Archive for the ‘Academic research & research papers’ Category

Sorry Mystics, Central Banks cannot finance Government spending: Lessons from Yemen

October 15, 2018

John Tamny on Yemen experiences:

Before Yemen’s civil war began in 2015, its currency (the rial) was worth 1/215th of a dollar. According to a report in the Washington Post last week, the rial has plummeted to 1/800th of a dollar, thus “sending food and fuel prices soaring.”

The tragedy underway in Yemen exists as yet another reminder that the Federal Reserve’s definition of inflation is completely upside down. While economists at the Fed believe that economic growth causes inflation, unstable countries in other parts of the world continue to reject the U.S. central bank’s simple-mindedness.

Indeed, it can’t be stressed enough that the biggest driver of rising prices is paradoxically a lack of economic growth. Growth is always and everywhere an effect of investment, and a falling currency repels the very investment necessary for the increased productivity that results in falling prices. In short, true inflation burns its victims twice: through rising prices in the near-term as the cost of goods reflects a shrunken currency, and through slower growth over time as the investment necessary for progress migrates away from the country that is irresponsibly pursuing devaluation.

The tragedy taking place in Yemen also offers a useful lesson about the well-oversold capabilities of central banks. Even certain members of the Austrian School claim that their very existence enables wasteful government spending as far as the eye can see. 


Though various economic schools relentlessly try to revive Santa Claus through their mysticism about governments, central banks and printing presses, the reality is that wealth and economic growth are always produced in the private sector. Government spending and printing presses are a consequence of the latter, and never a driver.

Hmm… These battles will continue forever perhaps…



How banks boomed during World War I and then busted due to agricultural price shock post World War I

October 15, 2018

Matthew S. Jaremski and David C. Wheelock in this paper show evidence of American banks boom and bust:

Bank lending booms and asset price booms are often intertwined. Although possibly triggered by a fundamental shock, rising asset prices can stimulate lending that pushes asset prices higher, leading to more lending, and so on. Such a dynamic seems to have characterized the agricultural
land boom surrounding World War I.

This paper examines i) how banks responded to the boom and were affected by the bust; ii) how various banking regulations and policies influenced those
effects; and iii) how bank closures contributed to falling land prices in the bust.

We find that rising crop prices encouraged bank entry and balance sheet expansion in agricultural counties (with new banks accounting disproportionately for growth in lending and banking system risk). State deposit insurance systems amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects.

When farmland prices collapsed, banks that had responded most aggressively to the asset boom had a higher probability of closing, and counties with more bank closures experienced larger declines in land prices.

Just replace the  farmland with real estate, infrastructure and so on. One will get a similar picture of most banking crises….Yet we are surprised each time…

Economic Gains From Gender Inclusion : New Mechanisms, New Evidence

October 9, 2018

Team of IMF researchers in this new paper:

While progress has been made in increasing female labor force participation (FLFP) in the last 20 years, large gaps remain. The latest Fund research shows that improving gender diversity can result in larger economic gains than previously thought. Indeed, gender diversity brings benefits all its own. Women bring new skills to the workplace. This may reflect social norms and their impact on upbringing and social interactions, or underlying differences in risk preference and response to incentives for example. As such, there is an economic benefit from diversity, that is from bringing women into the labor force, over and above the benefit resulting from more (male) workers.

The study finds that male and female labor are imperfect substitutes in production, and therefore gender differences in the labor force matter. The results also imply that standard models, which ignore such differences, understate the favorable impact of gender inclusion on growth, and misattribute to technology a part of growth that is actually caused by women’s participation. The study further suggests that narrowing gender gaps benefits both men and women, because of a boost to male wages from higher FLFP. The paper also examines the role of women in the process of sectoral reallocation from traditional agriculture to services and the resulting effect on productivity and growth. Because FLFP is relatively high in services, sectoral reallocation along development paths serves to boost gender parity and productivity.


Earlier these papers were mainly in the domain of World Bank. Now IMF is writing increasingly on these topics..

How elite universities shape upward mobility into top jobs and top incomes

October 8, 2018
Seth Zimmerman of University of Chicago Booth School of Business in this research shows why elitism matters in education:
Graduates of top universities hold a large share of leadership positions in big firms. At the same time, elite universities are aiming to expand access to middle- and low-income students. Yet, it is unclear whether the benefits of attending top universities accrue to students from poor backgrounds. This column examines new evidence from Chile and finds that admission to highly selective, business-focused degree programmes has very large effects on the rates at which male students from wealthy backgrounds attain top jobs and incomes, but little or no effect for female students and non-wealthy male students.

Why do men from wealthy backgrounds gain so much more than other students from attending top business-focused programmes? One possibility is that women and low-socioeconomic status men also benefit from top programmes, but start from too low a rung to reach the top of the income ladder. This does not seem to be the case: on average, admission does not raise income for these groups at all, while gains for high-SES men are large. A second possibility is that women and low-SES men are less interested in careers in business. But these students go on to work in similar sectors to high-SES men. A third possibility is that high-SES men are better prepared to succeed academically. But students from the best public schools in Chile—where college entrance exam scores are similar to those in best private schools—do not benefit from admission, and graduation rates for women are higher than those for men, even though labour market effects are smaller. 

A comparison with medical degree programmes is informative. Medical degrees are similar to elite business degree programmes in that they admit only top-scoring students and in that earnings for those students are very high on average. They differ in that medical students are very unlikely to lead large companies or have incomes in the top 0.1% of the income distribution. As first shown in Hastings et al. (2013), admission to selective medical programmes leads to large earnings gains for low-SES students. In particular, admission to top medical programmes closes gaps by SES and gender in rates of attainment of incomes on average and near, but not at, the top of the distribution—the top 10%, for example, but not the top 0.1%. This holds even though patterns of achievement by group are similar to those in business programmes. That elite education expands gaps by gender and SES appears to be a feature of business careers, not of academic content nor the Chilean economy as a whole. The returns to elite education for women and lower-SES men are not zero on all career paths, but are zero on the paths most likely to lead high-SES men to the very top of the income distribution. 

One way that business careers may stand out from careers in other fields is in the importance of peer networks. Research on managerial behaviour at big firms shows that social ties between top executives play a role in determining firm behaviour (Fracassi and Tate 2012, Shue 2013, Fracassi 2016). If high-SES male students are better able to form valuable peer ties while at school, this could explain why they gain from admission while other students do not. Studies of friendship formation among college students (Marmaros and Sacerdote 2006, Mayer and Puller 2008) show that ties are more likely to form between demographically similar students. Relationships with high-SES men may be especially valuable from the perspective of professional advancement, and may be most accessible for students already in that group.  

The peer ties channel does appear to be important: high-SES men who gain admission to top business programmes become more likely to lead the same firms as other high-SES men who are their school peers, but not with non-peers or with peers from other backgrounds. Several studies have shown that peer ties affect early-career job-finding (Marmaros and Sacerdote 2002, Arcidiacono and Nicholson 2005). They also seem to affect who makes it to top jobs over the long run. 


The transformation of economic analysis at the Federal Reserve during the 1960s

October 8, 2018

This is a superb paper by Beatrice Cherrier and Juan Acosta. In history of central banking, we barely look at role and evolution of economic research at the central bank. Did it influence policies and if yes in what way and if no why? Who were the key people in this economic research team and so on. Most of these people are also unsung but do quite a lot of work in the central bank.

This paper looks at eco research at Federal Reserve:

In this paper, we build on data on Fed officials, oral history repositories and hitherto under-researched archival sources to unpack the torturous path toward crafting an institutional and intellectual space for postwar economic analysis within the Fed. We show that growing attention to new macroeconomic research was a reaction to both mounting external criticisms against the Fed’s decision-making process and a process internal to the discipline whereby institutionalism was displaced by neoclassical theory and econometrics.

We argue that the rise of the number of PhD economists working at the Fed is a symptom rather than a cause of this transformation.

Key to our story are a handful of economists from the Board of Governor’s Division of Research and Statistics (DRS) who paradoxically did not always held a PhD, but envisioned their role as going beyond mere data accumulation and got involved into large-scale macroeconometric model building.

We conclude that the divide between PhD and non-PhD economists may not be fully relevant to understand both the shift in the type of economics practiced at the Fed and the uses of this knowledge in the decision making-process. Equally important was the rift between different styles of economic analysis. 

It is an interesting new approach to figuring history of central banking.

Adam Smith and his Russian admirers of the 18th century

October 4, 2018

How ideas transcend borders and in unlikeliest of places.

This is a fascinating paper written in 1937 by a Russian Michael P. Alekseev. It is reprinted in Econ Journal Watch.

