Archive for the ‘Economics – macro, micro etc’ Category

Impacts of an online English learning programme among Japanese high school students

May 23, 2017

Interesting paper by Yuki Higuchi, Miyuki Sasaki, Makiko Nakamuro.

They evaluate whether Japanese students can learn English using online programmes. They show students do make progress but also procrastinate learning:


Why any modern banking system is necessarily uncompetitive?

May 23, 2017

Interesting post by Cameron Murray, a professional economist on Naked Capitalism blog.

He argues why banks are uncompetitive in today’s system.


How the cold war led CIA to promote government financed human capital theory..

May 18, 2017

Fascinating piece by Prof. Peter Fleming of Cass Business School.

We in economics rarely figure how the guys at the top push certain ideas onto us. He says human capital is one such idea. The idea emerged as Profs. Theodore ‘Teddy’ Schultz and Milton Friedman debated how to beat USSR in the ideas battle during Cold War.

USSR announced how it will smash capitalist system by pushing state driven growth in agri and industry. The question was how should US respond?


What we can learn from tweets which predict movement of euro-dollar currency pair?

May 17, 2017

Interesting paper. As traders share their predictions across asset classes on social media, it leads to research opportunities.

Vahid Gholampour and Eric van Wincoop analyse tweets that predict Euro-Dollar rates. They find that Tweets get the direction right but not the magnitude:

We focus on opinions posted on Twitter, because Twitter is widely used to express opinions about asset prices. Several anecdotal stories suggest that this information can be important. For example, on 13 August 2013, Carl Icahn, an activist investor, tweeted about his large position in Apple. As a result, Apple shares increased in value by more than 4% in a few seconds. We investigate what can be learned from Twitter by considering two and a half years of tweets that expressed opinions about the euro-dollar exchange rate.


We find that the direction of exchange rate changes is predicted by tweets in a way that is statistically significant. This suggests that there was information content in the tweets. But we also find that Twitter sentiment does not predict the magnitude of future exchange rate changes in a statistically significant way. Such predictability would be needed to develop trading strategies from this data. This absence of predictability based on a data-only approach is not surprising, because exchange rates are notoriously hard to predict. Twitter sentiment is only directional, and the data sample covers only two and a half years.

Also, Sharpe ratio for Tweet based trades is high indicating one could make money:

The large Sharpe ratios that we find suggest that there are significant gains from trading strategies based on Twitter sentiment. We can compare the Sharpe ratio from the TSI trading strategy to that of the popular currency carry-trade strategy based on interest differentials. Burnside et al. (2010) reported an average annualized Sharpe ratio of 0.44 for 20 currencies against the dollar based on a carry-trade strategy. A Sharpe ratio in the range [1.59, 1.78] is clearly very high by any reasonable standard. The methodology developed here could easily be applied to other currencies or portfolios of currencies, as well as other financial markets such as the stock market.


Should Walmart be allowed to get into banking?

May 17, 2017

Prof Lawrence White of Stern School has a piece on Walmart entry into banking. He says we should actually ask the following question: Why shouldn’t Walmart get into banking?

By the way I also learnt from the article that the retail giant entered banking in Canada and Mexico. In Mexico it sold off its banking business in 2014. The one in Canada continues. The issue is whether it should be allowed in America as well.

Prof White says:

One question to ask might be, “Why should Walmart be allowed to enter banking?” But a more relevant question would be, “Why shouldn’t Walmart be allowed to enter banking?” 

After all, the U.S. economy is generally market-oriented, and entry is generally recognized as potentially beneficial for consumers, as entrants can bring new ideas, innovations, and efficiencies to the market. Of course, incumbents usually don’t like the idea of entrants’ disrupting the status quo; and often those incumbents lobby for regulation and/or legislation that creates barriers to entry. But, for most markets, the presumption in broad U.S. economic policy is that entry should be encouraged—or at least, that policy should be neutral between incumbents and entrants—so that the benefits of entry can be enjoyed by consumers.

Of course, banking is special—as the regular readers of this blog are well aware. And how the specialness of banking and the presence of Walmart in banking can be reconciled must be addressed, and will be addressed below.

But first, consider what the entry of Walmart into banking might well achieve: Walmart is well known for providing reasonably priced goods to low- and moderate-income households. Its position as the largest company in the United States—as measured by sales and by employment—is a testament to that reputation.

But it is exactly this demographic group—low- and moderate-income households—that is most in need of reasonably priced financial services. The percentage of U.S. households that are unbanked (i.e., do not have a bank account) or underbanked (i.e., have an account but rely on non-bank providers for some financial services and products) has been a longstanding policy concern. The most recent data (from a FDIC report that covers 2015) in this regard—based on a survey of more than 36,000 households nationwide—show that 7% of all households were unbanked and an additional 20% of all households were underbanked. Unsurprisingly, the percentages are substantially larger for low- and moderate-income households (see table)


The post also has a interesting discussion on the complex financial regulation setup in US:

So, how would the entry of Walmart—and, presumably, other non-financial companies that are interested in entering banking—fit into that system of prudential regulation?

The crucial concept is that the “Walmart Bank” that would provide banking services to the public would be organized as a separate subsidiary of the parent Walmart company. In essence, the parent Walmart company would be a bank holding company (BHC), which is a common ownership structure for U.S. banks. The Walmart Bank subsidiary would be expected to abide by all prudential regulations—including adequate net worth (capital) requirements—that apply to banks.


However, because it is relatively easy for the owners (including BHCs) of a bank to drain the bank of its assets—for example, by paying excessive dividends to its owners, or by making loans to the owners that are not repaid, or even by paying excessive prices for any materials that it buys from the owners—it is essential that any transactions between the bank and its owners be on arm’s-length terms. U.S. bank regulators have long been aware of this danger of the draining of a bank by its owners and have rules in place (which are embodied in Sections 23A and 23B of the Federal Reserve Act) that insist on this arm’s-length standard.

Current U.S. banking policy has much of this story right.  But where policy has gone “off the rails” is the insistence that a BHC cannot be engaged in commerce—that is, in non-financial services activities. This restriction on scope was embodied in the Bank Holding Company Acts of 1956 and 1970 and remains established policy for banks and banking in 2017. Its persistence as policy is more a testament to the lobbying strength of the incumbent bankers (who clearly prefer less competition) rather than to a concern about the economic welfare of consumers. It also yields the economically absurd result that it is okay for a local car dealer to own a bank (so long as the dealer doesn’t form a BHC that involves the car dealership); but it is not okay for AutoNation (a publicly traded company that operates hundreds of car dealerships) to own a bank.

Until 1999 there was a potential way around this no-commerce restriction on the activities of a holding company: the holding company of a savings and loan (S&L or thrift) institution faced no such restriction, and at various times companies such as the Ford Motor Company, Fuqua Industries, Weyerhaeuser, ITT, Gulf & Western, Household International, and Sears, Roebuck have owned S&Ls via the formation of thrift holding companies.

In the middle of the 1990s, Walmart decided to try to enter banking by becoming a thrift holding company. However, before Walmart was able to become a thrift holding company, the Gramm-Leach-Bliley Act of 1999 (which was primarily focused on allowing commercial banks—via BHCs—to enter investment banking) forbade the creation of any new thrift holding companies that could engage in commerce. It also restricted the sale of an existing thrift holding company to a non-financial company, such as Walmart.

There was a second, more limited way around the “no commercial owner” restriction: a few states—most notably Utah—offered “industrial loan company” (ILC) charters that allowed a commercial firm to own a financial institution that could issue deposits and make loans and thus could function as a bank. But in order to operate, the ILC would need to obtain deposit insurance from the FDIC.

Walmart duly obtained a Utah ILC charter and in 2005 applied for FDIC deposit insurance. In 2007 Walmart withdrew its application after it was clear that the FDIC would not grant it deposit insurance. Further, the Dodd-Frank Act of 2010 placed a three-year moratorium on the granting of deposit insurance to any new (or newly acquired) ILC. Although the moratorium expired in 2013, bank regulators appear to have “gotten the message” that the commerce-finance barrier should remain intact.

Another example of how despite best intentions, regulations leave many gaps to be filled.

But overall a good discussion about many aspects of economics and finance..

The Economic School you’ve barely heard of : Austrian School

May 16, 2017

The author of this article titles it as “The Economic School You’ve Never Heard Of”. I have been kinder and replaced never with barely. But yes the author could be just right. It is highly unlikely that today’s economists have never heard about the Austrian School of Economic thought. I just wrote about reading dead economists but we have case for many important things being just dead in economic teaching.

Valentin Schmid of Epoch times writes a nice piece about the forgotten yet highly important teachings from Austrian School (HT: Cafe Hayek blog).


Reading and Listening to Dead Economists…

May 16, 2017

Good friend Niranjan once told me how at a conference on so called new economics. To his shock and amusement,  none of what they were saying was new but old economics!

In the same spirit, Jeff Deist of Mises Institute says we should read and listen to dead economists:

We don’t revere dead economists to maintain their place in some academic hierarchy, or to satisfy an atavistic desire for an unchanging intellectual order. We revere them because their ideas still have purchase, because their work yields knowledge that is sorely needed today. We read them and promote them in order to understand the world as it is, filled with billions of purposeful but often irrational human actors. We need dead economists to save us from ourselves and to refute the stubborn myths of collectivism. We need them most of all because their work and their insights are far superior to those of most economists alive today. There is no “New Economics,” only new academic work that painstakingly advances the the knowledge bequeathed to us.

Totally agree!

Lessons from Government intervention in Nigeria

May 10, 2017

An interesting account from Feyi Fawehinmi who is an accountant.

He points how interventions from Central Bank of Nigeria and the Government have benefited the two Palm oil producers in Nigeria. They have made more profits while producing less, employing less thanks to the bank which does not allow foreign competition in palm oil.



Using church archives to do economic research…experiences from Northern Ghana

May 10, 2017

Fascinating post by , and ,

They point how in absence of reliable records/archives, one can use church records:


Compassionate capitalism in the Middle Ages: Profit and philanthropy in medieval Cambridge

May 9, 2017

Catherine Casson, Mark Casson, John Lee and Katie Phillips have a post:


History of economics teaching and pluralism in Brazil..

May 4, 2017

Ramón García Fernández and Carlos Eduardo Suprinyak have a nice piece (based on their paper here).

They wrote how economics teaching started and grew in Brazil. Through several forces, the economics community in Brazil is fairly diversified.


What Nassim Taleb can teach us: The importance of having skin in the game..

May 3, 2017

Prof. Jeff Deist points to lessons from Nassim Taleb.

Most advice from the economic elite causes least amount of damage to them when the advise goes wrong:


Why Europe still needs cash…

May 3, 2017

Yves Merschodf European Central Bank argues why Europe still needs cash.

He says there are 3 camps which argue for digital payments. However, their arguments are off the curve:


Central Bank Legal Frameworks in the Aftermath of the Global Financial Crisis

May 2, 2017

Perhaps one of the more important papers on central banking.

There is a lot of research on how and whether central bank objective functions have changed or the independence. But there is hardly any research on the most important thing that drives central banks at the first place: Their legislation, saw in India’s demonetisation how central bank law is so crucial to understanding monetary affairs.

It is written by Ashraf Khan of IMF and looks at how central bank legislations have changed post the financial crisis.

Drawing on the 2016 update of the IMF’s Central Bank Legislation Database, this paper examines differences in central bank legal frameworks before and after the Global Financial Crisis. Examples from select countries show that many central bank laws have undergone changes in objectives, decision-making, accountability, and data collection. A wider cross-country survey illustrates the common occurrence of price stability in central bank objectives, and varying practices in defining financial stability, “independence” versus “autonomy,” and who within a central bank determines monetary policy. The highlighted facts illustrate the uses of the database and could be a starting point for further analyses.

Even small changes in the central bank legislation should be keenly watched. There is usually a larger political economy game at play behind these small changes and the intent is much larger than initially thought. Moreover, the impact may be seen many years later as we see in case of Section 7 (1) in RBI Act.

Thus, instead of just focusing on usual literature on inflation/employment or central bank independence, we should look at the legislation and the changes.

Joan Robinson: Solutions offered by economists are no less delusory than those of the theologians

May 2, 2017

From Economic Sociology blog. How stalwarts of economics questioned the value of economics:


500th anniversary of Protestant reformation

May 1, 2017

Bruno Gonçalves Rosi writes on a very important milestone in political and economic history:

This year we celebrate 500 years of the Protestant Reformation. On October 31, 1517, the then Augustinian monk, priest, and teacher Martin Luther nailed at the door of a church in Wittenberg, Germany, a document with 95 theses on salvation, that is, basically the way people are led by the Christian God to Heaven. Luther was scandalized by the sale of indulgences by the Roman Catholic Church, believing that this practice did not correspond to the biblical teaching. Luther understood that salvation was given only by faith. The Catholic Church understood that salvation was a combination of faith and works.

The practice of nailing a document at the door of the church was not uncommon, and Luther’s intention was to hold an academic debate on the subject. However, Luther’s ideas found many sympathizers and a wide-spread protestant movement within the Roman Catholic Church was quickly initiated. Over the years, other leaders such as Ulrich Zwingli and John Calvin joined Luther. However, the main leaders of the Roman Catholic Church did not agree with the Reformers’ point of view, and so the Christian church in the West was divided into several groups: Lutherans, Anglicans, Reformed, Anabaptists, later followed by Methodists, Pentecostals and many others. In short, the Christian church in the West has never been the same.

The Protestant Reformation was obviously a movement of great importance in world religious history. I also believe that few would disagree with its importance in the broader context of history, especially Western history. To mention just one example, Max Weber’s thesis that Protestantism (especially Calvinism, and more precisely Puritanism) was a key factor in the development of what he called modern capitalism is very accepted, or at least enthusiastically debated. But I would like to briefly address here another impact of the Protestant Reformation on world history: the development of freedom of conscience.


On doing economic history (and its importance!)

May 1, 2017

Thanks to Clark medal 2017 , it is one of those rare moments when people are excited about economic history. Though the field is in precarious state  but still atleast there is some discussion. The question is whether it will meet the same fate as the 1993 prize when economic history was honored but again was ignored after some initial excitement.

This post by Vincent Geloso on Notesonliberty blog is a nice read on doing economic history:

And there is economic history properly done. It tries to answer which theory is relevant to the question asked. The purpose of economic history is thus to find which theories matter the most.

Take the case, again, of asymetric information. The seminal work of Akerlof on the market for lemons made a consistent theory, but subsequent waves of research (notably my favorite here by Eric Bond) have showed that the stylized predictions of this theory rarely materialize. Why? Because the theory of signaling suggests that individuals will find ways to invest in a “signal” to solve the problem. These are two competing theories (signaling versus asymetric information) and one seems to win over the other.  An economic historian tries to sort out what mattered to a particular event.

Now, take these last few paragraphs and drop the words “economic historians” and replace them by “economists”.  I believe that no economist would disagree with the definition of the tasks of the economist that I offered. So why would an economic historian be different? Everything that has happened is history and everything question with regards to it must be answered through sifting for the theories that is relevant to the event studied (under the constraint that the theory be consistent). Every economist is an economic historian.

As such, the economic historian/economist must use advanced tools related to econometrics: synthetic controls, instrumental variables, proper identification strategies, vector auto-regressions, cointegration, variance analysis and everything you can think of. He needs to do so in order to answer the question he tries to answer. The only difference with the economic historian is that he looks further back in the past.

The problem with this systematic approach is the efforts needed by practitioners.  There is a need to understand – intuitively – a wide body of literature on price theory, statistical theories and tools, accounting (for understanding national accounts) and political economy. This takes many years of training and I can take my case as an example. I force myself to read one scientific article that is outside my main fields of interest every week in order to create a mental repository of theoretical insights I can exploit. Since I entered university in 2006, I have been forcing myself to read theoretical books that were on the margin of my comfort zone. For example, University Economics by Allen and Alchian was one of my favorite discoveries as it introduced me to the UCLA approach to price theory. It changed my way of understanding firms and the decisions they made. Then reading some works on Keynesian theory (I will confess that I have never been able to finish the General Theory) which made me more respectful of some core insights of that body of literature. In the process of reading those, I created lists of theoretical key points like one would accumulate kitchen equipment.

This takes a lot of time, patience and modesty towards one’s accumulated stock of knowledge. But these theories never meant anything to me without any application to deeper questions. After all, debating about the theory of price stickiness without actually asking if it mattered is akin to debating with theologians about the gender of angels (I vote that they are angels and since these are fictitious, I don’t give a flying hoot’nanny). This is because I really buy in the claim made by Douglass North that theory is brought to life by history (and that history is explained by theory).


How Hawaii broke up from the US monetary union…(Why there is hardly any discussion on break up of Indo-Pak monetary union?)

May 1, 2017

Brilliant JP Koning has another superb post. He has a knack for drawing our attention to episodes from monetary history on which most of us are just clueless. Blame it on the teaching of economics which lays far more importance on theories and methods than learning about the subject from narration of historical events.

He points how Hawaii exited from US monetary  Union during the 1942 Pearl Harbour attacks: has interesting lessons for the Euro break-up:


As developing world aspires to become the developed US, the developed US is becoming like a developing country..

April 26, 2017

Prof Peter Temin of MIT who is a distinguished economic historian warns about decline of US. He actually goes a step further and says US has descended into a developing economy. He has recently written a book called The Vanishing Middle Class.

He actually says America is no more one country but divided into two parts. One part keeps growing and other keeps declining. The explanation is quite similar to India vs Bharat:


The ancient seaports of India which once thirived…

April 24, 2017

S.Muthiah has a fascinating article which once again shows how India was one of the trading powers till it got lost.

The author points to old names of Indian ports which are a pale shadow of their past: