Archive for March, 2014

Mirror, mirror on the wall, which is the most dynamic state of them all?

March 31, 2014

An interesting and comprehensive piece in by Maitreesh Ghatak  of London School of Economics and Sanchari Roy  of University of Warwick.

They look at this burning issue of which State has performed better than others. And whether we can ascribe this to so called political leaders. It is comprehensive as it compares States across many indicators and not just chosen ones. So it compares the states across growth, HDI, poverty and inequality measures.


The price of political uncertainty…

March 31, 2014

Bryan Kelly, Lubos Pastor and Pietro Veronesi have this interesting piece in voxeu.

The authors develop a measure of political uncertainty and see its impact on fin markets:


RBI’s first bi-monthly policy on April Fool’s Day…

March 31, 2014

What a perfect day to begin RBI’s nth change – shift from quarterly monetary policy to bi-monthly policy. It is tomorrow on 1st April, a day popularly known as  April Fool’s Day.

A day when children are out trying to trick/fool others and then saying some rhyme of sorts. These rhymes differ from places to places. In Hindi heartland, making a fool is replaced by making someone ‘ullu’ (owl). Based on the owl stories which floated around in last policy, it is an apt day. Most central banks anyways make people fools/ullus  and the day marks a perfect beginning for the next year.


Did Hyman Minsky find the secret behind financial crashes?

March 28, 2014

I think it has been a major mistake of the profession to ignore writings of Minsky and his key ideas. Why the profession has ignored it is obvious as he said things which are just not going to be accepted by the mainstream profession.

BBC has this article on five lessons from Minsky:



Which countries actually suffer from deflation in Eurozone…

March 28, 2014

There is a huge press and expert coverage on rising possibility of deflation in Eurozone and what ECB should do/not do..But then as we know EZ is a union of many countries. So which countries are really suffering from deflation in EZ?

Eilert Husabø of Norges Bank in this short note suggests it is only Greece which is suffering:

Euro area inflation has fallen to a low level, which has given rise to concerns about deflation. We have constructed an indicator designed to capture whether a country is in deflation. The indicator shows that the euro area as a whole and most individual countries are now farther away from deflation than during the financial crisis, with the exception of periphery countries where the indicator is approaching or exceeds the levels prevailing during the financial crisis. Greece is the only country experiencing deflation.

Again Greece seems to be the only culprit.

Crazy stuff and just the opposite of what others seem to be saying that most EZ is under deflation..The problems of managing the EZ and one sizing monetary policy continues..

Bernanke in theory and practice…were the two aligned?

March 28, 2014

Alexander Gill of North Carolina State University has this paper evaluating Bernanke in theory and practice. I don’t think we have had a policymaker whose research interests matched so close to the policy world. He studied Great depression and chaired Fed when there was a near depression 2.0.

Prof Gill says largely the two things match:

Ben Bernanke researched monetary policy for over 25 years prior to becoming a policymaker, and his two-term career as Chairman of the Federal Reserve featured a severe recession coupled with a financial crisis, a chief subject of Bernanke’s research. His reaction to economic events is noteworthy in its originality and breadth, but its intellectual underpinnings are, with a few exceptions discussed in the paper, not without written precedent. This paper will summarize and connect Bernanke’s research and policymaking and show that the two are closely aligned.

The author reviews the research of Prof Bernanke and then looks at how he use his research into policy. At the end he says:

A lifelong fascination with the role of banking in the economy led Bernanke to dedicate himself to ensuring that the mistakes of past monetary policy makers not be repeated. His consistency and dedication on these matters lend credence to the claim that he is genuine in his professed understanding of economics, history, and policymaking and in his desire to improve lives. In the introduction to his book Essays on the Great Depression, Bernanke claims that there is a consensus among macroeconomics that free markets are best for achieving economic growth but that central intervention is sometimes necessary to avoid some unwanted consequences of unbridled capitalism, like recessions. But we can take full advantage of the capitalist system’s bene cial properties under an interventionist regime that allows us to avoid some of the costs of recessions as long as the \will to do so” exists ([Bernanke, 2000b], p. 151). He could not have known it then, but the will to do so will critically depend on the perceived success of his own policies over the course of the Great Recession.

This is just a drop in the research ocean we will see on Bernanke and his Fed term in future…

What do banks lose money on during crises? Household loans or commercial loans?

March 27, 2014

Norges Bank econs Kasper Kragh-Sørensen and Haakon Solheim have this interesting piece on the topic.

They do a historical analysis of select episodes of financial crisis to answer this question. They say in most crisis banks lose money on commercial loans:


Brief analysis of Indian macro-economic time series…

March 27, 2014

Isha Agarwal (no relation to ME blogger!) a graduate student at Cornell Univ has started this intersting blog and hope we get to read some more posts.

In one of the two posts written so far, the author explains the time-series analysis of Indian macro data.

Macro economic time series are known to display trend growth. For example, if we look at a country’s GDP, it rises over time, i.e. it has a trend growth which can be categorized as a long term feature of GDP, however, in the short term we observe that the GDP fluctuates around the deterministic trend. A substantial literature in macro economics deals with the properties of these business cycles and how the government can come up with policies to counter these business cycles – also know as counter cyclical policies. Whether or not such policies are effective in containing the business cycles is a bigger question and there are different schools of thought (Freshwater and saltwater) which feel differently about this issue.

There is a class of models known as RBC (Real Business Cycle) models which addresses questions such as: what causes business cycles, how persistent is the deviation of any time series from its steady state, what accounts for co-movement between various time series(such as consumption and income). RBC model conjectures that business cycle fluctuations are due to real factors (such as shock to technology) as opposed to monetary factors(such as change in money supply/monetary policy). The macro economic course taught in the spring semester at Cornell revolves around RBC theory which also happens to be my area of interest.

In the first lecture of this course I learnt how to extract the cyclical component from any given time series and some stylized facts about GDP, consumption-income ratios, investment-income ratios, their correlations and persistence. In this post I endeavor to conduct the same analysis for Indian data. I take data on GDP and its components from RBI’s website.The first step is to extract the business cycles from the series of GDP. I use annual data from 1950 to 2012 for this analysis.

Nice stuff. Read the post for details.

Though, the graphs could be better as one can hardly detect the difference between original and cyclically/trend adjusted time-series. And then the author could also explain how does one actually detrend all this. It does share a matlab code but a code is a code.

Overall an interesting effort and looking for more such posts..

ME eventually wants to get into posts like these as econ research via papers is getting boring.  Idea is to use simple econometrics (an oxymoron!) to convey basic ideas.  There is hardly any dedicated website to doing economic research and helping people do research using basic tools. Especially these time series analysis where we fail to look at basics and keep projecting left, right and centre..

But as ME is still not there yet, so will have to wait. ME hopes to get into this space quickly..Till then hope Isha helps us..

Lining up to vote is no guarantee for a working democracy

March 27, 2014

Prof. Ricardo Hausmann is in top form given the articles he generates at Proj Synd. Really top stuff.

The recent  one on what makes democracies tick is a reallyold one. But he conveys the message really effectively:

He begins quoting Adam Smith and then goes to the most current event of missing airplane in Maalysia:

When Adam Smith was 22, he famously proclaimed that, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” Today, almost 260 years later, we know that nothing could be further from the truth.

The disappearance of Malaysia Airlines Flight 370 shows how wrong Smith was, for it highlights the intricate interaction between modern production and the state. To make air travel feasible and safe, states ensure that pilots know how to fly and that aircraft pass stringent tests. They build airports and provide radar and satellites that can track planes, air traffic controllers to keep them apart, and security services to keep terrorists on the ground. And, when something goes wrong, it is not peace, easy taxes, and justice that are called in to assist; it is professional, well-resourced government agencies.

All advanced economies today seem to need much more than the young Smith assumed. And their governments are not only large and complex, comprising thousands of agencies that administer millions of pages of rules and regulations; they are also democratic – and not just because they hold elections every so often. Why?

He goes back to Smith and invokes the invisible hand. Just like we have one for markets there is another one for political system as well:

This is an information-rich problem, and, like the social-coordination challenge that the market addresses, it does not allow for centralized control. What is needed is something like the invisible hand of the market: a mechanism for self-organization. Elections clearly are not enough, because they typically occur at two- or four-year intervals and collect very little information per voter.

Instead, successful political systems have had to create an alternative invisible hand – a system that decentralizes the power to identify problems, propose solutions, and monitor performance, such that decisions are made with much more information.

To take just one example, the United States’ federal government accounts for just 537 of the country’s roughly 500,000 elected positions. Clearly, there is much more going on elsewhere. The US Congress has 100 senators with 40 aides each, and 435 representatives with 25 aides each. They are organized into 42 committees and 182 subcommittees, meaning that there are 224 parallel conversations going on. And this group of more than 15,000 people is not alone. Facing them are some 22,000 registered lobbyists, whose mission is (among other goals) to sit down with legislators and draft legislation.

This, together with a free press, is part of the structure that reads the millions of pages of legislation and monitors what government agencies do and do not do. It generates the information and the incentives to respond to it. It affects the allocation of budgetary resources. It is an open system in which anybody can create news or find a lobbyist to make his case, whether it is to save the whales or to eat them.

So it is not about just elections. There is an entire process which is at place. Most developed countries seem to have understood and developed this process. Hence they are developed too:

Without such a mechanism, the political system cannot provide the kind of environment that modern economies need. That is why all rich countries are democracies, and it is why some countries, like my own (Venezuela), are becoming poorer. Although some of these countries do hold elections, they tend to stumble at even the simplest of coordination problems. Lining up to vote is no guarantee that citizens will not also have to line up for toilet paper.

Not sure whether we can ascribe this reason alone for development. But is a worthy reason.

The invisible hand should be as effective in the political arena as it is supposed to be in the economic arena. Alas this is seldom the case. Moreover, we usually ignore the polity and remain focused on economy. We just don’t realise that it is former  that drives the latter. Both are neither independent nor is it the case of latter driving the former. But we just don’t care and keep missing the lessons over and over again. Only when the invisible hand of politics becomes visible via poor governance and malaise do we realise the importance..

But a really good article. Read the comments too..

China’s economic potential is greatly limited by its political system..

March 27, 2014

HBS  Professors William C. Kirby (along with Regina Abrami and F. Warren McFarlan) has written this book –  Can China Lead?: Reaching the Limits of Power and Growth.

HBSWK does a review of the book. The similarity to India is too good to rule out:



The chartbook of economic inequality across the select economies (including India)

March 26, 2014

Inequality trends has taken over the world economy and  captured the interests of economists.

Tony Atkinson and Salvatore Morelli introduce to this superb chartbook on inequality in this voxeu piece. The chartbook captures trends for more than 100 years across twenty-five economies including India.

Even better is it has this common set of questions for all the countries which help understand the trends.

For India this is how it stands:


How target balances actually signal the strength of ECB system and not weakness…

March 26, 2014

The topic of Target imbalances which was in rage in 2011-12 has subsided big time. It hardly makes news now as EZ crisis has eased significantly as well..

Most then had suggested that TARGET imbalances showed the weakness of EZ system as it allowed weak countries to be bailed out by stronger ones. Thus creating imbalances. However, you now how economics is. There is always an alternative story to be tol.

Michael Bordo, eminent econ historian in this voxeu article defends the TARGET system. He says it shows historical lessons have been learnt!:


Reasons for India’s slowdown..

March 26, 2014

Nth paper on the topic. This one is by IMF econs Rahul Anand ; Volodymyr Tulin.

They say the slowdown is mainly because of policy uncertainty. The latter is measured by an index developed by Scott Baker and others:



How US universities have become like shopping malls…

March 25, 2014

A food for thought piece by Prof. Paula Stephan ,of Georgia State University.

She says how US university’s sources of  funding model has changed from federal govt to external sources. This is because universities have become research houses and want more and more funds to stay ahead of the curve. This has negative consequences:



Reading to teach or teaching to read…

March 25, 2014

Robert Pondiscio (ED of CitizenshipFirst, a civic education initiative based at Harlem’s Democracy Prep Public Schools, and a former fifth-grade teacher) writes this interesting article.

We usually think reading is an important way to teach a particular concept/issue etc. But what if we do not know what to read at the first place. He points how students have stopped reading important things and missing the broader picture. The more variety you read the better it gets.

Moreover, the focus of primary education remains on improving math scores. Not much credit is given to importance of reading. (Interestingly, this concept of reading to teach applies to economics as well..):



Is enonomic performance mostly about telling macro stories effectively?

March 24, 2014

The behavioral impressions and biases are not just limited to micro behavior. They seem to be aggregating to macro level as well.

Robert Shiller in his recent piece says much of Japan’s recent revival is based on a powerful economic narrative:


What comes first in money creation- credit or deposits?

March 24, 2014

Blogging has been absent in the last few days due to some work. Good to be back.

Let me start with this wonderful article in BoE’s quarterly bulletin – Money creation in the modern economy by Michael McLeay, Amar Radia and Ryland Thomas.

Usually we say first banks get deposits which are then passed on as credit and we the miltiplier going. The authors say this is a myth and it is actually the other way round – first is credit which is followed by deposits..

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. \

Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.

Monetary policy acts as the ultimate limit on money creation. The Bank of England aims to make sure the amount of money creation in the economy is consistent with
low and stable inflation. In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves. This then influences a range of interest rates in the economy, including those on bank loans. In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the economy may still be too low to be consistent with the central bank’s monetary policy objectives. One possible response is to undertake a series of asset purchases, or ‘quantitative easing’ (QE). QE is intended to boost the amount of money in the economy directly by purchasing assets, mainly from non-bank financial companies.

QE initially increases the amount of bank deposits those companies hold (in place of the assets they sell). Those companies will then wish to rebalance their portfolios of
assets by buying higher-yielding assets, raising the price of those assets and stimulating spending in the economy. As a by-product of QE, new central bank reserves are
created. But these are not an important part of the transmission mechanism. This article explains how, just as in normal times, these reserves cannot be multiplied into more loans and deposits and how these reserves do not represent ‘free money’ for banks.

Further on this credit/deposit thing:

The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.

Reversing the logic completely. Should be made part of reading on macro/monetary economics right away…

How Amit Mitra has fixed/is fixing West Bengal’s finances

March 19, 2014

Wow. This is truly the news of the day(or year may be) provided one believes the statistics.

AK Bhattacharya of BS says how Amit Mitra, Fin Min of West Bengal is reviving the state finances. More importantly minus any hype at all:


Why indicators like GDP/FDI etc. are misleading in today’s economy..

March 19, 2014

Sometimes I feel like rejecting all economics related stuff and get onto figuring technology. After all much depends on how the latter can generate economic growth and future opportunities. The action always has been in new emerging technologies and how they can change things..

Edward Jung (earlier at Microsoft and now at Intellectual Ventures) argues why it is time to look at new metrics for economic growth. The problem is much of economic activity is getting centred around digital technology but latter is not being measured properly in traditional indicators:


How the idea to revamp Global Cricket Governance model came from UN..

March 19, 2014

When the proposal to revamp cricket governance came out, it was hugely controversial. The proposal suggested that cricket in future shall be governed by three major powers- India, Eng and Aus. This led to troubles amidst other members who were unhappy being marginalised.

Even then, there were thoughts how the structure looked like a mini-UN kind with a permanent member security council.

Cricket Australia chairman Wally Edwards in this excellent and frank interview explains the need for these changes. Whether you like it or not, idea was to keep India happy.