Archive for July 5th, 2017

Making sense of Argentina ‘s 100 year bond offer

July 5, 2017

This blog pointed earlier how Argentina managed to sell a 100 year bond recently despite such a poor fiscal history.

Carmen Reinhart points this is mainly due to search for yield:

At the end of the day, this is not about the character of the country, the maturity of the debt, or the size of the issue. It is about the coupon rate on the offering, 7.9%, which is considerably higher than most other plausible alternatives. Just as water finds its level in nature, capital finds its level in international finance: when interest rates are low in core markets, it flows to higher-yielding alternatives.

Without question (and without much precedent), interest rates are extraordinarily low in advanced economies, pulled down partly by the slowdown in longer-term output growth, but also as a consequence of official efforts. Two of the “big three” central banks, the European Central Bank and the Bank of Japan, have lowered their policy rates into negative territory and continue to add to their balance sheets. As for the third, the US Federal Reserve’s slow motion monetary tightening has just put the federal funds rate above 1%, and plans to pare the Fed’s asset holdings appear to be in the works. As the chart shows, almost one half of GDP in advanced economies is produced where policy rates are below 0.5%. Only a sliver of activity takes place where the policy rate is above 1.5%.

Official measures extend beyond the realm of central banks, too. In terms of the huge stock of foreign exchange reserves held worldwide, the public sector holds more US Treasury securities than the private sector.

These distortions encourage investors in money centers to scan the horizon for more attractive destinations. Argentina got their attention, but so, too, did Cyprus, another country that recently had a financial crisis. Likewise, capital has flowed into Iceland at such a rapid clip that the International Monetary Fund felt obliged to warn that, “overheating risks are a clear and present concern.”

She is after all the co-author of the book which has become very important four words in economics: This time is different..

Measuring central bank communication via a Hawkish-Dovish (HD) indicator

July 5, 2017

ECB econs propose an indicator which measures the media perception of hawkish-dovish nature of monetary policy:


Moldova’s 4000 year old grape industry is trying now to export its wines ..

July 5, 2017

Ricardo explained comparative advantage using the Portuguese wine and British cloth example (comparative adv celebrated its 200 years recently). So wine has this interesting connection to figuring economics. There is a journal on  wine economics as well.

So came across this Interesting bit on EBRD website. It tells us how EBRD is trying to help Moldovan wine. Moldovans have rich traditions as they have been cultivating grapes for 4000 years:


Economics of the populist backlash

July 5, 2017

Dani Rodrik pours his wisdom on the hot issue:

The populist backlash may have been predictable, but the specific form it took was less so. Populism comes in different versions. It is useful to distinguish between left-wing and right-wing variants of populism, which differ with respect to the societal cleavages that populist politicians highlight and render salient. The US progressive movement and most Latin American populism took a left-wing form. Donald Trump and European populism today represent, with some instructive exceptions, the right-wing variant (Figure 2). What accounts for the emergence of right-wing versus left-wing variants of opposition to globalization?

I suggest that these different reactions are related to the forms in which globalisation shocks make themselves felt in society (Rodrik 2017). It is easier for populist politicians to mobilise along ethno-national/cultural cleavages when the globalisation shock becomes salient in the form of immigration and refugees. That is largely the story of advanced countries in Europe. On the other hand, it is easier to mobilise along income/social class lines when the globalisation shock takes the form mainly of trade, finance, and foreign investment. That in turn is the case with southern Europe and Latin America. The US, where arguably both types of shocks have become highly salient recently, has produced populists of both stripes (Bernie Sanders and Donald Trump).

It is important to distinguish between the demand and supply sides of the rise in populism. The economic anxiety and distributional struggles exacerbated by globalisation generate a base for populism, but do not necessarily determine its political orientation. The relative salience of available cleavages and the narratives provided by populist leaders are what provides direction and content to the grievances. Overlooking this distinction can obscure the respective roles of economic and cultural factors in driving populist politics.

Finally, it is important to emphasise that globalization has not been the only force at play — nor necessarily even the most important one. Changes in technology, rise of winner-take-all markets, erosion of labour market protections, and decline of norms restricting pay differentials all have played their part. These developments are not entirely independent from globalisation, insofar as they both fostered globalization and were reinforced by it. But neither can they be reduced to it. Nevertheless, economic history and economic theory both give us strong reasons to believe that advanced stages of globalisation are prone to populist backlash.

Fascinating as always..

How Bank of England used its balance sheet in earlier crises? And should it issue shares to fight future crises?

July 5, 2017

Interesting post by BoE’s Bloggers James Barker, David Bholat and Ryland Thomas.

They point how BoE used its balance sheet in the earlier crises as well: