD.

There is huge interest in fin markets on how much CAD is likely to be. As CAD numbers come with a lag of 3-months (Q1 data released at the end of Q2). So there is huge interest in the monthly trade data numbers released by Commerce Ministry. I was amused to see how this unfashionable data has become so much in demand. Yes, there are differences in RBI data and Commerce Ministry data but it still gives one some ideas over trade deficit and gives some ideas..

EPW’s recent edition  (16-Feb-13) has a paper (another version here) by Dr C. Rangarajan and Prachi Misra.

They model the sustainable level of CAD in India (it is around 2.32% of GDP) given the macro conditions.

The deterioration in India’s current account has led to a series of debates in the policy arena relating to sustainability, the importance of exchange rates in influencing the trade balance, and the role of high and rising inflation. Against this background, this article takes a step back and analyses the performance of the external sector in India since 1990. It estimates the sustainable current deficit to GDP ratio to be 2.3%.

Importantly, even to sustain a 2.3% CAD, India would need net capital inflows of the order of at least $50-70 billion annually over the next five years. Given the uncertainty around both the push factors (e g, rising global risk aversion) as well as the pull factors (slower growth in India) that determine capital flows, attracting such magnitudes of flows could very well be an uphill task.

RBI econ Rajan Goyal also released a paper on similar grounds. their acceptable level was a little higher at 2.4-2.8% of GDP with many conditions).
They prescribe ways to lower CAD:
Short Term: In the short term, boosting investor confidence remains the key to attracting capital  flows. Fiscal consolidation, reducing inflation, and further “careful” liberalisation of capital inflows could all contribute towards creating an environment conducive to domestic and foreign investors. The recent decisions to allow 51% FDI in multi-brand retail, 49% FDI in aviation by foreign airlines and the increase in the limit on foreign investment in government securities to $20 billion are welcome steps in this regard.It is important that foreign investors  perceive the economy’s fundamentals to  be strong and continue to be willing to demand Indian fi nancial assets. We need to be proactive in attracting capital flows. That is indeed the short-term solution because curtailing current account defi cit  in the short run is going to be tough.  Even the Twelfth Plan assumes that in  the next fi ve years CAD will on average  be around 3% of GDP
Medium Term: In regard to pushing our exports the framework should comprise various elements. Further diversifi cation of exports along the product space and across markets can help boost exports; e g, we can think about strategies to increase our exports to Asia, Africa and Latin America. In terms of products, we can consider exporting value added textiles in the Chinese markets. Further, investment in Africa can help build up a trade with African countries. Speeding up the trade agreements with EU and Canada can also potentially boost exports. Finally, we need  to move beyond the role of the exchange rate in thinking about strategies to increase competitiveness of our exporters.  In this regard, measures to improve the domestic infrastructure in ports and airports and to reduce barriers to domestic  movement of goods are essential.
On the import side, reducing our dependence on oil imports remains a perennial  challenge. Oil imports constitute about 30% of overall imports. Raising fuel prices  can potentially decrease consumption,  increase fuel efficiency and reduce our  dependence on imports. Increasing incentives for oil and gas exploration (e g,  through reducing uncertainty and creating an efficient revenue-sharing arrangement) could also serve to reduce our dependence on imports of oil. Also, as mentioned earlier, controlling inflation will   have an impact on gold imports. Increasing domestic production as in the case of  coal will again help to contain imports. 
What a big mess we have moved into…I mean the bigger warning is not to take India’s growth story as granted…It is amazing how we have moved into this vicious cycle despite having the best econs on board.

Economics of food buffets…(Could we use some Nudging?)

February 15, 2013

Another brilliant piece by Vandana Vasudevan of Mint. I had commented on her earlier column on Rajdhani Express as well. Such pieces help you think about applying economics at all times..

She points there is something about food buffets. We eat too much in buffets:

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Using Businessweek archives to explain the missing monetary explanation of Great depression

February 15, 2013

Well, research on the great depression moves on..And researchers keep using innovative ways to explain what made the crisis of 1920s a Great Depression..

In this paper one of the leading great dep  historian Christina Romer alongwith her husband David point to a missing link of the monetary explanation of Great Depression. Mon Exp as suggested by Friedman-Shwartz (FS) was that GD happened as Fed tightened policy rates and did not provide enough liquidity. There are two thoughts connected to this. First, there was monetary contraction which then led to expectations of deflation. So, FS do suggest there was monetary contraction but linkage to deflation expectations was not there. The authors address this puzzle:

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The technical competence of economic policymakers…

February 15, 2013

I have hardly seen any research on this very important topic. Esp in these testing times.

Mark Hallerberg & Joachim Wehner have a paper on the topic. They explain findings in voxeu:

When do governments appoint “technically competent” economic policy-makers? Our model focuses on why governments would normally want a specialist in economics over a generalist with more political skills (the demand side) and when such leaders are available (the supply side). Our analysis of data for 1200 economic policy-makers from EU and OECD democracies since 1973 has seven main findings.

  • First, governments appoint more technically competent economic policy-makers during financial crises.
  • Second, Eurozone countries are less likely to have prime ministers with an economics education.
  • Third, new democracies select more technically competent leaders.
  • Fourth, left governments appoint more technically competent finance ministers in years with a stock market crash.
  • Fifth, presidential systems have more technically competent finance ministers.
  • Sixth, the longer a government is in office, the less technically competent are finance ministers appointed, but the more competent are central bankers.
  • Finally, average tertiary education levels correlate negatively with technical competence.

 It begins nicely:

The following quotations suggest that ministers who lack technical competence make bad policy decisions.

“I don’t know what George Osborne’s degree was in. It was certainly not economics.” – Alex Salmond, First Minister of Scotland.

“In case you are wondering, George Osborne studied history.” – BBC Radio Four Announcer1

“[ECB President] Draghi countered the view of [German Finance Minister] Schäuble that the Island Republic of Cyprus is not ‘systemically relevant,’ and that a bankruptcy of the country is not a danger to the future of the Eurozone. Such a comment is what one hears especially from lawyers, argued Draghi. The question whether Cyprus is systemically relevant or not is not a question a lawyer can answer. It is a topic for economists. Schäuble has a degree in law.”2

Should policymakers be experts in their fields? This is an especially relevant issue in the midst of a financial crisis. One potential reason for crises is that the incompetent people made the wrong decisions. If one were to replace these leaders with competent policymakers, then the crisis might end and there might not be crises in the future.

Nice bit..

Though, I think we make a big deal of economic competence and degrees in politics. In politics what matters is willingness to do reforms and take tough decisions. It isn’t anything to do with econ degrees. Take India for example. We all thought all heavens will break lose when UPA elected MM Singh as India’s PM in 2004-09 and again in 2009-14 (assuming UPA-II  lasts). But really nothing much happened. We have the worst crisis in his second tenure when much was expected as there was no left this time. Even simple things have become a reform in these times.

Moreover, the govt is surrounded by all top econs with top econ degrees and econ advice. Wonder what they do…Infact sixth point about longer the govt in power less competent the fin min is..applies wonderfully to India..

 

 

 

 

 

How economic theory damages the moral imagination or poisons the well…

February 15, 2013

A paper which will please like of Prof. Michael Sandel. It is by Julie Nelson of U.Mass (Boston) and is quite a read. Being an econ herself, she has written quite a few papers to given an ethical and sociological dimension to economics. And yes to the importance of feminist economists.

Her main criticism is to look at economics only from a profit-maximisation mechanism:

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5 Weight Loss Tips From Behavioral Economists..

February 15, 2013

There you go.

Carmen Nobel does a real noble task of summarizing give res papers from beh eco area which provide tips on losing weight.

The tips are:

  • TIP #1 – Order your groceries a week in advance of delivery.
  • TIP #2 – Put your money where your mouth is.
  • TIP #3- Fill your backpack with rocks
  • TIP #4 – Put your hands on your hips a la Wonder Woman.
  • TIP #5 – Ignore your lazy colleagues.

It links the papers as well which lead to these tips. Nice read..

Economics of love..

February 15, 2013

Well I should have linked this article y’day. Just saw it today (HT: WSJ Blog).

It is written by super couple of economics world — Betsey Stevenson & Justin Wolfers. One could not ask for more.

They begin reporting survey findings in whether people experienced love?

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Should banking be a Fundamental Right of people?

February 14, 2013

A nice thought provoking speech from  Dr. K.C. Chakrabarty of RBI.

