Archive for January, 2014

How Ragnar Frisch introduced planning in Norway..

January 31, 2014

An intriguing historical narrative of this story is given in the recent edition of EJW.

It is written by  and :


US rural electrification in the 1930s..

January 31, 2014

Carl Kitchens (of University of Mississippi) explains how rural electrficiation in 1930s helped US economy:

It is a result which would be really surprising if it did not happen:

Economists have found that large-scale infrastructure investments tend to increase economic growth and reduce poverty. However, there has been relatively little research on the effects of smaller, more targeted investment projects. This column discusses recent research on the effects of the US Rural Electrification Administration, which provided subsidised loans for connecting farms to the electric grid. Counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity than similar counties that did not.

Subsidised loans? Did I read that correctly?

While large-scale projects have demonstrated benefits, often at a large expense, the literature has neglected smaller, more targeted, less expensive projects. In new research (Kitchens and Fishback 2013), we focus on electrification projects that directly connect rural consumers to the electric grid. In 1935, the Rural Electrification Administration (REA) was created in the US. In a five-year period, the REA provided $3.6 billion in subsidised loans to newly established cooperatively owned utilities. With these funds, rural utilities doubled the number of farms receiving electric service, and constructed more rural distribution line than private companies had constructed in the previous 50 years.

Using a sample of approximately 1,400 rural counties in the US from 1930 to 1940, we estimate the relationship between changes in access to electricity via the REA and agricultural outcomes such as crop values, livestock values, farm size, and land values. We are interested in how counties that received access to electricity from the REA changed relative to similar counties that did not receive REA electricity.

Our empirical findings suggest that access to electricity improved outcomes in agricultural counties. While agriculture was in decline everywhere at the peak of the Great Depression, counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity relative to counties that did not obtain electricity from the REA.


In case Scotland and UK agree to form a monetary union..

January 31, 2014

On Sep-18-2014 Scots are going to vote on their independence from UK. In case they do, what choice the country has on its economic framework? Should it continue the monetary union? If it does, what else will authorities have to do? Well, because  of  the EZ crisis, we know much of what needs to be done..

Some basics first. UK comprises Great Britain, Scotland.  Northern Ireland and Wales. It has an interesting monetary framework. Though B0E is responsible for currency in the area, some private banks manage the currency it as well. Wikipedia as always does a good job of explaining the concept.

Mike Carney of BoE in this nice speech explains the economics if UK and Scotland agree to remain in a mon union:

The Scottish government has stated that in the event of independence it would seek to retain sterling as part of a formal currency union. All aspects of any such arrangement would be a matter for the Scottish and UK Parliaments. If such deliberations ever were to happen, they would need to consider carefully what the economics of currency unions suggest are the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place.

Those risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance. The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a durable, successful currency union requires some ceding of national sovereignty.

It is likely that similar institutional arrangements would be necessary to support a monetary union between an
independent Scotland and the rest of the UK.  I suspect you have reached your limits of endurance of the dismal science, so you’ll be relieved to know that economics can take us no further. Decisions that cede sovereignty and limit autonomy are rightly choices for elected governments and involve considerations beyond mere economics. For those considerations, others are better placed to comment.

He covers some interesting stats on how the union looks like compared to other unions..

How gold prices are linked to real yields of Treasuries…

January 30, 2014

Nicholas J. Johnson of PIMCO has this useful piece on figuring Gold prices.

We usually say that when Treasuries become risky people buy gold and vice-versa. So there is an inverse relationship between treasury yields and gold prices.

His analysis looks at this relationship closely:


India’s trade paradox and Joan Robinson..

January 30, 2014

Arvind Subramanian of PIIE keeps  churning insightful pieces on Indian economy.

This one on trade (pretty dated as it appeared in BS on 10-Jan-14) looks at whether India trades more or less.

He says there is a paradox. India has much higher barriers to trade than is visible in services. But at the same time trades much more given its size compared to its peers. So as Joan Robinson says (which Dr Subramanian quotes very often) ..everything  and its opposite is true in India…:-)

A point which he does not cover but strikes this blog is this — Is our services  sector so buoyant  as we have such high trade barriers on the same? Is it just artificially competitive?

