Archive for October 17th, 2018

Revisiting role of a central bank: For monetary stability or financial stability or both?

October 17, 2018

Nice overview Speech by Sabine Lautenschläger of ECB:

….going back in time, the relationship between the different functions of central banks have generated quasi-existential questions.

What a central bank is, can be defined by what it does.1 And the “what it does” part mostly revolves around the question of whether a central bank cares about two types of stability.

The first is monetary stability: the creation of a monetary regime that can ensure price stability. The second is financial stability which, when central banking was born, was essentially the same as “bank stability”. So, throughout history, the most popular definitions of “central bank” have revolved around their role in ensuring monetary stability, financial stability or both.



Pakistan’s IMF bailout is fighting against history

October 17, 2018

Nice edit piece in Mint:

……Back in 2016 when Pakistan completed its last IMF programme, it held over $18 billion in forex reserves. Those reserves have now halved to a level barely sufficient to cover two months’ imports. A $15 billion current account deficit (CAD) then is likely to grow to $20 billion this fiscal. Add to that a likely $11.7 billion in external debt servicing and a budget deficit that was hovering at the 6.5% of gross domestic product mark around the time that the Khan government came to power. The revised budget presented last month aims to trim this to 5.1% of GDP by the end of the fiscal year. That is a tall ask and one deeply at odds with Khan’s promised land of an Islamic welfare state.

China’s role in this dysfunction is known. For all the rhetoric about the China-Pakistan Economic Corridor (CPEC) being transformative, it has been supply driven. This has been distortionary on multiple levels. Islamabad now finds itself holding the bag for 85 CPEC projects at various stages of planning and completion worth about $90 billion. Commercial and bilateral loans made by Chinese banks, such as the China Development Bank and Industrial and Commercial Bank of China, add to the mix. Consequently, China now holds a significant proportion of Pakistan’s external debt. The experience of a number of Belt and Road Initiative countries has shown that Beijing knows how to leverage this. This will come into play as the rumblings in Islamabad about reassessing CPEC projects grow louder.

The structural problems in Pakistan’s political economy, however, are more dangerous in the long run. Pakistan is a power-hungry country that has been singularly unsuccessful in meeting demand. This almost came to a head in the 1970s; hydro power from the Mangla and Tarbela dams bailed Islamabad out then. The tipping point came in the 1990s. In 1994, the Pakistan Peoples Party government under Benazir Bhutto launched a power policy aimed at privatizing the sector and attracting independent power producers (IPPs). It might have worked under a cleaner administration. Under the PPP, corruption—IPPs were given sweetheart deals guaranteeing high tariffs without competitive bidding—hollowed out the sector. It hasn’t recovered since.

This had ripple effects through the economy. It has led to poor investment in resource extraction; the fact that much of those resources are in Balochistan hasn’t helped. Consequently, Pakistan’s energy import bill has ballooned, leaving the CAD vulnerable to exogenous shocks such as the current spike in crude prices. Shortfalls in power and high tariffs have gutted Pakistan’s manufacturing base. In the 1960s, its manufactured exports were higher than those of the countries that would go on to become tiger cub economies. Today, uncompetitive and low value exports, and imported machinery mean that the balance of payments deck is stacked against it.

The amount of times Pakistan has gone in and out of crisis in last few years could make Pakistan Asia’s Argentina. As a sports fan, one is already suffering due to decline of football in Argentina and cricket in Pakistan. Sigh…

How railways shaped a modern metropolis: Evidence from London

October 17, 2018

Stephan Heblich, Stephen Redding and Daniel Sturm write on how Railways shaped City of London:

In new research, we use the mid-19th century transport revolution from the invention of steam railways, a newly created, spatially disaggregated dataset for Greater London from 1801-1921, and a quantitative urban model to provide new evidence on the contribution of the separation of workplace and residence to agglomeration (Heblich et al. 2018). The key idea behind our approach is that the slow travel times achievable by human or horse power implied that most people lived close to where they worked when these were the main modes of transportation. In contrast, the invention of steam railways dramatically reduced the time taken to travel a given distance, increasing average travel speeds from around 6 mph for horse-drawn vehicles and 3 mph for walking to around 21 mph, which permitted the first large-scale separation of workplace and residence. This separation enabled locations to specialise according to their comparative advantage in production and residence. Using both reduced-form and structural approaches, we find substantial effects of steam passenger railways on city size and structure. We show that our model is able to account both qualitatively and quantitatively for the observed changes in the organisation of economic activity within Greater London.

London during the 19th century is arguably the poster child for the large metropolitan areas observed around the world today. In 1801, London’s built-up area housed around 1 million people and spanned only five miles East to West. In contrast, by 1901, Greater London contained over 6.5 million people, measured more than 17 miles across, and was on a dramatically larger scale than any previous urban area. By the beginning of the 20thcentury, London was the largest city in the world by some margin (with New York City and Greater Paris having populations of 3.4 million and 4 million, respectively, at this time), and London’s population exceeded that of several European countries. Furthermore, London developed through a largely haphazard and organic process during this period, which suggests that both the size and structure of the city responded to decentralised market forces. Therefore, 19th century London provides a natural testing ground for assessing the empirical relevance of models of city size and structure.


The results show Greater London’s population would have been 30% lower in 1921 without the railway network. The findings and the quantitative urban models employed highlight the role of modern transport technologies in sustaining dense concentrations of economic activity.

Must be the same for most other metropolis as well such as New York, Mumbai, Calcutta and so on. But then as Fogel showed in case of US, impact of railways was overstated.

What is also interesting is what explains the decline of some of these metro/megapolis as in case of Calcutta?

How to spot a nudge gone rogue

October 17, 2018

Dee Gill has a useful post on the topic:

Even the most popular and proven nudges sometimes fail spectacularly, prompting the targeted individuals to do exactly the opposite of what the nudgers intended. These damaging anomalies — nudges that inadvertently lead to a drop in retirement savings rates or to higher energy consumption, for example — often look very much like the successful nudges documented repeatedly in workplace and government settings worldwide. What makes these seemingly reliable tactics backfire?

A recent article in Behavioral Science & Policy teases out several triggers that can make a good nudge go bad. With examples from dozens of nudge studies, UCLA Anderson’s Job Krijnen and Craig Fox, along with University of Utah’s David Tannenbaum, explain how to recognize potential nudge catastrophes, in which programs to steer people toward specific decisions might go off the rails. The authors explain their research and that of other experts in the field.

Certain choice presentations, the researchers find, inadvertently prompt decision makers to dwell on a few specific questions: What do these people want me to choose, and why? What will others think of me if I take that choice?

These internal musings can be dangerous for choice presenters, according to the paper, titled “Choice Architecture 2.0: Behavioral Policy as an Implicit Social Interaction.” Sometimes people don’t make the choice intended by the nudge.

The researchers offer a checklist to help choice presenters identify situations likely to heighten these concerns. Recognizing the red flags and making what are often small changes in the choice presentation may keep a worthy nudge from becoming a spectacular failure.

For instance, the Dutch nudge for organ donations went rogue:

When the Netherlands wanted to increase organ donation in 2016, the country’s lower house of Parliament passed a bill changing the way citizens gave consent to donate. Rather than sign up for the program, as they had before, all citizens would be presumed donors at death unless they explicitly opted out.

The lawmakers were surprised when this worked badly.

The change the bill proposed — making the desired choice the default option — is a tried-and-true tactic used by governments, employers and marketers hoping to influence individual decisions. A nudge, such as a do-nothing option when every other possibility requires action, makes it easier for individuals to make decisions that align with their goals and preferences. Several European countries have nudged their way to stellar organ donation rates by assuming consent unless otherwise stated.

The Dutch, however, rebelled. With the new law to go into effect in 2020, the number of citizens refusing to donate broke records. An annual donor sign-up drive staged shortly after the bill passed registered almost six times as many signatures for non-donors as donors. The legislature eventually tamped down the backlash with some crucial adjustments to the bill. But the implications for people in the business of this sort of persuasion were troubling: A sure-fire nudge, one that had seemingly worked elsewhere, had gone rogue for the Dutch.

This happened as Dutch saw a wrong message behind the default design:

With this checklist of red flags, the Dutch organ donation nudge looks particularly risky. There was an overt change in the choice presentation, complete with a lot of press explaining the intentions of the change. The subject could hardly have been more personal and, as such, was likely to be intensely important to many. Many people apparently did not trust the government to recommend the best decision for them.

The 2.0 researchers do not focus on how the Dutch, or any nudger, can fix the potential problems their prescribed audits find. The different circumstances of each project will determine the specific actions needed. The Dutch got appeasement in part by allowing individuals to put the decision to donate or not onto their surviving relatives. Time will tell if the Dutch nudge encountered only a temporary backlash and, with the adjustment, will become successful.

An audit for social sensemaking can give choice architects a heads up that a project needs more thought — or perhaps a really good pilot test — before a potentially regrettable nudge is unleashed.

Nudge 2.0 is a nice name…

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