Archive for February, 2014

Is Prof. Krugman a French war general?

February 18, 2014

Another round of debate on relevance of macro modelling.

It starts with NoahSmith’s poston macro modelling.  Prof Krugman reponds in his usual style connecting French war generals with macro modelling:



Why did RBI hold its TAC just before submission of Patel Committee report?

February 18, 2014

Imagine coming for a meeting not knowing that in the next you are likely to get fired for no real fault of yours.

RBI’s recent TAC was one such meeting. The minutes were released recently which said the meeting happened on 20th Jan. The policy was held on 28th Jan. It is ironical that  on 21st Jan 2014, Patel Committee submitted its mon pol framework report. And as we know the PC recommends scrapping TAC and instead make a MPC much like BoE etc.

The gap between TAC and monetary policy struck me as have been tracking this for a while. The gap between the two looked a bit wide. So  just looked at the dates of the two events. As TAC minutes were published from Jan-11 policy onwards, So here it goes:

TAC date MP date Gap
20-Jan-14 28-Jan-14 8
23-Oct-13 29-Oct-13 6
24-Jul-13 30-Jul-13 6
25-Apr-13 3-May-13 8
23-Jan-13 29-Jan-13 6
23-Oct-12 30-Oct-12 7
25-Jul-12 31-Jul-12 6
11-Apr-12 17-Apr-12 6
18-Jan-12 24-Jan-12 6
19-Oct-11 25-Oct-11 6
20-Jul-11 27-Jul-11 7
27-Apr-11 3-May-11 6
19-Jan-11 25-Jan-11 6

I was kind of right. Mostly the gap has been 6 days (9 out of 13 times). It was 7 days in 2 cases and 8 days in 2 cases, including the recent one.

It can’t be just a matter of coincidence that the report was submitted on 21st. The head of the committee was part of TAC being the DG of RBI.  So surely, things were known. Either the TAC could be held on 22 or the report submitted a little earlier. some might say this was because of travel issues. Not sure as during policy time  most of the seniors are present. And you could ask them to be present..

This could have led to some debates within TAC members on their comments on the new framework. This is no small policy change as the whole framework is expected to undergo change. RBI top brass could have sought suggestions/comments on the proposed policy change. Fed I know calls experts to comment and share their views apart from mon pol decision. Something similar could be done for this so called change as well.

As this blog has said earlier as well, one does not know why RBI has been following such an adhoc approach with respect to this report. It looks like a pet project of RBI top brass. I mean the committee did not even invite comments from public/experts and in 7 days flat has adopted some suggestions from the committee. No one knows what is the status of the report and how it just gives the Parliament a miss on critical decisions related to RBI Governance..

I am wondering what RBI top brass was thinking when the TAC members were giving their suggestions. Perhaps laughing and thinking that this is your last meeting and lecturing us. In that case why did RBI really waste their time and resources to bring them to RBI and give their policy suggestions. The policy decision on 28 Jul was anyways beyond logic and one did not need TAC suggestions which largely argued to pause.

Perhaps RBI did not want any comments on this seeing some resistance. So just kept it secretive just like the debt swap deal..So much so for transparency in mon policy..

Keeping or Replacing GDP as a measure of economic progress?

February 17, 2014

Diane Coyle of Enlightenment Economics (that is a nice name for a firm on economics), says despite limitations we need to keep GDP as the measure of economic progress.

Criticism of Gross Domestic Product (GDP) as an indicator of the health of the economy has grown in recent years, in part because of a new focus on measures of subjective well-being or ‘happiness’. This column argues that the debate needs to distinguish between the different purposes of measurement: economic activity, social welfare, and sustainability are distinct concepts and cannot be captured by a single indicator. There are good arguments for paying less attention to GDP and more to indicators of welfare and sustainability, but it would be a mistake to adjust or replace GDP.

If not replace, atleast the hype over GDP numbers should decline. Whichever country it is, GDP numbers attract way too much attention typically from financial markets. It takes the attention away from far more important things. If GDP is an imperfect as other indicators, the hype should be less like other indicators too..

Should Asian central bankers emulate the Fed by employing more and more Phds in economics?

February 17, 2014

Two articles on this. First by Justin Fox who argues how Fed has become an econ PhD safe haven lately. The second is by Michael Arnold in WSJ written in a follow-up to Fox on experiences in central banks of Asian economies.

First Fox:


If UPA did so well, why the need for moratorium on education loans..

February 17, 2014

The interim budget 2014-15 event is over and perhaps the hype will continue for a few more days. As expected the Budget was a showcase for how thankful this country should be for having UPA in power. Highest this, highest that and all kinds of statements were made..

As I was scanning the various statements, came across this interesting one on education loans. The government has announced a moratorium on education loans raised between 2009 and 2013:


The Greek financial crisis – from Grexit to Grecovery

February 14, 2014

A nice speech by Greece central bank head George A Provopoulos. He presents a complete and thorough picture on The Greece crisis.

He joined GCB just on the verge of the crisis:


Teaching macroeconomics using podcasts..

February 14, 2014

Prof  William J. Luther of Kenyon College has developed an interesting way of teaching macroeconomics.

He develops podcasts (like NPR Radio podcasts)and sends it to students before the class. It has been very effective:

Unfamiliar with aggregate concepts like gross domestic product and inflation, many introductory students struggle to understand the big ideas in macroeconomics. Macroeconomic educators typically respond with boring lectures aimed at bringing students up to speed; or, by jumping to the interesting topics their students are not yet prepared to consider.

In an effort to combat this problem, I have incorporated NPR’s Planet Money podcast into my Principles of Macroeconomics course. I describe the podcast and provide a list of episodes others might find useful. In my experience, the Planet Money podcast is well received.

Students enjoy listening to the assigned episodes. They report that it made them more interested in the principles course, helped them understand the relevance of macroeconomics, and increased their understanding of many macroeconomic issues. Most students also feel more comfortable discussing macroeconomic issues having listened to the podcast. And nearly half of those students surveyed say they will continue listening to the podcast after the course ends.

Interesting way to make macro interesting..



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..

IPL as a sport vs IPL as an auction platform…

February 12, 2014

In today’s auction covered really well by, someone asked – Is IPL Auction better than IPL game? Indeed it is. IPL as a sport keeps finding new lows with all kinds of stories, IPL as an auction platform keeps becoming more interesting .

There is so much to learn here in terms of auction theory, overbidding/underbidding, managing resources, team strategies, balancing team (as in balancing a portfolio of a mutual fund), valuation of players going up and down (from previous auctions) etc etc.n

The impact of Ashes was really strong as barring Kevin Pietersen no English player got any favors. And then Eng even plays Sri Lanka during IPL time this year. So, No bidding even for Sri Lanka players. On the other hand Aus players continue to command a premium.

Some players like Yuvraj, Dinesh Kartik seem to have been bid aggressively and  most people said they were overbid. Others like Ross Taylor who seem to be in great form got no bid. The hyped Corey Anderson got a lower than expected bid as by then most had run out of cash. Indian pacers (if one can call them that) were not much in demand barring Shami who seems to be the only hope.

I can go on and on..

Fascinating to see and learn..

A Century of Central Banking: Was the Fed a Good Idea?

February 12, 2014

A nice discussion at Cato Institute on the topic.

Four people from different  streams discuss whether Fed/central banks are a good idea:


German constitutional court ruling on ECB’s OMT…

February 11, 2014

You can never really leave EZ out of action….It had been quiet for sometime and then comes this interesting verdict by German constitutional court. It says that ECB’s Outright Monetary Transactions are against the EU law. The EU law states that monetary financing of Eurozone governments is not allowed and OMT just does that.

Hans Werner Sinn and Marcel Fratzscher write their perspectivess for and against the decision.

Now not a penny has been spent on OMT since it was announced in 2012  but worked as a magic pill to stabilise the markets. But it took so long to produce the verdict which makes things look really crazy. If it was produced in 2012 itself, may be EZ would have struggled to stabilise.

Given the central bank activism, we need to have faster court verdicts in such cases. If a policy is against a certain law etc and court sits on it for months, it does not help. For instance, if money was spent on OMTs, what would ECB have done?

Linking Maruti 800 history with Indian economic history

February 11, 2014

A nice piece by Anil Padmanbhan of Mint.

He says how history of Maruti 800 is connected to history of India’s economic reforms (which did not start in 1991):


Why are we surprised by the decline of Emerging economies?

February 11, 2014

Because we thought this time is different.