Pitfalls of practicing development economics like a Turing Machine…

January 30, 2014

Another great piece by Prof. Ricardo Hausmann of HKS.

He points to a book which says our brain doe not work like Turing Machine based on tables of rules. It is actually “giant hierarchical memory that is constantly recording what it perceives and predicting what will come next.


Lessons from the World’s Most Tech-Savvy Government — Estonia

January 30, 2014

Just to point this as a start – Estonians actually elect their Parliament online!

I was amazed to read this piece by Sten Tamkivi (of The Atlantic) on Estonia’s emergence as a tech powerhouse . It lost a lot of years due to Soviet Occupation in 1991 but has geared up really well since then. It has taken on the technology big way.

Estonia is perhaps in the news for wrong reasons. First, it became the 17th member of EU in 2011 and then this battle with Krugman over its austerity policy..

We should be talking more about its ventures with technology:


Pakistan’s economics and political mess….

January 29, 2014

Couple of interesting speeches by State Bank of Pakistan Governor  Yaseen Anwar..

One on fiscal and monetary policy in Pakistan and the other on Banking sector.

In the first, he starts with fisc-monetary policies in the world and then comes to Pak:


Central bankers as Owls, Hawks and Doves…

January 29, 2014

Well jokes have started ever since RBI chiefs have mentioned that they are neither hawks, doves but owls..

In case people think it is original, well Dallas Fed Fisher said this way back in 2008 (c0vered on this blog here)

Those of you who follow my speeches—probably a very small number of you with way too much time on your hands—will recall that I like neither the term “hawk” nor “dove.” I like to think that all FOMC members are best metaphorically described in ornithological terms as “owls”—wise women and men seeking to achieve the right balance in carrying out our dual mandate. To be owlish, and to avoid the imbalance of emphasis that gave rise to needed harsh discipline imposed by the Volcker FOMC, one has to bear in mind that the seeds of inflation, once planted, can lie fallow for some time, then suddenly burst through the economic topsoil like kudzu, requiring a near-toxic dose of countermeasures to overcome.

I am not sure of anyone who referred to it earlier..In case people know, do let this blog know..

Don’t believe the hype about behavioral economics..Really?

January 28, 2014

Allison Schrager a NY based economist says beh eco is mainly hype.

She says beh eco has not delivered the expected results:


RBI’s Flip Flop policy and Dr. Rajan’s bogey game continues..

January 28, 2014

Not sure what is going on at RBI. It should perhaps change its name to Random Bank of India (this will keep the acronym to RBI) given its recent nature of policy. Or a more suitable and perhaps preferrable Surprise Bank of India (this will require a change in both the name and acronym with latter clashing with the largest bank in the country). May be another committee can be floated to work on this..

Once again, against market expectations, RBI hiked policy rates. The bogey game continues but perhaps it is likely to be over as the statement suggested that no more rate hikes will be needed. But then the same was said in October review as well. Who knows? Just that markets have not really played a bogey so far…

Another thing is this confusion between RBI statement and Governor’s Press statement. Earlier, first version was longer and second was a shorter version for the press. Now both are nearly same. Why duplicate?

The blog supports revisiting the inflation stance but does not understand this idea of hiking rates for the sake of it. It has been way too random. Also read this piece for the confused policy at RBI which printed before the policy.


Should Fed abandon targeting fed funds rate and move instead to reverse repo rate?

January 27, 2014

An interesting paper by Joseph E. Gagnon of PIIE and Brian Sack of D. E. Shaw Group.

They say targeting Fed funds rate will be ineffective as an when Fed decides to exit from easy policy. A better tool would be reverse repo rate which will help Fed absorb liquidity:


Having fun with history…

January 27, 2014

Anurag Behar of Azim Premji Foundation, has this really nice piece on teaching history.

He points how history can be so exciting is taught properly.  He begins by saying how he did not like history when at school and how it missed telling key events.

And then points to this interesting anecdote on teaching history..


RBI’s other MPC problem – Minting, Printing and Counterfeiting..

January 27, 2014

RBI has been in news for two things.  One for its mon pol framework and other for its decision to take back currency notes issued before 2005. Interestingly both the news have a common acronym –  MPC – which is central to the issue. For first news,  MPC stands for Monetary Policy Committee and for second it stands for Minting, Printing and Counterfeiting..

