Archive for February 13th, 2014

How Ahmedabad has developed a market to exchange pre-2005 notes..

February 13, 2014

Tamal of Mint points to this really fascinating development.

The market savvy community of Gujarat without any fancy finance degrees smelled an arbitrage opportunity out of recent RB ruling to ban currency notes issued pre-2005. And they have already developed it:



As RBI tries to become a BoE clone, BoE tries to become like RBI…

February 13, 2014

As RBI evades Government/Parliament to adopt the fancied inflation targeting regime, things are changing in the inflation targeting world.  They still say they are inflation targeters but are looking at all kinds of things. Call it flexible inflation targeting which is nothing but RBI’s now discarded multiple indicator approach.

One such case is Bank of England which is even more interesting as RBI is going to try and become like BoE over the years. The RBI committee report borrows heavily from Bank of England framework.

There has been lot of discussion on forward guidance of these central banks and more in case of BoE. The inflation targeting central banks have all kinds of targets (in the name of flexibility) like BoE has for unemployment. So it had this target that it will keep stimulating till unemployment touched 7%. As it touched 7.1% there were debates over whether BoE will stop its easy policy.

There were two solutions. One to lower the unemp threshold to say 6.5% like Fed did (though US unemp has touched tantalising close to 6.6%) or to revamp its fwd guidance statement. BoE chose the second option.

In its recent inflation report (which is also going to be taken out by RBI), BoE explained its changed stance. And interestingly, BoE will look at many indicators for its future policy just like RBI policy.

BoE head Carney explained:


Two more sources of inequality…fiscal consolidation and capital account liberalisation

February 13, 2014

Davide Furceri and Prakash Loungani of IMF in voxeu add tw0 more sources of rising inequality — fiscal consolidation and capital account liberalisation.

They say research shows the evidence that these two actions lead to widening of inequality


Money makes people right-wing and inegalitarian..

February 13, 2014

Prof. Andrew Oswald of Warwick University has this interesting experiment in voxeu.

He says as people receive money they turn rightist and inegalitarian:

Why are you right-wing, left-wing, or in the middle? You probably believe that you made a genuine, calm, and ethical choice. But what were the deep causal forces upon those political preferences?

The scientific roots of people’s political views are poorly understood. One possibility (View 1) is that individuals’ attitudes to politics and redistribution are motivated by deeply moral views. Another possibility (View 2) – and this is perhaps some economists’ presumption — is that voting choices are made out of self-interest and then come to be embroidered in the mind with a form of moral rhetoric. Testing between these two alternative theories is important intellectually. It is also inherently difficult. That is because so many of our attitudes as humans could stem from early in life and are close to being, in the eyes of the researcher, a ‘person fixed-effect’.

In most data sets, rich people typically lean right. The fact that high income and right-wing views are positively correlated in a cross-section has been repeatedly documented in quantitative social science (recently, for example, by Brooks and Brady 1999 and Gelman et al. 2007 in US data, and by Evans and Tilley 2012 in British data). An analogous result is reported, using quite different kinds of methods, in Karabarbounis (2011). Economists such as Di Tella and MacCulloch (2005) have also studied political views and their implications, and other influences have been examined using causal evidence on political views (such as in Oswald and Powdthavee 2010 and Erikson and Stoker 2011).

Fine – so the rich favour the right not the left. The difficulty is to know how to interpret this famous correlation of political science. Is it actually cause-and-effect, and if so in what direction? It would be nice to run a real randomised experiment where a treatment group are showered with cash, but that would be too expensive for social-science funding agencies. Hence it is necessary to look elsewhere for inspiration.

He does an experiment to figure this:

Our new study, Powdthavee and Oswald (2014), tries to get to the bottom of the issue. By looking at lottery winners through time, it provides longitudinal evidence consistent with the second, and some might argue more jaundiced, view, namely the View 2 of human beings. We exploit a panel data set in which people’s political attitudes are recorded annually. Our work builds upon an interesting cross-sectional examination by Doherty et al. (2007), which we learned about late in our own research.

