Archive for June 4th, 2018

Hyping economic prospects only fuels future crisis…

June 4, 2018

There is this classic political problem: How should Governments/policymakers present economic prospects? If they present a sober prospect then they are unlikely to be elected. If they present over the top prospects, they might be elected but it will have its own set of consequences.

In this paper, IMF economists say over-optimism leads to crisis in future:

Is over-optimism about a country’s future growth perspective good for an economy, or does over-optimism also come with costs? In this paper we provide evidence that recessions, fiscal problems, as well as Balance of Payment-difficulties are more likely to arise in countries where past growth expectations have been overly optimistic. To examine this question, we look at the medium-run effects of instances of over-optimism or caution in IMF forecasts. To isolate the causal effect of over-optimism we take an instrumental variables approach, where we exploit variation provided by the allocation of IMF Mission Chiefs across countries. As a necessary first step, we document that IMF Mission Chiefs tend to systematically differ in their individual degrees of forecast-optimism or caution. The mechanism that transforms over-optimism into a later recession seems to run through higher debt accumulation, both public and private. Our findings illustrate the potency of unjustified optimism and underline the importance of basing economic forecasts upon realistic medium-term prospects.

Not surprised to read this. It happens all across time and countries. How Great Moderation converted into a global financial crisis is there for all to see and figure.

It is also interesting that IMF econs have written this paper. IMF itself is guilty of presenting overoptimism in world economy for several years now…

What can central banks and supreme court learn from each other to improve communications?

June 4, 2018

Interesting interdisciplinary research by one former central banker and another supreme court chief justice (both of Norway).

The minutes in which central banks justify their decisions vary considerably in length, and the same also applies to supreme court judgements. This column proposes criteria for ‘good’ justifications and asks whether these criteria are met in practice. It concludes that the Swedish Riksbank could look at the way the UK Supreme Court’s justifications have developed, the European Court of Justice could learn something from Paul Romer’s insistence on clear language, and the European Court of Human Rights Grand Chamber might draw inspiration from the length and clarity of the Central Bank of Iceland’s minutes.

Among central banks, the Swedish central bank writes the longest text and the Icelandic central bank one of the shortest. The length of the ECB ‘minutes’ increased from fewer than 2,000 words to around 7,000 when they switched from the “Introduction to the press conference” to the “Account of the monetary policy meeting”.  

The central bank is not the only important public institution that exercises power in society. A supreme court also does so. The number of words supreme courts use to justify their decisions varies even more (see Figure 2).

The European Court of Human Rights Grand Chamber (ECHR) is in a league of its own, with more than 30,000 words on average in 2017. The Supreme Court of the UK (SC UK) is a good number two. Judgements in the Scandinavian countries average between 2,000 and 4,000 words.


They adopt a 4 criteria for clarity for improving clarity in communications.

Criterion 1: The justifications should be technically sound 

When a decision is made, it is reasonable to require information to be provided on who made it, on what legal basis they made it, and whether all procedures have been correctly followed. 

Criterion 2: The justifications should be functional 

The decision must be explained logically, setting out the premises, analyses, assessments and conclusion. The justifications must be written in clear language so that it can be understood by and tailored to those affected by the decision. The justifications must be written efficiently, concentrating on the key points.

Criterion 3: The justifications should be open and complete

The justifications should also shed light on the path leading to the decision.Which points proved particularly hard? Which considerations led to the decision turning out the way it did, but presented difficulties? 

Criterion 4: The justifications should be formulated with the future in mind 

A supreme court judgement impacts directly on the parties to the case but also has a more general normative effect. Central bank decisions will affect expectations about the bank’s future behaviour. The justifications need to be written with the decision’s normative effects and impact on expectations in mind. 

Nice bit.

How Did Central Bank Independence become the norm?

June 4, 2018

Interesting review of this book – Priests of Prosperity: How Central Bankers Transformed the Postcommunist World- which becomes a must buy and read.


The repeated rise and fall of Nalanda University

June 4, 2018

A piece on Nalanda university:

A while ago there was this piece in Mint on building a world class university on banks of Ganges. There is another problem of restoring glory in old universities which once were world class.

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