Archive for June, 2013

Learning from Australia’s Political Meltdown…

June 28, 2013

Politics is a ruin everywhere. Disappointed with Aus Cricket team no-show recently, it seems the Aus political system is also undergoing a crisis.

Gareth Evans, Australia’s foreign minister for eight years reflects on what is going on in Aus political system and what is wrong.

God knows what is going on. We all fret over the current economic crisis but hardly much mention on political crisis going across most countries..

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Using Soap operas to increase financial education/literacy..

June 28, 2013

An interesting paper which I haven’t read fully but couldn’t resist from posting on it . It is by Gunhild Berg and Bilal Zia of WB.

They randomly evaluate whether soap operas which have financial edu messages impact people. The find it does:

This paper exploits the emotional connections and viewer attentiveness of mainstream media to evaluate the economic impact of financial education messages on debt management delivered through a popular television soap opera in South Africa. The study uses a symmetric encouragement design to compare outcomes of individuals who were randomly assigned to watch a soap opera with financial messages, “Scandal!” to those of individuals who were invited to watch a similar soap opera without financial messages, “Muvhango.” Both shows overlapped in evening primetime and had similar past viewership profiles. The financial storyline spanned two months and featured one of the leading characters of the show borrowing excessively and irresponsibly through hire-purchase, gambling, and ending up in financial distress; and eventually seeking help to find her way out. Two intermediate and one final follow-up surveys were conducted as part of the study.

The analysis finds individuals assigned to watch Scandal had  significantly higher financial knowledge of the issues highlighted in the soap opera storyline, in particular messages delivered by the leading character. On behavior, Scandal viewers were almost twice more likely to borrow from formal sources, less likely to engage in gambling, and less prone to enter hire purchase agreements. Messages promoting a national debt mediation helpline delivered by an external character did not sustain traction beyond immediate interest. Three qualitative focus groups highlight the importance of emotional connections with the leading character in motivating behavior change.

Hmm..It covers some other interesting studies which have used TV and some others to spread financial awareness as well.

Will this apply in India? Worthy of an experiment. Then we can ask and hope to see much better Soap Operas..

Why do Norwegians increase their savings when the interest rate is cut?

June 27, 2013

A nice paper showing an interesting result. It shows the Norway’s savings rate increased post crisis despite rate cuts. One would imagine consumption to go up post rate cuts and savings to declinme. We see just the opposite. Why?

Well, the reason is net financial wealth of Norweigians was negative pre-crisis as they ahd high debt on their books. So the rate cuts actually led to sort of rise in incomes as EMIs etc declined.

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Crisis economics – the crisis as a challenge for economists

June 27, 2013

Much has been written on this issue but there is always scope for more.

Dr Jens Weidmann, President of the Deutsche Bundesbank speaks on the topic. He begins comparing econs with seismologists:

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Going Beyond Heroic-Leaders in Development..

June 26, 2013

A nice paper by Prof. Matthew Andrews of Harvard Kennedy School (HKS).

He saysd we need to look beyond herioc- leaders in development:

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Why financial stability is a necessary prerequisite for an effective monetary policy??

June 26, 2013

Not a long time ago, we were lectured on how mon stability is all that matters to financial stability. It was seen as a necessary and sufficient condition for some and necessary condition for most. The logic was not difficult to beat as it took a while for central bankers to tame the inflation beast and hence they kept emphasizing on the idea. And then things like great moderation etc made them overconfident and stretched the idea even more.

Now, the tide has turned. So much so, the speech titles have just become reverse like this one from NY Fed chief – Bill Dudley. He titles it as  – Why financial stability is a necessary prerequisite for an effective monetary policy? The speech is given during Andrew Crockett First Memorial Lecture given by Prof. Rajan.

So why do we need to have Fin Stab is necessary for effective mon policy?

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A step in the dark: unconventional monetary policy after the crisis

June 25, 2013

It is really nice to read such research from Raghu Rajan. He should stay away from FinMin speeches and actually talk like he did earlier and does it here.

He speaks on the topic at the First Andrew Crockett memorial lecture. Raghu Rajan has always been a critique of using the easy liquidity policies and Keynesian policies to resolve the crisis. He is more in the camp of need for structural policies for structural crisis.

He begins quoting Crockett who alongwith BIS officials did not buy the idea that mon stability leads to financial stability. Like Minsky they argued, the bubble is around the corner and c-bank should look at financial stability and macrofinancial/ macroprudential risks. He then discusses the causes of the crisis an the policies to mitigate the crisis. Finally he looks at the theories behind the policies taken and unintended consequences of the unconv. policies.

