The next big idea of macroeconomics: Linking human psychology with debt markets?

Noah Smith in this piece wonders how come the 2008 crisis has not led to any new  thinking/development in macroeconomics.

Macroeconomics tends to advance—or, at least, to change—one crisis at a time. The Great Depression discredited the idea that economies were basically self-correcting, and the following decades saw the development of Keynesian theory and the use of fiscal stimulus. The stagflation of the 1970s led to the development of real business cycle models, which saw recessions as the efficient working of the economy, and central bank meddling as likely only to cause inflation. The painful recessions of the early 1980s saw a shift to so-called New Keynesian models, in which monetary policy is the central stabilizing force in the economy.

The housing bubble that peaked in 2006, the financial crisis of 2008, and the Great Recession that followed constitute another crisis. So far, however, it has produced mostly evolution, rather than revolution, in economists’ conception of the business cycle. The bubble and the following crisis convinced macroeconomists that recessions often emanate from the financial sector—an idea that had often been resisted or overlooked before. There was immediately a flurry of activity, as economists hastened to shoehorn finance into their standard models. Some now believe that the addition of finance will allow New Keynesian models to forecast crises before they happen; others are, understandably, sceptical.

For instance this paper by Jordi Galli says New Keynesian Macro, which was the dominant framework before crisis, is working fine even post-crisis with modifications.

Smith points to this paper (slides discussed in Nobel Symposium as well) by Pedero Bordalo, Nicola Gennaoli, and Andrei Shleifer which could be the next big thing to look at in macro:

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What is in a surname? Helps figure decline of Northern England…

Fascinating research on economic history by Profs Gregory Clark and Neil Cummins.

They try figure decline in Northern England compared to Southern England. They use surnames to figure migration and development which raced in South but not North:

How EU banks modelled their stress away in the 2016 stress tests?

Trust (or mistrust?) banks to figure out a way through most things.

Friederike Niepmann and Viktors Stebunovs of Federal Reserve argue how European banks managed to hide losses in the stress tests. Without the manipulation, their credit losses would have been higher by 28%:

The European Banking Authority (EBA), together with the national competent authorities (the Single Supervisory Mechanism, the ECB, and others), regularly conducts stress tests for major banks in the EU.¹  The EBA kicks off a stress test with the release of two macroeconomic scenarios: a baseline scenario and an adverse scenario. Following the EBA’s methodology, banks apply these scenarios to their exposures at a fixed date and project losses and capital ratios over a three-year horizon under a static balance sheet assumption. Banks submit their projections to the supervisors, who scrutinise the projections and benchmark them against outcomes of a supervisory challenger model.  After results have been agreed upon by banks and regulators, they are made public by the EBA and serve as an input for the supervisory evaluation process that sets bank capital requirements for the following year.²  

The European approach to stress testing differs significantly from that of other countries, most prominently the US, where the Federal Reserve projects capital under stress for individual banks following an “industry-wide approach, in which the estimated model parameters are the same for all” banks.³ Our latest paper highlights a key issue with the European approach of letting banks run their own stress test models, providing evidence that some banks were able to significantly lessen the stringency of the 2016 EBA stress test by manipulating the results (Niepmann and Stebunovs 2018).⁴ Based on our estimations, these banks projected systematically lower credit losses than what their models used in earlier years would have predicted for the same macro scenario and risk exposure. Detecting and counteracting such bank behaviour apparently poses a challenge.

The banks and its supervisors just keep moving from one low to another…

Monetary historians need to move beyond Friedman and Schwartz’s Monetary History of the United States

I had blogged about the Nobel Money and Banking Symposium held in Sweden recently.

In the symposium, Prof Barry Eichengreen presented a paper chastising monetary/financial historians for being too narrow in their research.

First, there is too much attention on  Friedman and Schwartz’s Monetary History of the United States which basically looked at US as closed economy. Since then research (including Prof Barry’s) has shown how gold standard led the depression to become a global event. Second related point is much of research remains centred on US economy and does not look at other economies. Third, we draw false similarities such as those between gold standard and Euro whereas both systems are very different.

He starts with a bang:

A documentary traces Kerala family that migrated to China 700 years ago

Absolutely fascinating to read this:

Joe Thomas Karackattu does not want to share images of the climax of his film. It is a documentary, a non-fiction, but the climax is still very intriguing.  

Guli’s Children is a documentary that’s been noticed, talked and written about. The one-liner Joe wrote on the Facebook page caught many curious eyes: “Over 700 years ago…a family from Kerala moved to China. This film is the story of one man’s search for the forgotten links in Kerala-China history.” 

It all began as part of his research, Joe says. He is an Assistant Professor at IIT Madras. “I take courses on international relations and Chinese studies. Apart from teaching we also pursue research on individual areas of interest. Cultural Diplomatic History is something I have been studying for the past many years.” 

That’s how he comes across a lot of published material on the history of Chinese maritime outreach, particularly to Kerala where he hails from. But Joe, who has roots in Kottayam, has mostly lived outside Kerala. 

Yet you find him speaking fluently to men in Fort Kochi, who talk about ‘Cheena vala’ – Chinese nets which are still a common sight in the waters of Kerala. Joe interviewed many people, spoke to historians, read a lot, to finally reach a family in the south of China – in Guangxi – that traces its ancestor to a Malayali, who came from Kozhikode. 

He actually finds a Chinese family which has maintained these family records religiously.

hrough his contacts he spoke to teachers in China about people who would have migrated. It took him two years but finally he met a family that goes by the name of Guli Ma and has maintained family records with a lot of care. “They call it Jiapu, the record of the family tree. The first ancestor who came from Kozhikode is referred to as Ma Like. The historians I spoke to said this could be a variant of Maliki or Malik. And Guli is what they call Kozhikode in Chinese. So, they still go by the name Guli Ma family – Kozhikode’s Ma family,” Joe says unable to contain his excitement. The family too was thrilled to meet a man from India. 

“They don’t have the resources to visit India but they follow the news from the country. They talked to me about pottu, what Indian women wear on the forehead.” The family he spoke to is the 14th generation descendant of Ma Like. 

Joe was also surprised to find in his research men in Kerala who bore physical resemblance to the Chinese even after so many years of when the traders had come and gone. He was a little reluctant to ask a man he met at a mosque in Kozhikode, about his appearance, that wasn’t “like a Malayali’s”.  

“But he didn’t mind it. He said that his family was in charge of trade with the Chinese all those centuries ago,” he recounts. Joe also speaks of the Cheenam Palli (Chinese mosque) in Panthalayani, Kozhikode, guessing the origins of the name came because of this Chinese connection.  

Made in China existed many years ago too!

The state of New Keynesian economics: A Partial Assessment

Jordi Galí reviews the research around New Keynesian economics.

He says it still remains robust:

In August 2007, when the first signs emerged of what would come to be the most damaging global financial crisis since the Great Depression, the New Keynesian paradigm was dominant in macroeconomics. It was taught in economics programs all over the world as the framework of reference for understanding fluctuations in economic activity and inflation and their relation to monetary and fiscal policies. It was widely adopted by researchers as a baseline model that could be used flexibly to analyze a variety of macroeconomic phenomena. The New Keynesian model was also at the
core of the medium-scale dynamic, stochastic, general equilibrium (DSGE) models developed and used by central banks and policy institutions throughout the world.

Ten years later, tons of ammunition has been fired against modern macroeconomics in general, and against dynamic stochastic general equilibrium models that build on the New Keynesian framework in particular. The criticisms have focused on the failure of these models to predict the crisis, a weakness often attributed to their lack of a financial block that could account for the key factors behind the crisis, whose origin was largely
financial.

Other aspects of the New Keynesian model and its extensions that have been the target of criticism include the assumptions of rational expectations, perfect
information, and an infinitely-lived representative household.

Those criticisms notwithstanding, the New Keynesian model arguably remains the dominant framework in the classroom, in academic research, and in policy modeling. In fact, one can argue that over the past ten years the scope of New Keynesian economics has kept widening, by encompassing a growing number of phenomena that are analyzed using its basic framework, as well as by addressing some of the criticisms raised against
it. Much recent research, for instance, has been devoted to extending the basic model to incorporate financial frictions in the basic the model, as described in Gertler and Gilchrist (2018) in their contribution to the present symposium. In addition, the New Keynesian model has been the framework of choice in much of the work aimed at evaluating alternative proposals to stimulate the economy in the face of the unusual circumstances triggered by the crisis, including the use of fiscal policy and unconventional monetary policies.2

The present paper takes stock of the state of New Keynesian economics by reviewing some of its main insights and by providing an overview of some recent developments.

It is a decent primer on New Keyensian macroeconomics…

Russia is Dumping Its US Bonds for Gold, But Where Is It Storing Its Bullion?

Russia has been buying gold aggressively and has come in the top 5 gold holding nations in Feb-18.

This piece looks at where all this gold is being stored. This is important given the context that it has been difficult for some central banks to repatriate and store gold.

Gold repatriation operations have not been without their difficulties. In 2013, when Germany began the repatriation of its gold from the US, so-called “logistical difficulties” saw just five tons of some 300 brought home that year, giving rise to theories that the US was holding up the process. When the Dutch Central Bank launched their repatriation program, they did so on the sly, shaving their Fed gold holdings by 122.5 tons in 2014 and only announcing that they did so after the fact. Turkish President Recep Tayyip Erdogan, perhaps sensing problems with Turkey’s repatriation efforts, proposed ditching dollar loans in favor of loans “based on gold” at the recent G20 meeting in April.

But not for Russia:

Russia won’t face any headaches in repatriating any gold because its reserves are already held in the country. Nearly two-thirds of Russia’s stocks of the precious metal are held at the Central Bank’s repository in Moscow, shrouded in secrecy until recently. In 2017, a Komsomolskaya Pravda journalist became the first to get a glimpseof the Moscow storage facility, with rows and rows of containers with 20 gold bars between 12 and 13 kilograms apiece shown in a 17,000-square-meter warehouse.

The rest of Russia’s gold is stored in St. Petersburg, and the city of Ekaterinburg in the Russian Urals.

We are already seeing central banks pile up gold and repatriate gold. Signs of financial worries are leading to all this behavior…

How South East Asian are gearing to become financial centres and compete with Singapore?

Interesting piece on how SE Asian nations such as Indonesia, Malaysia, Vietnam etc are trying to compete with Singapore for financial services. Though, Singapore dwarfs most of these countries but the others are trying their best to get some part of the pie:

Banks lose trust, their buildings lose elegance

Nice piece by Sundeep Khanna of Mint.

He points how earlier bank buildings were so grandiose to display both awe and this sense of security given fortress like features. This does not apply anymore:

The big banks may not be dying but the big bank buildings that defined the skylines of cities across the world are certainly a thing of the past. Over the years, banks were housed in magnificent structures, beautiful buildings, often, the biggest in town. Their size was expected to convey solidity, a sense that people’s money was safe with them since they were not going anywhere in a hurry. When it came to money, the motto was as safe as a bank.

Thus, when the Hong Kong and Shanghai Banking Corp. was planning its office tower in Hong Kong, its brief to its architects was a simple one, to build “the best bank building in the world”. The eventual building that came up in 1986 was a work of art prompting The Observer Magazine to turn poetic in its description: “In the congested centre of Hong Kong, the Bank unfurls from the sky, like a mechanised Jacob’s Ladder, and touches the ground.”

As many such buildings in various architectural styles came up, the bank in the town square replaced the clock as a symbol of continuity, binding it to the popular culture. For over a hundred years, these buildings became a landmark for the cities they were in. London’s Midland Banks building, the Bank of China Tower in Hong Kong, Macquarie Bank Centre in Sydney or the Bank of America Tower in New York, each of them became the itinerant tourist’s most trusted marker. Get there and you can find your way around. Many of them were spanned with glass to offer that sense of transparency. In Luxembourg, for instance, the headquarters of the European Investment Bank is an impressive all-glass building.

In India, too, with a 200-year-old history of banking, the buildings have been an integral part of the landscapes of major cities. Thus, the Standard Chartered Bank building in Mumbai, built at the turn of the 20th century, is a highlight of the Fort area serving both as a city landmark as well as an exemplar of the neo-classical style of architecture. Through the many vicissitudes that the bank went through over the 120 years of existence, the building continued to serve as a metaphor for its motto, “Here for Good”. The elegant State Bank of India Chandni Chowk branch in Delhi built some 200 years ago as well as the SBI George Town branch in Chennai, built in the Indo-Saracenic style nearly 120 years ago, are both part of the cities’ folklore.

With Lehman failure in US and PNB failure in India, the banks have lost their sheen.  Then digital transactions imply bank branches no more in vogue as well. So, there is not much importance to the design of bank buildings.

Having said that, central bank of Bahamas recently approved a design for its new building which looks really grand. And then banks are using these branches in interesting way as Axis bank showed in opening its new branch at Kargil.

Nobel symposium on Money and Banking

The Stockholm School of Economics houses Swedish House of Finance, which is Sweden’s national research center in financial economics.

It recently ran a symposium on banking and finance bringing all who’s who of academia in financial matters. Given the picture of the venue and the stunning backdrop, finance should be least on the minds. Nevertheless, the program is here.

Prof John Cochrane aka Grumpy economist (his blog) summarises the proceedings and papers really well.

• Day 1  (mainly on banking)
• Day 2 (mainly on monetary policy)

I attended the Nobel Symposium on Money and Banking in May, hosted by the Swedish House of Finance and Stockholm School of Economics.   It was a very interesting event. Follow the link for all the presentations and videos. (Click on “program.” )

This review is  idiosyncratic, focusing on presentations that blog readers might find interesting. My apologies to authors I leave out or treat briefly — all the presentations were action-packed and even my verbose blogging style can’t cover everything.

“Nobel” in the title has a great convening power! The list of famous economists attending is impressive. And each presenter put great effort into explaining what they were doing, in part on wise invitation from the organizers to keep it accessible.  As a result I  understood far more than I do from usual 20 minute conference presentations and 15 minute discussions.

The first day was really “banking day,” giving a whirlwind tour of the financial economics of banking.

Lots of ideas and discussions to digest on money and banking in just 2 days…

How capitalism (read entrepreneurship) brought ice cream to the masses

Fascinating piece on how ice-cream moved from being a dish of aristocracy to being a dish of masses.

Britain’s blistering heat wave has created a record-breaking demand for the treat that, over the course of the last century, has become a summer favorite the world over: ice cream. Sales have increased 100 percent year on year, and London is even hosting an ice-cream themed pop-up exhibition, fittingly titled ‘Scoop’.

Just 350 years ago, ice cream was a rare delicacy, reserved for kings and the richest of aristocrats. To enjoy it a person had to be able to afford refrigeration, which in the pre-industrial world was arduous and expensive.

But thanks to technological and scientific progress, ice cream has become available to pretty much everyone.

Back then, to refrigerate foodstuffs, people needed the land to build an ice house (to store the ice), freshwater access, and servants to cut and hull the ice. The ice would have to be regularly restocked and was available only in some climates at sometimes. But thanks to technological and scientific progress, ice cream has become available to pretty much everyone.

It discusses key innovations such as cone, the hand cracked machine, cheap refrigeration, different flavors and so on. I mean so many things we take for granted today came about in interesting ways.

For instance cone:

People are mocking Hong Kong’s new $100 bill for resembling “hell money”

Last week, Hong Kong Monetary Authority released a new design of banknotes.

The Hong Kong Monetary Authority (HKMA), and the three note-issuing banks (NIBs) (Standard Chartered Bank (Hong Kong) Limited, Bank of China (Hong Kong) Limited and The Hongkong and Shanghai Banking Corporation Limited) announced today (Tuesday) the issue of the 2018 new series Hong Kong banknotes.

Consistent with the current series, the new series will consist of five denominations, each adopting the same colour scheme. It is the first time that the thematic subjects on the reverse side of the NIBs’ new series banknotes are standardised for each denomination to facilitate easy recognition by the public. The selected thematic subjects represent different aspects of Hong Kong as an international metropolis, featuring its rhythm of life, recreation and entertainment, as well as its rich natural and cultural heritage. The five denominations depict respectively the position of Hong Kong as international financial centre (HK$1,000), the spectacular Hong Kong UNESCO Global Geopark (HK$500), Cantonese opera as our art and cultural legacy (HK$100), butterflies that inhabit Hong Kong (HK$50), and the popular dim sum and tea culture (HK$20). For aesthetic presentation of the subject and easy distinction from previous series, the reverse side of the banknote is in vertical orientation instead of the traditional horizontal layout.

The designs of all five denominations were unveiled today. The HK$1,000 and HK$500 notes will be put into circulation in the last quarter of 2018 and early 2019 respectively, and the lower denominations of HK$100, HK$50 and HK$20 will be ready for issue in batches between 2019 and 2020.

However, one of the banknotes HK$100 is being mocked for its design:

Iran to launch state-backed cryptocurrency to sidestep US sanctions

Earlier, the Iran Government banned private cryptocurrencies. But now  they are planning to start its own crypto:

As US sanctions loom, Iran is reportedly planning to launch its own crypto-currency, according to a 25 July story from the nation’s official news channel Press TV. The report claims Tehran is preparing to develop its own digital currency to circumnavigate impending sanctions from American President Donald Trump’s administration that, says the Islamic Republic, aim to cripple the country.

The sanctions come as Washington prepares to not just leave the international Iranian nuclear framework agreement but also penalize anyone that does business with Iran. It is anticipated that this will bring serious financial consequences to the country’s oil, banking and even its famous carpet trade sectors.

“We are trying to prepare the grounds to use a domestic digital currency in the country… This currency would facilitate the transfer of money (to and from) anywhere in the world. Besides, it can help us at the time of sanctions,” Alireza Daliri, deputy for management and investment affairs at Directorate for Scientific and Technological Affairs of the Presidential Office told Press TV.

Will be interesting to track this bit of news…

Milton Friedman and the case for flexible exchange rates and monetary rules

Harris Dellas and George S. Tavlas (both at Bank of Greece) review Friedman’s thinking on flexible exchange rates.

After New Zealand, Irish Central Bank also looks to cartoons to explain its activities to public

Recently, New Zealand central bank took to cartoons to explain its policy decision.

Now. Ireland central bank is planning to take this route as well:

Some Things a Central Bank’s Banker Doesn’t Know About Monetary History

BIS chief Agustin Carstens has been speaking against the cryptocurrencies.

Larry White says the central bank’s banker should learn some lessons on mon history.

While it is true, as Carstens notes, that banknotes did not circulate a par nationwide in the United States during the antebellum period, the reason was not fraud but government interference in the form of legal restrictions against interstate branching. Nationwide par circulation was the norm where banks were free to branch, as in Canada and Scotland. When Carstens (p. 7) refers to “the unhappy experience with private forms of money” he ignores the facts. When he suggests that “the experience with currency debasement that has peppered history” should warn us against “the proliferation of such private monies,” he inverts the facts. Currency debasements have been symptomatic of government monopoly in currency, not of private competition. A central bank with a monopoly on currency issue can debase the currency. A single bank in a multi-issuer system cannot, neither legally nor practically. As Adam Smith noted, the greater the proliferation of private note-issuers, the lesser the consequence to the public of the failure of any one of them. The system is robust. A central bank monopoly, by contrast, is a fragile single point of failure.

Well. not just BIS but applies to other central bankers too..

Making economic research more readable and interesting…

IMF has redone its Research Bulletin.

IMF has renamed it as Research Perspectives and has presented it in a “fresher, bolder look”.

When you read the Spring/Summer 2018 issue of the IMF Research Perspectives (formerly published as IMF Research Bulletin), if we did it right, you will meet
the more approachable, more human side of IMF research and IMF researchers. The bulletin has just turned 18, and we thought this was a good time to revamp the design and content. How?

First, we transformed our Q&A feature into a complete interview. Second, we added more research summaries to give you a better sense of what IMF research has to offer on recent topical issues. Third, we changed the design to make your reading experience more enjoyable and reaching out to the contributors
easier. And, of course, we changed the name to Perspectives, which we feel more accurately reflects our new approach focused on sharing views and encouraging interaction.

One thing that hasn’t changed is our commitment to conduct and disseminate state-ofthe-art, policy-relevant research to foster further discussion for better
policymaking around the world. 

Such an undertaking would not have been possible without a dedicated group of individuals: the guest editorial team led by Sweta Saxena and the design team led by Felipe Leon deserve the utmost credit.

We hope you will like our fresher, bolder look. Let us know what you think.

Looks promising with all the colors and pictures.

Some institutions like IMF are making efforts to make their economic research more readable and accessible. This is encouraging.

A dialogue between a populist and an economist

4 IMF economists have this interesting way of presenting research. The research is on trying to understand the rise of populism in the world. One could just go about preparing a research paper with detailed lit review, research 0bjective, research gap, methodology, empirical estimation, result explanation and then conclusion.

But instead the econs choose to explain their research via a dialogue between a populist politician and economist:

Turkey’s Attempt to Mop up Mattress Gold (Lessons for India?)

JP Koning has a nice post reviewing few measures taken by Turkish Govt/Central bank to monetise gold:

This measure which allows commercial banks to park gold to get central bank reserves is interesting:

The history and future of Quantitative Easing…

Ben Broadbent of Bank of England reviews the experiences of QE policy. He remembers Friedman and Shwartz’s work on US monetary history:

In 2002, the University of Chicago held a 90th birthday party for the great American economist Milton Friedman. One important guest was Anna Schwartz, who four decades earlier had co-written with Friedman the landmark book A Monetary History of the United States.

It’s possible that, even among those of you prepared to give up a pleasant July evening to come to a talk by a central bank official, an 800-page tome entitled “A monetary history of [anywhere]” won’t have found its way to the very top of your holiday reading list.

But it’s actually a gripping read, especially the chapter about the Great Depression. It also has a claim as the most influential piece of economic history ever written. The book pioneered a new “narrative” approach to identifying independent changes in monetary policy – the idea being that, to separate these from the more automatic (“endogenous”) reactions of policymakers to the economy you needed to scour the historic record and understand how their decisions were actually taken.

It changed economists’ perceptions of the role of monetary forces, including monetary policy, in economic fluctuations. For example, it helped to establish the view that the effects of monetary policy on real variables – real national income or its distribution, for example – are in the long run negligibly small. You cannot permanently enrich a country, or raise real wages, simply by easing monetary policy and engineering some inflation.

Equally, the book argued that policy can have very powerful effects at shorter, cyclical horizons. In particular, it claimed that the Great Depression could have been averted had the US Federal Reserve not over-tightened policy in the late 1920s and if had it acted more precipitously to loosen it once the downturn
began. The appropriate measures would have included an earlier abandonment of the gold standard. They would also have involved “large-scale open-market purchases”, designed to contain the rise in private-sector bond yields and supply reserves to the banking system. We have a new name for this – we now call it
“Quantitative Easing” – but the policy itself is not new.

He says QE is not printing money and has had impacted on the lines of Friedman/Schwartz:

QE has often been described as a “new-fangled” policy, something that involves “printing money” and has served only to engineer large rises in the prices of financial and other assets, benefiting only the better off. 

Broadly speaking I don’t think any of these things is true. It’s not new; it’s not exactly printing money; equity and house prices are in real terms still comfortably below their pre-crisis levels; inequality hasn’t risen – nor, according to the most detailed analysis available, did easier monetary policy have any net impact on it.

To be sure, asset prices would probably have fallen further had QE and other measures not been put in place in 2009. The same goes for the economy itself. As far as we can tell, asset purchases provided significant support to aggregate demand, even if it wasn’t enough to offset fully the extended contractionary
effects of the crisis. Perhaps Friedman and Schwartz over-emphasised the failures of the US Fed as a cause of the Great Depression. But I don’t think anyone can reasonably argue it was worth risking those same mistakes a second time.

Later rounds of QE may have been less effective than the first. In the US, where the Fed has begun to shrink its balance sheet, its “QT” announcements appear to have had very little impact. At least in part, that’s likely to be by design. The pace of unwind is very gradual. And the FOMC emphasised that, to the
extent a shrinking balance sheet tightened monetary conditions the official interest rate would be commensurately lower (than it would otherwise have been). The overall stance of policy would be set to ensure the central bank meets its objectives.

The same is true here. Our task remains to hit the inflation target and we will always seek to ensure that the combined effects of the APF and of more conventional changes in Bank Rate are set to that end. 

The debates on QE being a success or failure will interest econs for a long time…