What do MPC members think?

 Mikael Apel, Carl Andreas Claussen and  Petra Lennartsdotter of Riksbank have written a nice insightful paper. Thanks to Alan Blinder, we have large volume of emerging literature on how monetary policy committees have evolved, are organised now etc.

This paper interviews Riksbank’s MPC members themselves on the various MPC and economic issues.

This paper reports and analyzes the results from a questionnaire sent to all present and former members of the Riksbank’s Executive Board, the monetary policy committee (MPC) of the Swedish central bank. The questions cover a number of issues discussed in the growing literature on monetary policy making by committees. The paper thus relates research to the views of practitioners in a way that has not been done before.

We find, among other things, that many members consider the six-person strong Riksbank MPC to be slightly too large, that it is very common that members have decided before the policy meeting how they will vote, and that members, when forming their opinions, consider input from the staff more important than input from their colleagues.

So hearing it from the horse’s mouth. A nice paper with many references on the issues as well.

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History of quantitative easing in UK

David Miles of Bank of England gives an insightful speech on the topic. He looks at the recent monetary policy at BoE and says this is nothing new for BoE:

SBI cannot find a chief economist

Shyamal Majumdar of Business Standard points to an interesting story:

N Raja, deputy managing director of SBI, says a public sector bank has to learn to live with the constraints as its mandate is much beyond just making profits. But the attrition level, he says, is still well within single digits, though it’s something the bank is determined to bring down.

The bigger challenge, he says, is to attract the right kind of talent in specialised functions that SBI has got into: Private equity, treasury, risk management, general insurance etc. For example, the bank has been looking for a chief economist for some time now. But the available pool is small, and though the right candidates are enthused by the challenges that the job offers, the remuneration is a problem as SBI just can’t match competition.

Hmmm…

I think size of the talent pool is likely to be a major issue. If salary was the main issue, public sector banks will not find any people to fill in any positions. But you do get to see great large number of talented people in public sector banks. There are chief economists in other public sector banks as well and most have similar salary structure.

Whatever,it is interesting to know SBI, India’s largets bank is finding it difficult to recruit a chief economist.

A public debt target for India?

Petia Topalova and Dan Nyberg in a new paper write:

This paper discusses possible medium-term public debt targets for India, based on evidence from the economic literature on prudent levels of public debt and the feasibility for the country to meet a particular target over the next 5-6 years. While recognizing the challenges in determining an appropriate debt target, cross-country analysis and simulations suggest that a debt ratio in the range of 60-65 percent of GDP by 2015/16 might be suitable for India. Such a debt ceiling, while still above the average debt level for emerging markets, is within the range of debt ratios that would provide room for countercyclical fiscal policy and contingent liabilities. It would also send a strong signal of the government’s commitment to fiscal consolidation by making a clear break with the past.

Currently it is at around 78% of GDP and is high in the emerging market space. It has also made the least progress in reducing its debt despite great growth.

Wishing all a very Happy New Year

Mostly Economics wishes all its visitors a very happy new year. May 2010 bring all prosperity and success. 

Keep visiting the site, sending your suggestions and posting comments.

Rupee Design contest – final 5 entries are out

Thanks to the various comments, I got to know that  top 5 entries for the Rupee Symbol design contest are out.

Congrats to all the winners.

Indian political system – why don’t we see the risks?

If we could have an index for assessing the political climate it would resemble a mirror image of the equity market index. Each time it touches a new low you think this is the end, it always surprises you with a lower dip. The sensex may still decline but there is no upwards trend in the Indian political index.

Wish visitors a very happy diwali

Wishing all the visitors and a very happy diwali. Blogging will resume on Tuesday.

Diwali has brought some good news for ME visitors. As per Palgrave econ blog rankings, Mostly Economics is back in the top 50 eco blog ranks.

Thanks for all the visits and comments. Keep them flowing.

A peek into eco research at Indian Ivy Leagues/ Think tanks

I have noted there is a lot of research flowing from educational institutions/ think-tanks on impact of crisis on their respective economies. In US, UK etc there is simply an overdose and I keep getting reports etc from Australia, NZ, Canada etc.

This inspired me to just do some search on the research done by Indian counterparts. I checked websites of India’s ivy leagues, Economics Schools and thinktanks and was not very pleased.