In our data set, many hundreds of individuals serendipitously receive significant lottery windfalls. We find that the larger is their lottery win, the greater is that person’s subsequent tendency, after controlling for other influences, to switch their political views from left to right. We also provide evidence that lottery winners are more sympathetic to the belief that ordinary people ‘already get a fair share of society’s wealth’.

Like someone told me you are a communist/egalitarian when you are in college (as you have no money)…as you get a job you move to the right and don’t care much about egalitarian issues….

False Promises of Digital Democracy

February 13, 2014

An interesting perspective byKatinka Barysch (Director of Political Relations at Allianz SE).

She says despite the initial positives and expectations from so called digital democracy, it has turned to be disappointing. The Govt has become a smart user of digital world undoing much of the advantage people had:

Most people used to think of the Internet as a force for good. It was supposed to allow us not only to shop, stay in touch with former classmates, and find a new sushi restaurant; it was also supposed to empower us politically by allowing the disenfranchised to make their voices heard, help activists mobilize supporters, and enable ordinary citizens to publicize evidence of official corruption or police brutality.

But doubts have crept in – and not only since the revelations of government agencies’ use of the Internet to spy on us, our leaders, and one another. The Internet’s impact on politics is deeply ambiguous. Unless and until it becomes a space where rules and rights apply like they do in the real world, that is unlikely to change.

Early enthusiasts dreamed that mere access to the Internet would help spread democracy. This did not happen. At the end of the 1990’s, 4% of the world’s population was using the Internet; today, almost 40% do. But the share of countries classified as “not free” or “partly free” by the democracy watchdog Freedom House has hardly changed over the same period. In the battle between networks and hierarchies, the hierarchies seem to be winning more often than not.

One reason is that governments have become as skillful at using the Internet and modern communications technology as activists. Autocratic governments use it to track down protest and opposition leaders, as we have recently seen in Ukraine. They employ armies of people to vet and skew online conversations. Some people even argue that the Internet acts as a political release valve that helps dictators stay in power.

But even the most determined autocrat cannot fully control political activity online. Tech-savvy young people tend to circumvent attempts at official censorship. And yet Internet activists are not necessarily gaining power.

 The internet audience shuns leadership and as a result there is limited progress. Moreover, people feel just participating on the net is enough:

Internet-inspired movements usually have lasting impact only if they generate traditional political activity, such as street protests or the establishment of political parties. For this, they need leadership, which net activists tend to reject, because they view themselves as pure grassroots movements. In the absence of viable strategies and clear direction, most Internet-aided uprisings have dissipated quickly.

The Internet has thus turned out to be less potent than expected in the fight against tyranny. Nor is its effect on established democracies straightforward. While democracies have arguably become more vibrant, their politics have become more volatile.

Consider the media. Only 16% of Americans in their 40’s read (print) newspapers these days; the share among 20-somethings is 6%. Digital media offer great diversity, easy access, and opportunities to comment. But they encourage people to retrieve only information and commentaries that fit their existing views. While traditional media can present their readers with balanced coverage, digital media can fuel political polarization.

Moreover, political firebrands, populists, and radicals, from Italy’s Beppe Grillo to American Tea Party members, use social media and the blogosphere to appeal directly to potential supporters. The Internet allows many political upstarts to amass a large following quickly, only to disappear just as fast. But the ebb and flow can unsettle established politics – for example, when centrist parties move to the right to lure voters away from more extreme parties.

At the same time, young people seem to think that they have exhausted their civic duties by tweeting and blogging. They no longer join political parties, trade unions, and other interest groups. The average age of party members in Germany is over 50. In the United Kingdom, a retiree over 60 is more likely to be a trade-union member than a worker under 30 is. Without civil-society organizations, politics becomes more fragmented and less cohesive – and finding workable compromises becomes harder.

Interesting ideas.

This article takes me to this really interesting paper on Tullock challenges for facebook. It was by Prof. Bruno Frey. Tullock believed – What is important, will be manipulated by the government. He was always sceptical of innovations which believed that they could undermine government’s role. So Frey argues that things like social networks have to face the Tullock challenge and might not succeed. It is still early days to say whether these networks have failed but some expectations have declined..

Perhaps the more things change the more they remain same..

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