Alekseev writes on how Adam Smith’s thoughts and ideas were so well admired in Russia in the late 18th- early 19th century. There is even a Pushkin connection!:

Reproduced here is an essay by Michael P. (Mikhail Pavlovich) Alekseev. In the 1760s two students from Russia, Semyon Efimovich Desnitsky (1740–1789) and Ivan Andreevich Tretyakov (1735–1776), attended Glasgow University, learned directly from Adam Smith, John Millar, and others, returned to Russia, and commenced a tradition of Smithian thought in Russia. Alekseev tells of other Russian Smithians including N. S. Mordinov (1754–1845), Ekaterina Romanovna Dashkova (1744–1810), Alexander Romanovich Vorontsov (1741–1805), Semyon Romanovich Vorontsov (1744–1832), Christian von Schlözer (1774–1831), Heinrich Friedrich von Storch (1766–1835), M. A. Balugiansky (1769–1847), Nikolay Turgenev (1789–1871), and the great author Alexander Pushkin (1799–1837). Alekseev writes: “After the war of 1812 Adam Smith became extremely popular among the liberal youth of Russia who were organizing secret circles. In endowing the hero of his novel Eugene Onegin with a taste for economic problems and by making him read Adam Smith, Pushkin merely reproduced the actual feature of the time, the writer himself having had the same taste.”

Hmm. That is a long list of admirers.

What is even more interesting is how there were these two Russian students who had studied under Smith. They made notes in early 1770s which clearly shows that Smith was teaching what was to become The Wealth of Nations. 🙂


50 years of the Boeing 747: How the ‘queen of the skies’ reigned over air travel

October 2, 2018

Janet Bednarek Professor of Aviation History at University of Dayton writes about 50 years of Boeing 747:

On Sept. 30, 1968, the first Boeing 747 rolled out of its custom-built assembly plant in Everett, Washington. From the beginning, everything about the plane once knownas the “queen of the skies” was big.

It was the first wide-body “jumbo jet” ever built, involving about 50,000 construction workers, mechanics, engineers and others who took it from an idea to the air in just 16 months in the late 1960s. Until 2007 and the introduction of the Airbus A380, it was the largest civilian airplane in the world.

Versions of the 747 have been used in a variety of famous ways. In 1990, for example, a pair of 747-200s began operating as Air Force One, the plane that ferries around the U.S. president.

Just to produce the 747, Boeing first had to erect what was and still is the largest building by volume ever constructed – big enough to hold 75 football fields or all of Disneyland.

I’ve been researching and teaching the history of American aviation for more than a quarter-century. Even though all U.S. airlines have retired their 747s, marking the end of an era, I believe it’s worth remembering the amazing story of the airplane that helped make international air travel affordable.

2018 is indeed the year of anniversaries!

Culture matters in saving behaviour

October 1, 2018

Joan Costa-i-Font, Paola Giuliano and Berkay Ozcan in this research show culture matters for savings:

Previous research (Carroll et al. 1994) could not find evidence of a cultural saving motive. They used data from the Canadian Surveys of Family Expenditures to study the saving behaviour of first-generation immigrants in Canada, and test whether saving rates varied systematically by place of origin. But the sample was small, the authors knew only broad geographical regions rather than country of origin, and did not control for wealth.  

In our recent work (Costa-Font et al. 2018) we have re-examined the cultural saving motive by looking at the saving behaviour of three generations of immigrants in the UK. The UK is one of the largest immigrant-receiving countries, with immigrants from many countries of origin. 

This strategy mitigates (though it does not totally eliminate) problems of selection and disruption due to immigration. We could control for wealth, and had access to detailed information on both actual and self-reported savings. We use a measure of saving rate over GDP, calculated from 1990 until 2010, as a proxy for culture. We attribute the association found in our data between the behaviour of immigrants and the saving rate in the country of origin to differences in cultural beliefs across immigrant groups. 

Although migrants leave the economic and institutional conditions that determined their saving behaviour behind, they bring their cultural beliefs with them. If savings/GDP at the aggregate level in the home country explains the variation in saving outcomes in the host country, even after controlling for their individual economic attributes, only the cultural component of this variable can be responsible for this correlation. 

This is because immigrants from different countries now have the same economic and institutional environment in the UK. We can attribute the correlation of saving behaviour for different generations with saving outcomes in the country of origin to intergenerational cultural transmission. 

Suddenly, culture has become one of the most fancied words to explain/figure everything in finance. One wonders though why and how culture is ruled out at the first place? Culture is central to most economic behavior and much more in financial behavior….

Major economic policy debates in India from 1950s to today…

September 28, 2018

Dr YV Reddy in this speech covers some of the key policy debates in India.

He divides each decade based on a dominant policy/debate theme:

  • 1950s: Mahalanobis versus Vakil-Brahamanda Model
  • 1960s: The Devaluation of 1966
  • 1970s: Equity and Efficiency?
  • 1980s: The IMF Loan
  • 1990s: Growth and Poverty?
  • 2000s: Opening Up the External Capital Account
Nice bit.  The speech is a useful way to start a discussion on economic policy in India. Should be made part of course curriculum.
Most of us are clueless about these battles of ideas. For instance, the Mahalanobis versus Vakil-Brahamanda Model was:


Book Review: How Economics Professors Can Stop Failing Us

September 27, 2018

Prof Samuel Bostaph (University of Dallas) reviews this hard-hitting book: How Economics Professors Can Stop Failing Us: The Discipline at a Crossroads bSteven Payson.

The book says:


Three tariff lessons from US interwar history

September 27, 2018

Eric Bond, Mario Crucini, Tristan Potter and Joel Rodrigue in this research:

History of macro models (and computing) at the Federal Reserve

September 26, 2018

Nice bit of history by David Price.

It starts with this fab story on how a physicist Frank Adelman got into macro modelling:

One evening in the fall of 1956, Frank Adelman, a physicist at the Berkeley Radiation Laboratory — now the Lawrence Livermore National Laboratory — came home from work with a question for his wife, Irma, a Berkeley economist. He wanted to try writing a program for the lab’s new IBM 650 vacuum-tube computer, but he had found that all of the physics problems he considered interesting were too complex. He asked Irma whether she thought there was an economic model that he could use instead.

“A few days later,” she remembered, “I presented him with a copy of the book by Laurie [Lawrence] Klein and Art Goldberger, An Econometric Model of the United States 1929-1952.”

Frank obtained approval from his boss for one free hour of central processor time, with the stipulation that they would have to reimburse the lab for any additional time at an hourly rate of $600, several times her monthly salary. The couple then set to work together on writing code for Klein and Goldberger’s 25-equation model of the U.S. economy. Their new side project was a journey into uncharted territory: Before then, the results of such models had been worked out by human assistants — known as “computers” or “computors” — wielding slide rules or mechanical calculators.

Working in the lab’s computer room at night, loading the code and data via punched IBM cards, the Adelmans had an initial version ready to present at an economics conference a little more than a year later. Frank’s boss, impressed, allowed them a second free hour, which they used to create a more elaborate version, the results of which appeared in 1959 in the journal Econometrica.

🙂 I wish econometrics classes started with such stories for motivation.

Then the note takes us through the development of macro modelling at Fed…

From this modest start, the science — and, some would say, the art — of computer modeling of the economy has become indispensable to policymakers and businesses seeking to forecast economic variables such as GDP and employment or to analyze the likely effects of policy changes. The Fed’s main computer model since the mid-1990s, known as FRB/USOffsite (commonly pronounced “ferbus”), has about 380 equations covering the behavior of households, firms, inflation, relative prices, numerous interest rates, and government taxes and spending (at the federal, state, and local levels), among other phenomena.

Yet even as large-scale macroeconomic models such as FRB/US have attained a role probably undreamed of by Irma and Frank Adelman, their usefulness is debated within economics circles — a reflection of a rift, starting in the 1970s, between many research economists in academia and their counterparts in policymaking institutions and businesses.


All India Radio’s Glory Days and Its Search for Autonomy

September 26, 2018

Coonoor Kripalani, an independent scholar revisits history and glory of All India Radio:

In the recent row over the “autonomous corporation” status of the Prasar Bharati, the fate of state broadcasters like All India Radio is in a deadlock. In the face of competition with private broadcasters, the corporation cannot exercise full autonomy in managing the state broadcaster, even though the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 has been passed. Functional autonomy remains a far-fetched reality with the government of the day finding it difficult to cut the umbilical cord with the state broadcaster. As AIR is reeling under the pressure of this managerial conundrum, one should not lose sight of its historic role as a nation builder, as well as its contribution to the cultural landscape of India. Many of the towering intellectuals, musicians, writers and theatre personalities of mid to late 20th-century India were associated with this remarkable institution.


Economists (and Economics) in Tech Companies

September 25, 2018

Profs Susan Athey (of Satnford who once worked for Microsoft) and Michael Luca (HBS) in this paper look at role of economists in tech sector:

As technology platforms have created new markets and new ways of acquiring information,
economists have come to play an increasingly central role in tech companies – tackling problems
such as platform design, strategy, pricing, and policy. Over the past five years, hundreds of PhD
economists have accepted positions in the technology sector. In this paper, we explore the skills
that PhD economists apply in tech companies, the companies that hire them, the types of
problems that economists are currently working on, and the areas of academic research that have
emerged in relation to these problems.


How the Great Telegraph Breakthrough of 1866 shaped global markets and economies…

September 25, 2018

Superb short review by Helen Fessenden of Richmond Fed.

The article looks at how advent of telegraph technology in 1866 between US and UK shaped their markets and economies:

Economists have been increasingly studying the role of technology, in particular, as a way to break down information frictions and make markets more transparent. This field of inquiry applies not just to trade but to any kind of economic activity, especially when real-time information is critical but difficult to find. For example, economists have looked at the effect of Internet shopping on life insurance markets — cheaper on net for consumers, according to Jeffrey Brown of the University of Illinois at Urbana-Champaign and Austan Goolsbee of the University of Chicago. As these and other studies suggest, the speed and ease of online shopping can reduce these frictions for consumers.

To anyone who surfs websites to shop, these insights are intuitive. But as the case of the transatlantic telegraph cable shows, history is rich with examples of how earlier breakthroughs had similar effects. In a stroke, the cable helped reshape many U.S. industries, including one of the biggest exports, raw cotton, ultimately growing U.S. exports through increased efficiency.

This story has special resonance in the Fed’s Fifth District, especially in the Carolinas, where the cotton industry recovered with surprising speed in the years following the Civil War. Even though cotton production and exports sharply fell during the war, both rebounded to prewar levels by 1870. In particular, the communication revolution that the telegraph ushered in helped turn splintered local markets into a national network, leading to the 1871 founding of the New York Cotton Exchange.

Superb bit.


The policymakers in US and UK economy should focus on underemployment and not unemployment

September 24, 2018

There was a time when underemployment was essentially seen as a developing country phenomenon. Not anymore.

David Bell and David Balnchflower in this piece:


Gradually, we are admitting that banks create money by giving loans and not accepting deposits…

September 21, 2018

After the storm created by Bank of England questioning the inter-mediation role played by banks, other central banks are also waking up. We are usually taught that banks first accept deposits and then lend this money and via the multiplier money is created. But this is wrong. Banks actually first give loans and then this money comes back to the banking system as deposit.

Chris Kent, Assistant Governor of Reserve Bank of Australia also says banks create money via credit and not deposits:


What Keynes should have said: Central banks/government should target stock markets

September 20, 2018

Prof Roger Farmer of UCLA has this proposal:

How did banks get limited liability status? Debates from 19th century Britain..

September 20, 2018

This is a superb paper and we need more such research.

It is written by Matthew Willison of Bank of England. It tracks the debates in UK in 1850s on whether banks should be given a limited liability status or not.

In 1853 a Royal Commission was set up to investigate whether laws related to limited liability in Britain needed to be modified. As part of its evidence gathering the commission issued a questionnaire that included a number of questions on whether banks should be subject to the same liability laws as other types of commercial enterprises.

This paper analyses the responses to the questions about banks to understand whether banks were seen as a special case. Support for modifying the law to make limited liability more easily available to banks was lower than for enterprises in general.

Banks were seen as a special case because of the risk of bank runs and because their creditors were not able to assess accurately the riskiness of banks. But the special nature of banks caused others to favour limited liability because it made banks’ capital levels more transparent. These arguments echo wider debates during the nineteenth century and are similar to contemporary theories for why banks are regulated.

In Britain, there was limited liability for chartered banks, unlimited liability for others.

There were arguments on both sides for limited liability for banks. Those who supported unlimited liability said that depositors and note holders are not well-informed and unlimited liability gives them comfort. Those which supported limited liability said it gave a truer picture of the bank’s financials. The shareholders may not be in a position to pay back all the debts.

In 1857, limited liability status was given to banks in UK.

In 1861, limited liability status was given to banks in India too (and may be other colonies). Before this, lack of limited liability was seen as a major reason for instability in banks. Large number of banks failed in Bengal before 1861.

This change in law along with US Civil war led to several banks coming up in Bombay catering to the demand for cotton. There was huge euphoria leading to eventual panic in 1865 as civil war ended with closure of these banks. Even Presidency Bank of Bombay had to shut shop in 1867. So clearly limited liability hardly made much impact as far as prudence in Indian banking is concerned.

But the key here is how ideas shape up. How law and finance come together and become so critical to thinking about financial organisations…

RIP Anna Rajam Malhotra: The first Woman IAS officer..

September 19, 2018

Another torchbearer passed away.

Anna Rajam Malhotra (wiki profile) was Independent India’s first woman IAS officer. SHe was asked to take up IFS which was seen more suited to women. Apparently there were rules which said if the woman married on being an IAS, she had to quit the job! But obviously Anna fought all these rules and biases. Better India has a more detailed profile.

She married another IAS, R.N. Malhotra who became the 17th Governor of RBI (04 February 1985 – 22 December 1990).

I just checked to figure whether there is an autobiography/biography of Ms. Anna. Could not fine one. I hope she has written something about her experiences which will help inspire the future generations…


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