Thinktanks – I checked working paper sections of leading thinktanks like ICRIER, NIPFP, NCAER etc. But did not find any research on ongoing crisis except at ICRIER.  Then I saw the seminars, conferences etc conducted by these thinktanks and see some seminars etc being conducted on the crisis.  But again we hardly get transcripts, etc of the seminars. NIPFP has a program with DEA which has some good papers and discussions.  But most of these papers are written by common economists and you usually get a one dimension view. At some places we do not get proper hyperlinks etc etc. I also saw researchers webpages at these thinktanks and find hardly anyone providing links to their papers/publications.

Ivy Leagues: The biggest disappointment comes from Indian Ivy Leagues. See the working paper section at IIM-A, IIM-B, IIM-C, IIM-L (no link), IIM-I (not updated), IIM-K (no links to studies) etc.   True, they are business schools and not really eco schools. But some research/policy brief can be given??  Even here, the Profs hardly provide links to their papers. What is worse is some don’t mention their research at all. I also checked the various seminars/conferences being held and we hardly get the papers etc presented.

Eco Schools: I checked DSE, MSE (a good website), JNU, IGIDR and everywhere the story seems to be the same. No research on current economic environment at all! Even here the most faculties do not link their papers at all. IGIDR has an annual conference where some research on the crisis was done.

I found all this quite strange. I had started the exercise to get some ideas on Indian economy/business firms/financial markets etc but there is hardly anything. Most of the research being done is also quite exotic which I did not really understand. The research which looked interesting to me hardly has any links. The thinktanks are doing a much better job and if you dont see much research on current crisis, you do see some research on other issues as well.

I would reiterate to India’s  Ivy leagues to shore up their research. The quality of research needs a serious makeover.

Assorted Links

1. Cowen says creditors should suffer as well

2. Krugman on Japan’s recovery

3. Mankiw points to a new paper on Great Depression

4. Rodrik on how ideas shape policies

5. FMB points Euroarea is in recession since Q1 2008.

6. ASB points to some views on G-20 meeting

7. TTR on Turner Review

8. Urbanomics points to views of Fed Balance Sheet and deflation

Mostly Economics on Econacademics.org

Here is another achievment for Mostly Economics.

Christian Zimmerman, a professor at  University of Connecticut is also a manager of the famous economics research paper portal- IDEAS. He started a blog Econacademics, which is an aggregator blog for economics academics. He says:

The purpose of this blog is to encourage the discussion of research in Economics. This is not a traditional blog, as it mainly serves as a portal to other blogs. As was discussed (1, 2) a while ago on the RePEc blog, there is currently little in the Economics profession in terms of forums to discuss current research. Here, we would like to highlight those blogs where this happens and hopefully encourage others to join the fray.

The selection of the featured blogs is made on the following criteria:

• A fair share of posts discusses current research. The discussion is more about papers and articles than other blog posts, op-ed or newspaper articles.
• The bloghas been active for at least one month and seems to be managed in a sustainable manner.
• The blog is about Economics, Finance and their fringes. It needs to be of academic nature.

Mostly Economics missed the list earlier and was included in the list on the right – Some blogs than did not quite make the selection.

It gives me pleasure to note that the blog has now been selected and made it to the list of academic blogs. It is a personal list of Chris but it gives a great feeling nonetheless. He managed REPEC so knows what economic research is. Again there are some great blogs like Becker-Posner Blog, Stern on Finance, Stumbling and Mumbling etc (I have only read them, yet to read the others in the list). What is also interesting is that he has a very few blogs on the list and am sure he has read through the other top econ blogs.

After getting ranked in other lists, this addition to econacademics is very satisfying. as the purpose of the blog was to highlight research on economics and finance. It is great to get acknowledgement from a reputed source.

Thanks to all the visitors for their support.

What is liquidity trap?

 Gauti Eggertsson, a  NY Fed Economist has done considerable research on Great Depression, Liquidity Trap and Zero-bound interest rates. It is fascinating to see so many economists still doing so much research on great depression. With the crisis, I am sure more is to follow. No wonder, Fed Chairman Bernanke in his book on Great Depression said:

To understand the Great Depression is the Holy Grail of macroeconomics. Not only did the Depression give birth to macroeconomics as a distinct field of study, but also—to an extent that is not always fully appreciated—the experience of the 1930s continues to influence macroeconomists’ beliefs, policy recommendations, and research agendas. And, practicalities aside, finding an explanation for the worldwide economic collapse of the 1930s remains a fascinating intellectual challenge.

We do not yet have our hands on the Grail by any means, but during the past fifteen years or so substantial progress toward the goal of understanding the Depression has been made.

 I came across this superb primerfrom Eggertsson on a topic which is going to increase going ahead – liquidity trap. It is slightly technical with equations etc but one can skip it.

A liquidity trap is defined as a situation in which the short-term nominal interest rate is zero. The old Keynesian literature emphasized that increasing money supply has no effect in a liquidity trap so that monetary policy is ineffective.

The modern literature, in contrast, emphasizes that, even if increasing the current money supply has no effect, monetary policy is far from ineffective at zero interest rates. What is important, however, is not the current money supply but managing expectations about the future money supply in states of the world in which interest rates are positive.

 

To recall, Keynes main ideas came in force as US faced liquidity trap and Keynes said monetary policy is ineffective as interest rates had become zero. And then came the idea of using fiscal policy – govt expenditure, tax cuts etc to  pump-prime the economy. And we had a set of policies popularly called as Keynesian.

Then came the new theory post Milton Friedman, which said monetary policy is far from ineffective in liquidity trap. Even at zero interest rates monetary policy can do wonders (see this Vincent Reinhart speech for details). It is this second view which continues to be debates hugely by economists. It was debated during Japan’s deflation, US deflation scare in 2003 and is being debated now (debate is expected to grow severe going ahead).

What Eggertsson points out is the need to shape expectations in liquidity trap/zero interest rates.

The lesson of the irrelevance results is that monetary policy is ineffective if it cannot stir expectations. The previous section illustrated, however, that shaping expectations in the correct way can be very important for minimizing the output contraction and deflation associated with deflationary shocks. This, however, may be difficult for a government that is expected to behave in a discretionary manner. How can the correct set of expectations be generated?

 

 This shaping expectations is what is very difficult to do as Kazuo Ueda points in Japan’s case. The policies should be credible enough which leads to positive inflation expectations in the economy. Eggersson says government/central banks should follow a policy rule to stir expectations and it better be credible:

If the central bank, and the government as a whole, has a very low level of credibility, a mere announcement of future policy intentions through a new ‘policy rule’ may not be sufficient. This is especially true in a deflationary environment, for at least three reasons.

First, the deflation bias implies that the government has an incentive to promise to deliver future expansion and higher inflation, and then to renege on this promise.

Second, the deflationary shocks that give rise to this commitment problem are rare, and it is therefore harder for a central bank to build up a reputation for dealing with them well.

Third, this problem is even further aggravated at zero interest rates because then the central bank cannot take any direct actions (that is, cutting interest rate) to show its new commitment to reflation.

 

 It is like going in circles. What are the suggestions for way out?

Perhaps the most straightforward way to make a reflation credible is for the government to issue debt, for example by deficit spending. It is well known in the literature that government debt creates an inflationary incentive

Jeanne and Svensson (2006) and Eggertsson (2006a) show that foreign  exchange interventions also have this effect, for very similar reasons.The reason is that, if the government prints nominal liabilities (such as government bonds or money) and purchases foreign exchange, it will incur balance-sheet losses if it reneges on an inflation promise because this would imply an exchange rate appreciation and thus a portfolio loss.

Real government spending, that is, government purchases of real goods and services,can also be effective to this end (Eggertsson, 2005).

 

 

 

Very interesting paper.

P.S. One can even see Paul Krugman’s superb paper on liquidity trap. It is quite detailed though.

Everyone needs to play their part

RBNZ Governor Alan Bollard in his speech summarises the developments in NZ economy. He says inflation is still very high but things look better as prices are falling sharply. He then says:

We need to see inflationary pressures reducing significantly across the board, if we are to keep on easing monetary policy, thus helping the New Zealand economy to recover. That depends on all sectors of the economy responding to the reduced demand and not adding inflationary pressures to the system.

 

Some examples: we would hope that the electricity industry does not take advantage of its market position and keep increasing rates, that local authorities realise they need to set rates increases below inflation for a change, that the construction materials industry respond to much weaker demand, that the food industry react to lower international commodity prices with price cuts, that petrol companies keep cutting forecourt prices, that the transport industry pass on fuel price cuts, and that the banks pass on interest rate cuts. Only then will all these firms be playing their proper role in New Zealand’s recovery.

These are actually desperate calls for the NZ industry to get its act together and pass-off lower prices to the consumers. One hears these statements so often from policymakers across the world these days. I would think let markets take their own call on what to do and what not to do. If you believe markets perform well in good times they should do the same in bad times as well.  

European Monetary Union to break-up or see additions?

The EU set up is quite complex. There are 27 economies which are members of the European Union but only 15 have adopted Euro as their currency (see the list here). These 15 have abandoned their monetary policy and have given the same to one Central Bank – ECB. These 15 are said to members of European Monetary Union (EMU)

The current set of events has put entire EU in an interesting (and dangerous) twist. All economies under EU have been caught under severe economic and financial stress. This has divided the members into 2 lists:

• The members of EMU (15 economies) are feeling the pressure of staying in the EMU. They can neither use monetary policy  to stimulate their economies nor use fiscal policy and provide fiscal stimulus as they are under the Stability and Growth pact. Read the superb articles by Simon Johnson and Martin Feldstein for some clarity on the matter. The list of economies under this are:

Austria	Italy
Belgium	Luxembourg
Cyprus	Malta
Finland	Netherlands
France	Portugal
Germany	Slovenia
Greece	Spain
Ireland

• The other set that are not members of EMU for different reasons. For instance UK, Denmark and Sweden can become members but have not chosen to. The others need to work on the conditions in the growth and stability pact before they can become members. This group is feeling pressure to join EMU more than ever before mainly to protect their falling currencies. Euro currency has taken a beating but has still been much better shaped than others. The list of economies under this are:
  

  Bulgaria	Lithuania
  Czech Republic	Poland
  Denmark	Romania
  Estonia	Slovakia
  Hungary	Sweden
  Latvia	United Kingdom

  This list of joining Euro currency also includes economies that are not yet members of EU like Iceland and Russia.

As Feldstein and Johnson point out, EU is going to face a real crisis going ahead. It is going to test its policymakers to the hilt and would have to ensure that it does not break-up.

ECB has just completed 10 years (it was established on 1 June 1998) and Euro will complete 10 years old on Jan 1 2009 (started on Jan 1, 1999). It hasn’t faced a crisis like this in past 10 years and even asking members to join in might have been a lot easier. European policymakers also take a lot of pride in ECB (read Trichet’s interview) and its policies. The path ahead will be very tricky and testing.

Update:

Barry Eichengreen provides his excellent insights as well.

IMF explains the Iceland package of USD 2.1 billion

IMF hasapproved 1 USD 2.1 billion package for Iceland. Actually, IMF has agreed to pay $2.1 billion and Iceland would need about $5 billion to keep afloat. Where did this $ 5 billion come from?

In a conference call, IMF explains the details.

QUESTIONER: In Article 24 of the Icelandic Letter of Intent, it is commented that there’s a need for $24 billion until the year 2010. Can you explain this to us? What is this amount for and how does the IMF see this?

MR. THOMSEN: Yes, I can explain that to you. The $24 billion has three components. One component is the estimated cost of paying on the foreign deposits, which when this was drawn up it was estimated at close to $8 billion. With the information we have today, we think this is a significant overestimation. So probably it’s closer to $5 billion, $6 billion, something like that.

That part of the financing is already assured in the sense that the concerned countries and particularly the UK and the Dutch have agreed to provide financing earmarked for the payments of these foreign deposits. So, of the $24 billion, or if we have the more recent, more realistic number of probably $21 billion or $22 billion, $5 billion to $6 billion is already secured through the commitment of the UK, Dutch and any other countries that will get payments to provide financing earmarked for this.

Secondly, there is an estimated $10 billion in arrears to private creditors. These are payments. When we calculated the $24 billion, or the corrected $21 billion or $22 billion, we assumed that all payments are being made. Now we know that these payments, this $10 billion, are not being made. So we have a counter item below the line of $10 billion of arrears that will be subject to discussions between the banks and those that are administering the banks now and the foreign creditors. That’s also, so to speak, taken care of in the financing picture.

This leaves this residual financing gap, cash financing gap of about $5 billion. It’s another way of saying, in the jargon of economists, when we do the balance of payments, we do it on an accrual basis, what is due. What is due gives you a financing need of $24 billion, that is $21 billion or $22 billion, corrected.

If we did all of this on a cash basis, the $24 billion would only be $5 billion, and that’s the $5 billion we’ve been talking about.

I realize that this way of putting it sounds somewhat strange for somebody who is not in the IMF world, but this is the way we present it. We have to present the balance of payments on an accrual basis, what is actually due, not what are the actual payments taking place.

So actually Iceland needs $21-22 billion out of which around $15 bn to $ $16 bn have been worked out. Remaining is around $ 5-6 billion out of which $ 2.1 bn comes from IMF. What happens to the rest?

QUESTIONER: How sure are you that Iceland will get those $3 billion from other countries?

MR. THOMSEN (IMF): I’m confident that we will get the $3 billion. I’m very confident.

Talks are on with other Economies (like Russia) to provide the rest.