Archive for September 12th, 2019

50 years of remarkable relationship between the Federal Reserve Bank of Minneapolis and the University of Minnesota..

September 12, 2019

In end-August 2019, Minneapolis Fed and Univ of Minnesota hosted a conference celebrating their 50 years of association.

Sound economic research is the bedrock of solid economic policy. That research is often inspired by confronting key policy issues in an independent environment.

The proof will be on display August 21-23 when some of the world’s leading economic thinkers gather for an academic conference—“Research and Policy: A Golden Minnesota Partnership”—and for a historic public event, a conversation with “The Four Horsemen of the Economic Revolution.”

t’s all to celebrate a half-century of a unique partnership between the Minneapolis Fed and the University of Minnesota, a collaboration that has fueled pioneering research and driven significant impact on monetary and public policy.

That impact was detailed in a recent Star Tribune commentary by Senior Vice President and Research Director Mark Wright and former Research Director Art Rolnick.

The three-day academic conference will be livestreamed on the Minneapolis Fed’s website. Registration for these sessions is closed.

The “Four Horsemen” conversation features Nobel laureates Edward Prescott, Thomas Sargent, and Christopher Sims, along with Neil Wallace. All were (and Prescott remains) Minneapolis Fed researchers. They received the collective moniker of “Four Horsemen” when all were on the faculty of the University’s economics department in the 1980s.

Their discussion, moderated by Rolnick, will be held at the University’s Ted Mann Concert Hall on Thursday, August 22, at 5 p.m., and is free and open to the public.

As Rolnick and Wright wrote in their Star Tribune commentary, the “Research and Policy” conference “is not a mere celebration of bygone research. Our glory days have not passed. Energetic, smart graduate students continue to shuttle between the university and the Fed, and they are proof that the future of the partnership is brilliant. In ways we cannot begin to imagine, when it comes to economic theory and policy, they will launch the next revolutions.”


How Do Private Digital Currencies Affect Government Policy?

September 12, 2019

Max Raskin, Fahad Saleh, and David Yermack in this paper show support for digital currencies:

This paper provides a systematic evaluation of the different types of digital currencies. We express skepticism regarding centralized digital currencies and therefore focus our economic analysis on private digital currencies. Specifically, we highlight the potential for private digital currencies to improve welfare within an emerging market with a selfish government. In that setting, we demonstrate that a private digital currency not only improves citizen welfare but also encourages local investment and enhances government welfare.


250 years of history of covered bonds

September 12, 2019

On 29 Aug 1769, Frederick II led discussions on the introduction of a new financial instrument, which was later sealed by a cabinet order signed in Wrocław (Breslau) which in in Poland today. The year 2019 marks 250 years of covered bonds.

EBRD reviews this fascinating history of covered bonds:

Financial innovation is as old as the financial sector itself. But sometimes we can move forward by dusting off instruments that have been in our tool box for a long time, adapting them to modern usage and applying them, in order to address contemporary challenges. Such is the case with covered bonds.

First introduced by Frederick II of Prussia exactly 250 years ago, covered bonds have now become a major building block in efforts to build safe and efficient capital markets in many central and eastern European countries.

And perhaps it is not accidental that the forerunner of the modern covered bond framework was initiated in Breslau. Today, the city is called Wrocław and belongs to Poland – one of the countries where the EBRD has played a major role in developing the capital market as the “engine room of a modern economy”.

While the economies in this region have been growing strongly over the past 30 years, the development of capital markets was not able to fully keep up with this pace. Whereas the central and eastern European countries currently account for 8 per cent of the EU’s total GDP, their capital markets represent only 3 per cent of all listed shares and debt.

Yet, capital markets are essential for the functioning of a modern economy. In the case of central and eastern Europe, we still see an overdependence on bank finance, with associated problems such as access to finance and a persistent gap between demand and supply.

It demonstrates that capital market development is one of the key pressing challenges for these countries to secure their advances and lay the groundwork for further progress. It is here that covered bonds, as a long-term funding tool, come in.

Covered bonds are debt securities issued by banks and backed by a portfolio of mortgages. They are not a panacea, but they are an important and efficient source of long-term, low-risk funding. They can benefit issuers, investors, market participants and the public by stimulating the real economy with their vitalising impact on the housing market.

There is a book which looks at usage of covered bonds across the world economies.

The Well-meaning Economist: Choosing an appropriate “mean” matters..

September 12, 2019

Adam Gorajek of RBA in this paper writes why choosing “mean” matters:

Economists usually inform policymakers with conclusions that come from studying the conditional expectation, i.e. arithmetic mean, of some potential outcome. But there are other means to study, from the same ‘quasilinear’ family. And they can support very different conclusions. In trade research, for instance, studying other means can transform the perceived roles of colonial history, geography, and trade wars. In wages research, studying other means can reverse perceived earnings differentials between groups. Similar scenarios will be common in other tasks of policy evaluation and forecasting. To choose means well I propose selection criteria, which also consider options that are outside of the quasilinear family, such as quantiles. Optimal choices are application-specific and ideally accommodate the preferences of the relevant policymaker. In the wages case, policymaker aversion to inequality makes it sensible to reject the arithmetic mean for another quasilinear one.


Suppose we discover today that in 1990 a random subset of Australian schoolchildren were given a badly misprinted version of the standard mathematical textbook. Its answers were wrong and the explanations were nonsense. Suppose also that today we can survey these and the unaffected schoolchildren (all now adults) about their incomes. Besides objecting to the injustice of the misprint, an economic researcher might see this as a unique opportunity to assess the value of effective educational materials for career outcomes.

Conducting the survey, our hypothetical researcher records that half of the affected students now have annual incomes of $40k and half have $100k. For the unaffected students, half have annual incomes of $60k and half have $80k. For reasons that I leave to the paper, the standard strategy in this simplified situation would be to summarise the salaries of each group with their so-called ‘arithmetic mean’, which is a basic type of average. Since both groups have arithmetic mean incomes of $70k, the headline conclusion for the policymaker is that the misprint was unimportant. Even in complex research situations, summarising outcomes with numbers akin to these arithmetic means is a standard strategy.

But what if we choose a different summary measure, like a ‘geometric mean’, or any other mean in the ‘quasilinear’ family? Leaving an explanation of these concepts aside, the point is that often the conclusions will change. For instance, in the textbook misprint case, the geometric mean income for the affected students is $63k and for the unaffected students is $69k. Hence the headline conclusion for the policymaker is that the misprint was detrimental. The reason for the change is that the geometric mean penalises inequality, which is higher among the affected students. The penalty is an attractive feature here, because in western democracies it is evident from tax and social security systems that policymakers view income inequality as undesirable. The question is only what amount of penalty is appropriate.


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