In an interesting article, Prof Vivek Moorthy of IIMB helps understands this second MPC problem of RBI. Needless to say lot less is written about this second MPC which is far more important than the first MPC which is just a reorganisation exercise :


Rupee the most undervalued currency as per BigMac Index..

January 25, 2014

Though there are quite a few criticisms of Big Mac Index but still serves as an interesting way to compare currencies across the world.

Economist which publishes the index regularly, has put up an interactive feature of the index. They also provide the data in a  time series format across countries.

As per the index, Indian Rupee is the most undervalued currency in the world. Its value in terms of USD should be around Rs 20-21 per USD for it to be called a fair value! Whichever currency you take, INR is most undervalued compared to that currency and needs to appreciate by quite a margin.


Bernanke’s Monetary Mess and why he deserves zero stars on the Michelin guide

January 24, 2014

Prof Steve Hanke of Johns Hopkins University thinks experts are being kind to Bernanke by giving him grades from B to C.

He says the outgoing Chair has created a huge monetary mess:

Most who have graded Prof. Ben Bernanke’s twelve years at the Federal Reserve have issued marks which range from A to a gentleman’s C. I think those marks are much too generous. Indeed, I think a failing mark would be more appropriate.

In the ramp up to Britain’s Northern Rock bank run in 2007 and the Lehman Brothers’ bankruptcy in September 2008, Bernanke and the Fed created a classic aggregate demand bubble: when final sales to domestic purchasers — a good proxy for aggregate demand — surge well above the trend rate of growth consistent with modest inflation. The Fed also facilitated the spawning of many market-specific bubbles in the housing, equity, and commodity markets. True to form, Fed officials have steadfastly denied any culpability for creating the bubbles that so spectacularly burst during the Panic of 2008-09.

The pre-2008 crisis bubble was set off by the Fed’s liquidity injections which were initially designed to fend off a false deflation scare in late 2002. That’s when then-Fed Governor Bernanke sounded a deflation alarm in a dense and noteworthy speech before the National Economists Club. Bernanke convinced his Fed colleagues that a deflation danger was lurking. As then-Chairman Alan Greenspan put it, “We face new challenges in maintaining price stability, specifically to prevent inflation from falling too low”.

This was followed by an ultra easy mon pol:

To fight the alleged deflation threat, the Fed pushed interest rates down sharply. By July 2003, the Fed funds rate was at a then-record low of 1 percent, where it stayed for a year. This artificially low interest rate — compared to the natural or neutral rate at that time, in the 3-4 percent range — induced investors to aggressively speculate by chasing yield in “risky” venues and to ramp up their returns by increasing the amount of leverage they applied. These activities generated asset bubbles and created hot-money flows to developing countries.

However, as the accompanying chart shows, the Fed’s favorite inflation target—the consumer price index, absent food and energy prices—increased by only 12.4 percent over the entire 2003–08 (Q3) period. The Fed’s inflation metric signaled “no problems”.

But, as the late Prof. Gottfried Haberler emphasized in 1928, “the relative position and change of different groups of prices are not revealed, but are hidden and submerged in a general [price] index”. Unbeknownst to the Fed, abrupt shifts in major relative prices were underfoot. For any economist worth his salt, these relative price changes should have set off alarm bells. Indeed, sharp changes in relative prices are a signal that, under the deceptively smooth surface of a general price index of stable prices, basic maladjustments are probably occurring. And it is these maladjustments that, according to Haberler, hold the key to Austrian business cycle theory — and, I would add, a key to understanding the current crisis.

Just which sectors realized big swings in relative prices during the last U.S. aggregate demand bubble? Housing prices, measured by the Case-Shiller home price index, were surging, increasing by 45 percent from the first quarter in 2003 until their peak in the first quarter of 2006. Share prices were also on a tear, increasing by 66 percent from the first quarter of 2003 until they peaked in the last quarter of 2007. The most dramatic price increases were in commodities, however. Measured by the Commodity Research Bureau’s spot index, commodity prices increased by 92 percent from the first quarter of 2003 to their pre-Lehman Brothers peak in the second quarter of 2008.