In the end:

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Raj Chetty advise to college graduates..

June 25, 2013

Here is the piece. He advises students to take up academics as a career profession and within acads look at economics as well.

He says there are very few application to US univs from India (really?? I thought there were too many):

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Why macro-fiscal policy should be coordinated in economic unions?

June 24, 2013

EZ crisis is leading scholars to look at other important aspects of an economic union.

In this voxeu column, Gerald Carlino, Robert Inman say we need to look at local govt. expenditures as well and coordinate them:

How should macro-fiscal policy be coordinated in economic unions? This column argues that the received wisdom has it right, and presents new empirical evidence suggesting that there are important positive spillovers between an economic union’s lower-tier governments in the management of macro-stabilisation policies. We should pursue coordinated policies. Finding programmes and institutions that can best facilitate this coordination is the important next step, both for new and established economic unions.

 

 

Five years in BIS Tower and figuring lessons from the global crisis

June 24, 2013

Mr Stephen G Cecchetti of BIS reflects on his 5 years in BIS and lessons going forward.

He says there are two lessons for econ researchers:

  1. Quantities matter more than we thought.
  2. Moral hazard is worse than we thought. 

For policymakers, there are 3 insights:

1) Short-term interest rates are not enough.
2) High debt levels are a drag on growth.
3) Market discipline is not enough.

Nice bit..

The rise and fall of Economic History at MIT

June 24, 2013

Peter Temin of MIT looks at this topic in this nice paper. It is about how econ history as a subject rose and declined at MIT. It perhaps is the case for most econ depts across the world:

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Reflections on Finance and the Good Society

June 20, 2013

A nice short paper by Prof. Robert Shiller. Though would prefer to title this differently -Reflections on Good Finance and the Society.

After the financial crisis that began in 2007 many have expressed renewed doubts about the basic goodness of the financial sectors, doubts related to deeply-held moral principles and traditions of larger society. We need to reconcile these doubts with financial practice. We must acknowledge the important principle of reciprocity. We must understand that there are natural human tendencies towards aggression and hoarding, which no financial institutions and codes of ethics can completely eliminate. We must appreciate the important role of professional organizations in moderating these tendencies. When these principles are made part of financial education we can expect better public acceptance of the important role that finance plays in our society.

 

Who got LBW in IPL?

June 20, 2013

Another piece from  Shashi Tharoor and I cannot stop but commenting. It is good when he writes pieces like this where he draws on his experience from UN days.It is completely another case when he defends things for the sake of defending them just because he is an Indian politician from the ruling party. Sad to see how politics is so damaging.

So this piece is on guess what? IPL. The same IPL which made him lose his Cabinet position. He points how the media attention has shifted from corruption to IPL:

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What is European Integration Really About? A Political Guide for Economists..

June 20, 2013

As I keep saying. the more you read about Europe the lesser your know-how becomes. The ongoing research on EZ crisis just keeps getting better making you want more and more.

Though, this is easily one of the best papers I have read on the EZ crisis. It is by Prof. Enrico Spolaore of Tufts University. As the title suggests, it is a political guide for EZ crisis and an amazing one at that. Most people now agree that EZ crisis is not because of economic reasons but political ones. In political analysis we are told how EZ leaders agreed to form a union to avoid wars and destructive econ policies in Europe. But the approach leads to many questions like what was the basis for agreeing foe certain economic integration and not others. 

This paper helps understand the broad political ideas on which the economic integration of Europe was based.

Europe’s monetary union is part of a broader process of integration that started in the aftermath of World War II. In this “political guide for economists” we look at the creation of the euro within the bigger picture of European integration. How and why were European institutions established? What are the goals and determinants of European Integration? What is European integration really about? We address these questions from a political-economy perspective, building on ideas and results from the economic literature on the formation of states and political unions. Specifically, we look at the motivations, assumptions, and limitations of the European strategy, initiated by Jean Monnet and his collaborators, of partially integrating policy functions in a few areas, with the expectation that more integration will follow in other areas, in a sort of chain reaction towards an “ever-closer union.” The euro with its current problems is a child of that strategy and its limits.