He says banking is not a fundamental right so far. As banks are expected to provide basic banking services to all. More importantly, they cannot deny the banking services to anyone who asks for it (barring for frauds, crimes etc.):

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Linking security to economic growth…

February 14, 2013

Well a useful speech by the FM. Though, it also suggests whatever is wrong with the current administration. The seeds for current fiscal mess were sowed way back in UPA-I (2004-09).

Being the home minister in first 3.5 years in UPA-II, he knows a bit about security. And as he has mostly handled the finance portfolio as a Minister (whenever his party is in power), he ofcourse knows finance. Infact, I dont think anyone understands finance better than him. Though, most of the time it is about tricks like off-balance sheet bonds in 2004-09 regime which led to lower fiscal deficit. This time it is keeping plan expenditure low and using the cash surpluses generated from lower exp to keep fiscal deficit lower. And then most people forget that the recent fiscal mess which was mainly started due to fiscal stimulus in 2008-09 was allowed under his previous tenure as FM..

First some bit on India’s security:

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Parking Policy in Delhi: A Golden Opportunity?

February 13, 2013

I was just seeing internship projects at Centre for Civil Society, India’s leading think-tank. Quite a few are worth a read.

For instance this one deals with Parking problems in Delhi. It is by Yang Li, Andrew Humphries, Vedant Batra. They cover economics of parking in general and apply the ideas to Delhi:

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Input-Output Matrix of Mumbai’s urban system

February 13, 2013

Well, the title of the paper was pretty complex – Metabolism of Mumbai—Expectations, Impasse and the need for a new beginning. I changed it a bit in the post to make it look less intimidating as it is a great read. It is by B.Sudhakara Reddy of IGIDR.

He says cities need to understand the input/outputs used to keep the city functioning. So treating cities like a metabolism:

Despite urban areas covering less than 1% of the world, they host over 50% of the world’s population. As population and human activities expand they exert heavy environmental pressure through the resource requirement, their production and consumption. Hence, it is important to understand the resource flows into the city, the transformations that take place and the resulting products and wastes. 

One method of measuring resource use efficiency is through the analysis of urban metabolism. It provides a good analytical framework for accounting of urban stocks and throughputs and helps understand critical processes as well (increasing or decreasing ground water resources, long-term impacts of hazardous construction materials, etc.).

We have considered Mumbai, a business and industrial city, with a population of about 18 million, as a case study. It highlights the economic, social and environmental conditions of the city. On the input side, water, energy, food and construction material use are taken into account, and on the output side, wastewater, air pollution and municipal
solid waste are examined. From the methodological point of view, it is easier to examine the input side but there are some difficulties from the output end. Similar difficulties can be found in the identification of built-in material stock (buildings, roads, etc.). The material stock is limited to building stock and passenger vehicle fleet. The concept of urban metabolism is put forth as an organizing concept for data collection, analysis, and synthesis on urban systems. The main findings and recommendations of the case study underpin efficient resource urban policy and design, as well as enhance sustainable production and consumption.

Fairly neat idea.

By having such a matrix for most big cities and over a period of time, we can judge whether cities are becoming more efficient and less. And then cross comparison of cities can help one draw lessons for each other.

Should form a critical part of urban policy..

Where Social Networks, Payments and Banking Intersect..

February 12, 2013

An excellent note by Terri Bradford of Kansas Fed.

It shows how social networks are being used in payment systems/commerce:

This article begins with a glimpse of the extent to which social networks have been adopted. Next, it describes the diversity of commerce arising among social networks and the  payment methods that support it. The article then describes  ways in which financial institutions are using social networks  to provide banking services and how consumer attitudes may drive opportunities to offer person-to-person (P2P) payments. Finally, the article concludes by setting out some of the potential risks of these various interactions.

Nice bit..

Will economics textbooks change in next 30 years??

February 12, 2013

A depressing at the same time hopeful article by Prof. Barry Eichengreen.

He points that there was a session in recently held World Economic Forum over state of economics textbook. Will it change post crisis? The depressing bit is that most econs feel there is no need for a change. Hope bit is Prof. Eichengreen feels it is due for a change and it will change. Like all technologies change overtime despite pessimistic expectations, same is the case with econ text-book as well.

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