Archive for December 2nd, 2013

Europe’s Deflation Problem..

December 2, 2013

Jean Pisany-Ferry of Bruegel has a nice piece in Project Syndicate on the topic.

He says like Bernanke acted on possibility of deflation in 2002, so should ECB.

“Having said that deflation in the United States is highly unlikely,” outgoing Federal Reserve Chairman Ben Bernanke famously remarked in 2002, “I would be imprudent to rule out the possibility altogether.” At that time, annual inflation in the US exceeded 2%, and the risk of it becoming negative was indeed remote; but Bernanke nonetheless felt it necessary to map out an escape route from a potentially catastrophic scenario. The response that he described was essentially a preview of the policies that the Fed implemented in the aftermath of the 2008 shock.

For the eurozone today, the threat is not remote. According to the latest inflation data, annual consumer price inflation is just 0.9% (and 1% if volatile energy and food prices are excluded). That is one percentage point below the European Central Bank’s target of “below, but close to, 2%.” With the economy clearly operating below full capacity and unemployment above 12%, the risk of a further decline cannot be excluded, especially given downward pressure from a gradually appreciating exchange rate and a global context of negative growth surprises and subdued commodity prices. So it is past time to recognize the deflation danger facing Europe and to consider what more could be done to prevent it.

He does not give his policy choices. But are we looking at QE from ECB now?

Raising Washington’s height of buildings..

December 2, 2013

A nice short article on woes of price of real estate in Washington DC.

The height of city buildings in the city are governed by a act called height of buildings act:


Why Argentina and Venezuela keep repeating same mistakes?

December 2, 2013

Prof. Ricardo Hausman of Harvard and former minister of planning of Venezuela has this really nice piece on the topic. each time you think this is different, the reality is it isn’t..

It is often difficult to understand how countries that are dealt a pretty good economic hand can end up making a major mess of things. It is as if they were trying to commit suicide by jumping from the basement.

Two of the most extreme cases (but not the only ones) are Argentina and Venezuela, countries that have benefited from high prices for their exports but have managed to miss the highway to prosperity by turning onto a dead-end street. They will eventually have to make a U-turn and backtrack over the terrain of fictitious progress.

The puzzling thing is that this is not the first time either country has veered into an economic cul-de-sac. It has been said that only barbers learn on other people’s heads, but some countries seem unable to learn even from their own experience. The ultimate reason for such self-destructiveness may be impossible to identify. But it is certainly possible to describe how the road to hell is paved, whatever the intentions.

He says the troubles begin whenever the govt. tries to put controls to keep inflation and exchange rate under control:

It all starts when some imbalance causes overall inflation or some key price – typically the exchange rate, but also power, water, and gasoline – to come under upward pressure. The government then uses its coercive power to keep a lid on price growth. For example, Brazil has wreaked havoc on the financial health of its national oil company, Petrobras, in order to keep gasoline prices low. Argentina destroyed its natural-gas sector with price controls. Many countries have kept power and water prices too low and have ended up with shortages.

But things become really nasty when the government opts for foreign-exchange controls. The usual story, nicely summarized by the late Rüdiger Dornbusch and Sebastian Edwards, is that lax fiscal and monetary policies cause a flood of freshly printed currency to chase more dollars than the central bank can provide at the going exchange rate. Rather than let the currency depreciate, or tighten its policies, the government opts for foreign-exchange controls, limiting access to dollars to those who “really” need it and thus preventing “speculators” from hurting “the people.”

Foreign-exchange controls, typically accompanied by price controls, give the government the sense that it can have its cake (lax policies) and eat low inflation. But controls lead to a parallel exchange rate, which can be either legal, as in Argentina, or illegal and even unpublishable, as in Venezuela.

But having two prices for an identical dollar creates enormous arbitrage opportunities. A dollar purchased at the official rate can be sold for almost twice as much in the “blue” market in Argentina and a whopping ten times more in Venezuela. Repeat that game a few times and you will be able to afford a corporate jet. Nothing becomes more profitable than over-invoicing imports and under-invoicing exports. In Venezuela, importing spoiled food and letting it rot is more profitable than any investment anywhere else in the world (disregarding, of course, the bribes needed to make it happen).

The dual-exchange-rate system ends up distorting production incentives and causing the effective supply of imported goods to decline, leading to a combination of inflation and shortages. But here things turn interesting. Public spending tends to rise with inflation more than government revenues do, because revenues depend on the tax on exports, which is calculated at the pegged official exchange rate.

So, over time, fiscal accounts worsen automatically, creating a vicious circle: monetized fiscal deficits lead to inflation and a widening gap in the parallel exchange-rate market which worsens the fiscal deficit. Eventually, a major adjustment of the official rate becomes inevitable.

He points how Venezuela continues to suffer from this choice of policies. Why does this happen all the time?

Why do countries opt for such a strategy? Any system creates winners and losers. In Argentina and Venezuela, the winners are those who have preferential access to foreign exchange, those who benefit from the government’s profligacy, those who can borrow at the negative real interest rates that lax policies create, and those who do not mind waiting in long lines to buy rationed items.

Such a system can generate a self-reinforcing set of popular beliefs, which may explain why countries like Argentina and Venezuela repeatedly drive down dead-end streets. Because so many businesses make money from the rents created by the rationing of foreign exchange, rather than by creating value, it is easy to believe that markets do not work, that entrepreneurs are speculators, and that governments need to control them and impose “fair” prices. All too often, this allows governments to blame the car, and even the passengers, for getting lost.

Nice bit..

How fiscal policy became more transparent overtime?

December 2, 2013

We have much more work on central bank transparency but hardly anything on fiscal transparency. Central bank transparency usually begins around Reserve Bank of New Zealand adopting inflation targeting in 1989 and then shows how other central banks started opening up as well.

How did this start in case of fiscal policy? Now fiscal policy has existed for  much longer than monetary policy as conducted by central banks today. Both the history and issues around fiscal policy make FP transparency worth thinking about.

So here is this paper on the topic looking at European history of fiscal policy transparency. It is written by Timothy C. Irwin of IMF and is quite an interesting read. As always and ironically, it started in Greece:


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