Dani Rodrik says decline of emerging economies is on expected lines:

This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised. Economists, in particular, should have learned a few fundamental lessons long ago.


An Economist’s Guide to Visualizing Data…

February 11, 2014

Jonathan A. Schwabish of Congressional Budget Office has this really useful article on doing research. He focuses on how we can improve the graphs etc in the various papers.

For economists who want readers to apprehend results quickly and accurately, presentation matters. Effective visualizations show the data to tell the story, reduce clutter to keep the focus on the important points, and integrate the text with the graphs to transfer information effifi ciently. With the increased flfl exibility of even fairly basic software programs (like Excel), it is now more cost-effective in terms of time and energy for researchers to invest some time learning and thinking about the details of graphical presentation.

To create great, effective visualizations, carefully consider the needs of your audience—the numbers, facts, or stories that will help them understand your ideas and your arguments. Consider the interfaces—static versus interactive—they will use. And pair the depth and clarity of your data, models, and writing with visualizations that are just as clear and compelling.

 Author shows how certain graph styles can be changed to make it look more effective. There are three principles one shd focus on: show the data, reduce the clutter and integrate the text and the graph..

Very useful…




Delhi’s water supply – Going, going, gone? (applies to most cities in India)..

February 11, 2014

Asit K Biswas (of  Lee Kuan Yew School of Public Policy, Singapore.) & Cecilia Tortajada (of Third World Centre for Water Management, Mexico) have written this stirring piece. They have written a book on how Singapore improved its water supply system and must be quite a read.

The piece is on woes of Delhi Water supply but it applies to most Indian cities. For instance, Bangalore is sitting on a water time bomb with all kinds of issues.

They point how Delhi which had good quality of water in 1950s has such poor quality now:


How Paul Samuelson defined his own role as an economist as a technical expert

February 10, 2014

There has been some interest amidst historians on why Samuelson moved to MIT and how MIT turned itself into a top econ dept.

This new paper by Harro Maas of Utrecht University expands further and looks at how Samuelson became a technical expert and in the process turned economics into a technical subject:

This paper examines how Samuelson defined his own role as an economist as a technical expert, who walked what he called ‘the middle of the road’ to – seemingly – stay out of the realm of politics. As point of entry I discuss the highly tempting offers made by Theodore M. Schultz in the 1940s to come over to Chicago, which Schultz persistently repeated over a period of three years and despite strong Chicago faculty resistance. A contrast between Schultz’s own experiences as an economic expert at Iowa State, Samuelson’s work as an external consultant for the National Resources Planning Board during the Second World War and the firm support of the MIT administration for Samuelson’s research, serve to pinpoint the meaning of being technical for Samuelson, and the relation of the technical economic expert to the realm of politics.
Though not all agreed to this shift:

 Not all agreed with economics becoming technical. From 1947 Samuelson had been in irregular correspondence with a Brooklyn Jew and economics school teacher, Martin Wolfson. Samuelson clearly had been charmed byWolfson’s aphorisms, complaints about the state of economics, and requests for free copies of his books. But in later years “old Wolfson” was getting “uppity”.52 In 1972, Wolfson lambasted “the people who choose the Nobel Prize Winners in Economics” and angrily complained that economics had become a “technology, A Techne” and MIT ‘too mechanical, too technical, too technological” and summoned Samuelson to change the name of MIT to Charles Sanders Peirce University and to name the economics department after Thorstein Veblen (see Figure 2).

One can of course dismiss such postcards from minor figures though it speaks for Samuelson he never did so. There was a mild irony in Wolfson’s command. If there ever was an economist who trusted technicians, it was Veblen. “Veblen’s experts,” as Theodore Porter notes, “were hired experts who could serve capitalists as well as communists” (Porter 2009, 305). But Veblen’s technicians were engineers, knowledgeable about nature’s principles. In the post-war era, economists themselves had become engineers who carved out, with “neutral, self-effacing objectivity” (Porter 2009, 305), the logical space of economic policy. Naming the economics department after Veblen would have marked that shift.

 It is amazing to read such pieces. How economics profession has developed over the years is quite a tale. How thoughts of certain individuals and importance of certain econ departments (in NE US) has forced other depts all around the world to follow..Why the econ departments across the world have blindly adopted the line of thought taught in couple of Univs in US, is a tragedy. So much so, it does not seem to matter where you study. The indoctrination by US univs is near complete..

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