Hmm.. He goes onto criticise inflation targeting which ignored exchange rate risks:

While operating under a regime of inflation targeting and a floating U.S. dollar exchange rate, Chairman Bernanke also saw fit to ignore fluctuations in the value of the dollar. Indeed, changes in the dollar’s exchange value did not appear as one of the six metrics on “Bernanke’s Dashboard”—the one the chairman used to gauge the appropriateness of monetary policy. Perhaps this explains why Bernanke has been so dismissive of valid questions suggesting that changes in the dollar’s exchange value influence either commodity prices or more broad-based gauges of inflation.

As Nobelist Prof. Robert Mundell — one of the founding fathers of modern supply-side economics — has convincingly argued, changes in exchange rates transmit inflation (or deflation) into economies, and they can do so rapidly. This was the case during the financial crisis.

Another thing he says is that though Fed has infused large amounts of base money but has not done enough to increase  money supply:

The problem is that central banks only produce what Lord John Maynard Keynes referred to in 1930 as “state money”. And state money (also known as base or high-powered money) is a rather small portion of the total “money” in an economy. The commercial banking system produces most of the money in the economy by creating bank deposits, or what Keynes called “bank money”.

Since August 2008, the month before Lehman Brothers collapsed, the supply of state money has more than quadrupled, while bank money has shrunk by 12.1 percent — resulting in an anemic increase of only 4.5 percent in the total money supply (M4) (see the accompanying chart). The public is confused — as it should be. After all, the Fed has embraced contradictory monetary policies. On the one hand, when it comes to state money, the Fed has been ultra-loose. But, on the other hand, when it comes to the largest component of the money supply, bank money, a tight monetary stance has been embraced.

Prof. Bernanke’s days at the Fed have been marked by monetary misjudgments and malfeasance. Since the proof of the pudding should be in the eating, zero stars in the Michelin Guide.

Not sure what Prof means by did not do enough to create so called bank money. That should be the role of banks..

What a tenure Bernanke had. Some say he staved off a certain second great depression and others who say he failed to resurrect the economy. Then there are others like Prof Hanke who say his policies in 2003 started it all…

Will developing countries leapfrog on their energy consumption needs?

January 24, 2014

There is a group of experts who believe that today’s developing world has lesser energy intensity than advanced economies which were once developing themselves. This implies that as today’s developing world develops. they will require lesser energy than the developed world. This means lesser demand for energy in future and hence a less impact on environment.

K@W discusses recent research work of Prof. Arthur van Benthem, of Wharton. He analyzed data on energy consumption, prices and GDP for 76 countries in an effort to answer these and other questions about patterns of energy use worldwide.

The findings are not as rosy as projected:


Building a Think-and-Do Tank: Lessons from the First 12 Years of the CGDEV

January 24, 2014

Lawrence MacDonald and Todd Moss of Center for Global Development(CGDEV) reflect on the 12 years since this think and do tank was formed. Nice way to call it think and do tank..:-)

They say it has been quite an experience:


Urjit Patel Committee on Monetarty Policy Framework – Some reflections

January 23, 2014

What does a RBI Deputy Governor do when he is appointed by the RBI Governor to look at a revamping mon pol framework (whatever that means)? Of course he looks at whether  the Governor has written on the matter and simply work around it. In this recent committee’s case, this is clearly the case. There is hardly any difference between what the Governor said in his 2009 report and what this comm says in 2013. (The same is true for Mor committee on financial inclusion). And then recent report on FSLRC also has similar ideas on RBI. One wonders what purpose do these committees serve other than generating hype.

Another thing which aids the Comm is that you need to just look around the central banks and see what they are doing. Lot of work has been done on this design aspect so makes it easier. No wonder the comm has picked up insights from central banks around the world – BoE, Fed etc. So soon, RBI will be in global company of central bank policies.

Much was already known about the committee and written upon. Things like targeting CPI, having an inflation target, forming a MPC etc have been written by several people in the past. So, the committee is bang on expected lines. Some thoughts:


Building a circular economy — based on reuse and refurbishment of products, components, and materials..

January 23, 2014

Long back Mahatma Gandhi said “the world has enough for everyone’s need but not for everyone’s greed”.

Frans van Houten CEO of Royal Philips has this interesting piece revisiting the Gandhi dictum (does not mention it though). He says world economy is going to be majorly urbanised and middle classed by 2030. This will put huge constraint on the available resources given our current economic system of use and throw: