Archive for October 10th, 2018

Universal Economics: Title of a new textbook which tries to explain economics in a way that anyone can understand

October 10, 2018

Came across this new textbook titled Universal Economics By Armen A. Alchian and William R. Allen and Edited by Jerry L. Jordan:

(more…)

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The importance of disseminating economic news/knowledge effectively (so that fake ones can be avoided)

October 10, 2018

An interesting speech by Salvatore Rossi of Bank of Italy.

The thesis of this lecture is that nowadays serious manufacturers of information, and scholars in particular, have what has become an impelling and absolute duty to disseminate their knowledge. This should be their main concern. In all fields. Before it is too late. Especially here in Italy. Especially when it comes to economics.

…….

 Let me give you an example of an inaccurate and misleading myth about the Italian economy, which would benefit greatly from a fair account of the facts, that is, from good popularization. According to this myth, the Italian economy could be prosperous and happy if only Europe, out of Teutonic foolishness, and the market, out of occasional political antipathy, did not impose a financial straitjacket on it. In this oversimplified narrative, there are grains of truth and mountains of lies. 

The issues are much more entangled and complicated, and it is up to those who have spent a long time studying these problems to make this clearly
understood. 

For now, let’s clarify one thing: the main problem with the Italian economy is that, when something is produced (industrial equipment, a legal
opinion, a history lesson), it is not done efficiently enough. In other words, resources are wasted and it costs more to achieve a given level of quality.
On average, of course. The differences between one firm and another, between one lawyer and another, between one professor and another, are enormous,
but overall the Italian economy suffers from a competitive disadvantage and growth gap when compared with other economies. And it has done so for at
least the past 20 years. Italy knows how to do all manner of things, but it does them, overall, less frequently and less well than it could.

Hmmm.

He discusses why disseminating information in economics is particularly difficult. This allows a lot of mistaken and misrepresented ideas to develop and spread to people.

We citizens are not used to paying attention to the sources of the news that rains down on us every day when we leaf through a newspaper, consult the digital
devices that most of us have, or look at dear old television. The media is full of tables and charts about various economic facts and almost never indicate sources and methodologies. Even if they were indicated we would not pay them any heed as we normally have very little time to devote to one particular news item. But if the fact is non-existent or measured badly we will receive an incorrect impression which, however mild and fleeting, can leave traces in our psyche and affect our behaviour.

It is even worse when we are faced not with non-existent or poorly measured facts, but with mistaken or misrepresented theories. Any statement about the way
in which economies work, the laws they obey, the ways in which they pursue the goal of well-being that a society sets itself must correspond to a theory that
has been empirically and robustly validated. Otherwise, especially if emotionally persuasive, this might induce the recipients to behave in a way that is contrary to their own interests.

….

In short, what was in the past only desirable – that economists communicate reliable and proven economic theories and data more, and more effectively – is imperative and urgent in these times of omnipresent bad or inaccurate economic information, used for political purposes. It is not only the good name of the economic profession that is at stake here. It is the very functioning of our democratic societies.

Useful speech and coming from a central banker, makes it more interesting.

In praise of India’s women economists

October 10, 2018

Niranjan in his recent piece lists some of the prominent women economists of India and discusses their work.

In any general economic discussion, it is rare to find mention of Indian economists and even rarer to find mention of  works by women economists. This is a good starting put to think and work on the women economists in India….

Whether and should we include financial stability in monetary policy? Three views…

October 10, 2018

Peter Praet of ECB has this useful summary of thinking about including financial stability in mon policy:

To prevent the emergence of such bad outcomes, a sound, system-wide approach to financial regulation is of the essence. But what is the role of monetary policy? Can monetary policy be conducted in a way that reduces the likelihood of financial instability? The long-running debate on these issues within academic and policy-making circles can be broadly broken down into three different viewpoints.[3]

  • The first is the “pre-crisis consensus” view, which argues that monetary policy should maintain a relatively narrow mandate of price stability, leaving financial stability to prudential authorities. Under this view, the monetary authority should only take financial stability concerns into account in so far as they affect the outlook for price stability and economic activity.
  • The second view is to “lean–against–the–wind”, i.e. that as price stability may not be sufficient for financial stability, central banks should lean against the emergence of financial imbalances by tightening the monetary policy stance over and above the level necessary to bring inflation back to target over a policy horizon that is generally understood to be around two years.
  • The third view is that “financial stability is price stability”. Proponents of this view advocate a more radical change in the objective of monetary policy, arguing that financial stability and price stability are so intertwined that one cannot distinguish between the two.[4]Under this view, both standard and non-standard monetary policies are in the first place attempts at stabilizing the financial system, addressing malfunctioning financial markets and smoothing the monetary transmission process.

Hmm…Nice way to summarise the many views on the contentious issue.

He then says these interplays depend on the following:

While all these viewpoints recognise the important interplay between financial stability and monetary policy in pursuit of price stability, their relevance ultimately depends on (i) the weight to be attached to the “risk-taking” channel of monetary policy, (ii) the strength of the macroprudential framework and (iii) the policy strategy of the monetary authority, especially as regards its policy horizon.

He discusses all these and then looks at how ECB fares on this front:

Our monetary policy measures have proven effective in sustaining a resilient recovery and addressing the risks to price stability. This in turn provides a strong contribution to financial sector resilience. Looking ahead, significant monetary policy stimulus is still needed to support the gradual build-up of price pressures for inflation to return to levels below, but close to, 2% in a durable fashion.

At this stage of the cycle, careful monitoring of the risk-taking channel of monetary policy is important. While there is no evidence of excessive misalignment across asset classes in the euro area right now, there are signs that valuations are stretched in specific market segments. Macroprudential instruments are best placed to counteract the emergence of specific financial imbalances in an efficient and targeted manner. Macroprudential policy and monetary policy thus complement one another in pursuit of their respective objectives.

 


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