It discusses these two concepts – intergovernmentalist and functional perspective – to discussing formation of EZ:

Intergovernmentalists believe that national governments are in charge, and that supranational institutions are tools of the national states, which use them to pursue their own goals. Moravcsik (1993, 1998), an influential proponent of this theory, believes that national governments have built European institutions in order to pursue the economic interests of their domestic constituencies. In this spirit, Moravcsik (2012) views the euro as an economic gamble, mostly reflecting the interests of powerful national producers. This interpretation fits within a broader literature emphasizing the link from domestic economic interests to national attitudes and policies towards European integration (for example, Frieden 1998, 2002). The political-economy approach to regional integration based on domestic economic interests is familiar to the economics profession, and therefore I will not say more here. I will focus instead on the alternative theory of functionalism, which is much less known among economists, even though it has played a significant role in the ideology and practice of European integration and the creation of the euro.

Functionalists believe that European integration is not primarily driven by national governments and their voters, but mostly pushed by elites and interest groups that transcend national boundaries. They stress the role of supranational entrepreneurs and civil servants like Jean Monnet in the 1950s and Jacques Delors in the 1980s and 1990s. The theory is called “functionalism” because it is about the dynamic effects of transferring specific “functions” to supranational institutions – for example, regulation of coal and steel production to the European Coal and Steel Community or monetary policy to the European Central Bank. Although this integration starts in economic areas, integration in one area may well lead to further integration in many other areas, not only economic but also political (Haas 1958, 1964; Pierson 1996; Sandholtz and Stone Sweet 1998). In sum, while intergovernmentalists believe that European integration is rooted in the pursuit of national economic interests, functionalists believe that it is about economic integration as a path towards political integration.

The author goes on to say how it was mainly fuctuionalist perspective on which EZ was built. But obviously the logic was flawed that the integration could only deepen going ahead..

Read on. Superbly written..

Dani Rodrik on State of economics..

June 19, 2013

A nice interview of Prof Rodrik on State of economics.

Nice bit..

 

How Greg Mankiw became an economist?

June 18, 2013

Well, Prof Mankiw’s blog and research followers know he was a math guy first and then moved into econ.

Here is a more elaborate version of what actually happened. He realised he is not good enough in Math as others are and then moved into economics based on what someone in college told him about the subject.

This is part of a commencement lecture he gave recently at a school. He discusses the key moments in his life. He draws four lessons from his life experiences:

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How LPG distribution companies have become CBI like and owning LPG gas cylinder a Veblen good…

June 18, 2013

Shifting to Bangalore has been a wake up call on many fronts.  Benefits of labor mobility looks so farcical till one does not figure the transaction costs in shifting places. It is not trivial at all.

One such experience has been with respect to LPG cylinders. I have never really understood this whole business of subsidies anyways. The government first subsidises to  get cheap votes and then rolls it back to show its reform colors. In LPG it is worse as we are neither here nor there with 6/9 subsidsed cylinder per household per annum.

People should pay the right price of the good and especially on energy related goods which are scarce and needs to conserved and used judiciously. But what has happened all these years is just reckless usage and wastage of this scarce resource as govt. subsidised LPG cylinders by a huge amount for a very long time.

Having said that, if one is willing to pay the market price he/she should be able to get LPG connection with minimal fuss. However, it is here where the whole system crumbles. Like Niranjan says the focus is on subsidies and never really building the system. The government heaped huge praise on itself for creating transparency portals of gas connections but is it really needed? What is the government trying to achieve by figuring how many LPG cylinders should a family be consuming? This whole wasteful consumption of LPG cylinders is a result of governemnt’s subsidies at the first place. If it was priced correctly, people would have been more conscious of it right away. You incentivise bad habits and expect good actions? Possible?

The focus should have been on provision of the good. To get a new gas connection is such a headache. Even in transfer cases one just does not get the connection immediately. One is subject to ridiculous things for a gas cylinder like KYC documents (which has become a fancy name/tactic for public harrassment as rowdies manage the game whatever KYC maybe), several proofs etc. Infact one even needs to make a affidavit on stamp paper saying that “I will use this cylinder for household purposes etc etc”. *I thought this was a joke but was told this is serious stuff.

So you have these distribution  agencies becoming like CBI checking whether you are a bonafide citizen so that the subsidised cylinder is used correctly. I mean how ridiculous the whole thing could be. The subsidised gas cylinder has become like a veblen good of sorts and has become neighbour’s envy. So adding on to Siddharth’s piece in Mint we have a case of govt not making private goods as public but also kind of Veblen goods.

This government also loves to centralise policies and systems. LPG is another such case where am told IT systems have been centralised. So if one link goes down, all goes down. There has been such a problem and as a result customers are getting harrassed.

Even more funny is to note a new kind of shortage created by govt- that of LPG cylinder regulators. Lately, I  am told there are no regulators and hence no cylinders. Can anyone beat that?

Compare all this to a private LPG supplier in Bangalore – Jyothi Gas. You make a call, the guy drops the cylinder in 30 mins and you just pay the bill. No harrassment at all. Next time just give your customer no and immediate replacement.

In case of govt. cos just forget it. All people from those booking cylinders to providing it behave as if some favor is being done. The delivery guy also expects a tip per cylinder which is pushed onto all.

Despite much better services, agencies like Jyothi run limited in scope. Why? Thanks to govt subsidies, households still prefer the govt LPG cylinders. The natural (read forced) monopoly also spoils the chances of private sector surviving. Essar and Reliance tried with petrol pumps but as their products were expensive died soon.

So private sector does not have a chance unless you could be as efficient as Jyothi. Perhaps the public sector distribution in Bangalore is terrible for companies like Jyothi to make an impact.

Makes for a very interesting paper…Why private gas companies like Jyothi do well in places like Bangalore ( I am assuming they do well, which itself is a hypthesis) and not in other cities Are public agencies better in other cities? I doubt it but has to be tested..

Why BoE is called Old Lady of Threadneedle Street?

June 17, 2013

UK has two world famous addresses  – Buckingham Paalce and 10, Downing Street. There is another one for econ nerds called Threadneedle Street, the place where Bank of England is housed. Interestingly, BoE is called Old Lady of Threadneedle street as well.

There is some interesting history behind this title given to BoE. John Keyworth, curator of the Bank’s Museum (and the Old Lady’s oldest and longest-serving employee tells the story in this nice article in BoE’s latest bulletin.

BoE got this title thanks to a cartoonist named James Gillray published on 22 May 1797.

 

The cartoon shows the Prime Minister of the day, William Pitt the Younger, pretending to woo an old lady, the personification of the Bank, but what he is really after is the Bank’s reserves,
represented by the gold coin in her pocket, and the money-chest on which she is firmly seated.(1)
At the time, the Bank was a joint-stock company(2) operating under Royal Charter, and therefore essentially a private company — and so it was perceived as having been taken advantage of by the politicians. A series of events beginning with a landing in February 1797 by several hundred French troops at Fishguard on the Welsh coast and ending with an accusatory speech in the House of Commons by the opposition MP Richard Sheridan had prompted Gillray to produce the cartoon.(3)

The Fishguard incident was perceived by many as a precursor to the long-expected French invasion and sparked a panic. The Bank was inundated by holders of notes wanting to exchange them for gold and its reserves were reduced within a fortnight from £16 million to less than £2 million. This situation could not be sustained and an order was passed releasing the Bank from its obligation to pay its notes in gold. Known as the ‘Restriction of Cash Payments’ or simply ‘The Restriction Period’, it had the effect of reserving the gold in circulation and the Bank’s vaults for the war effort. The Restriction Period continued until 1821. Unsurprisingly, this action was seen by the Government’s detractors as outrageous and Sheridan, representing the Whig opposition, described the Bank as ‘an elderly lady in the City who had… unfortunately fallen into bad company’.(4)

Gillray, from his workplace in St James’s, latched onto Sheridan’s words. Dressed in a gown made of the new £1 and £2 notes issued to supplant the gold coin in circulation, an old lady sits
protectively on a chest representing the Bank’s reserves, declaiming against the unwanted
attentions of the skeletal, freckle-faced, pointy-nosed Pitt. The scene is set in the Rotunda, a
well-known public office in the Bank’s Threadneedle Street building. Clerks seated at their
desks can just be discerned in the background. A document headed ‘Loans’ refers to the
Pitt administration’s continual demands on the Bank for funds.(5)

It has other historic cartoon strips as well. They show BoE’s history as it has evolved in interesting manner…Wish we could study economics using such tools as well..

Teaching Economic Policy in Italy..

June 17, 2013

I stumbled upon this very interesting conference- The economics curriculum: towards a radical reformation hosted by World Economics Association. Some very interesting papers there.

I just read this nice paper by Nicola Acocella former Prof at Sapienza University of Rome.  He discusses the birth of econ policy in Italy:

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Right to food or drinking water or any water?

June 14, 2013

A very apt and hitting article by Niranjan of Mint.

Two broad points in his piece.

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