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

Trade and travel in the time of epidemics

May 26, 2020

Hans-Joachim Voth in this voxeu piece says we need to think about trade and travel differently for goods and people.

Goods carry little diseases whereas people do:


Understanding the policy choices: Saving Lives vs Saving Economy

May 26, 2020

Frederic Boissay, Daniel Rees and Phurichai Rungcharoenkitkul of BIS in this research:


Rakesh Mohan 2006 Speech on Avian Influenza Pandemic: Remains relevant to fighting the crisis today

May 26, 2020

Came across this 2006 speech by Rakesh Mohan, who was then Deputy Governor at RBI.

He outlined what to expect in case there is an outbreak of large scale pandemic :


The vanishing interest income of Chinese banks as an indicator of loan quality problems

May 26, 2020

Karlo Kauko of Bank of Finland in this voxeu research:

Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?

May 25, 2020

Robert Hall and Marianna Kudlyak in this new NBER paper:

It is a remarkable fact about the historical US business cycle that, after unemployment reached its peak in a recession, and a recovery began, the annual reduction in the unemployment rate was stable at around 0.55 percentage points per year. The economy seems to have had an irresistible force toward restoring full employment. There was high variation in monetary and fiscal policy, and in productivity and labor-force growth, but little variation in the rate of decline of unemployment. We explore models of the labor market’s self-recovery that imply gradual working off of unemployment following a recession shock. These models explain why the recovery of market-wide unemployment is so much slower than the rate at which individual unemployed workers find new jobs.

The reasons include the fact that the path that individual job-losers follow back to stable employment often includes several brief interim jobs, sometimes separated by time out of the labor force. We show that the evolution of the labor market involves more than the direct effect of persistent unemployment of job-losers from the recession shock—unemployment during the recovery is elevated for people who did not lose jobs during the recession.


RIP Alberto Alesina and Oliver Williamson: Taking political and economic frictions seriously

May 25, 2020

2020 roars and keeps bringing bad news.

Economists Oliver Williamson and Alberto Alesina passed away last week.

A Fine Theorem Blog pays a tribute:

Very sad news this week for the economics community: both Oliver Williamson and Alberto Alesina have passed away. Williamson has been in poor health for some time, but Alesina’s death is a greater shock: he apparently had a heart attack while on a hike with his wife, at the young age of 63. While one is most famous for the microeconomics of the firm, and the other for political economy, there is in fact a tight link between their research agendas. They have attempted to open “black boxes” in economic modeling – about why firms organize the way they do, and the nature of political constraints on economic activity – to clarify otherwise strange differences in how firms and governments behave.


Tryst with destiny, planning and deficit financing

May 23, 2020

My new piece on Moneycontrol:

The media is rife with discussions on whether and how the RBI should monetise the government’s deficits. India is no stranger to deficit financing as its 5-year Plans were based on it, which in turn created several problems for the Indian economy. We explore this long history and also try and answer the questions of today at the end.

Read on for details

Electrifying Rural America: How during Great Depression, communities formed cooperatives to bring electricity to rural areas

May 22, 2020

Super article by Tim Sablik of Richmond Fed. He narrates how US initiated its rural electrification program during Great Depression. As they say don’t let a crisis go waste.


Burned by leverage? Flows and fragility in bond mutual funds

May 21, 2020

Luis Molestina Vivar, Michael Wedow and Christian Weistroffer of ECB in this WP:

Does leverage drive investor flows in bond mutual funds? Leverage can increase fund returns in good times, but it can also magnify investors’ losses and their response to bad performance. We study bond fund flows to provide new evidence for the link between mutual fund leverage and financial fragility. We find that outflows are greater in leveraged funds during stressed periods and after bad performance, compared with unleveraged funds. We provide supporting
evidence that leverage exacerbates the negative externality in investors’ redemption decisions.

In this regard, we find that fund managers in leveraged funds react more procyclically to net outflows compared with fund managers in unleveraged funds. Such procyclical security sales in leveraged funds may increase investors’ first-mover advantages and their response to bad performance. These findings suggest that leverage amplifies fragility in the bond mutual fund sector.

Applies to the crisis in India’s bond MFs as well.

In crisis, we pray: Religiosity and the Covid-19 pandemic

May 21, 2020

Jeanet Sinding Bentzen of University of Copenhagen in this paper:

In times of crisis, humans have a tendency to turn to religion for comfort and explanation. The 2020 COVID-19 pandemic is no exception. Using daily data on Google searches for 95 countries, this research demonstrates that the COVID-19 crisis has increased Google searches for prayer (relative to all Google searches) to the highest level ever recorded. More than half of the world population had prayed to end the coronavirus. The rise amounts to 50% of the previous level of prayer searches or a quarter of the fall in Google searches for flights,  which dropped dramatically due to the closure of most international air transport. Prayer searches rose at all levels of income, inequality, and insecurity, but not for the 10% least religious countries. The increase is not merely a substitute for services in the physical churches that closed down to limit the spread of the virus. Instead, the rise is due to an intensified demand for religion:

We pray to cope with adversity.


The drivers of cyber risk

May 21, 2020

Iñaki Aldasoro, Leonardo Gambacorta, Paolo Giudici and Thomas Leach of BIS in this research:

Cyber incidents are becoming more sophisticated and their costs difficult to quantify. Using a unique database of more than 100,000 cyber events across sectors, we document the characteristics of cyber incidents. Cyber costs are higher for larger firms and for incidents that impact several organisations simultaneously. The financial sector is exposed to a larger number of cyber attacks but suffers lower costs, on average, thanks to proportionately greater investment in information technology (IT) security. The use of cloud services is associated with lower costs, especially when cyber incidents are relatively small. As cloud providers become systemically important, cloud dependence is likely to increase tail risks. Crypto-related activities, which are largely unregulated, are particularly vulnerable to cyber attacks.


17 May 2020: Bank for International Settlements turns 90!

May 21, 2020

BIS turned 90 recently.

In this podcast, Piet Clement explains the origins of the BIS and the roles it has played since opening on 17 May 1930.

Historical city travel guide: Nineveh, 7th century BC

May 19, 2020

British museum curator Gareth Brereton takes us through the Assyrian capital city of Nineveh:

The city of Nineveh has recently undergone extensive development to become the new capital of the mighty Assyrian empire. It is now a vast metropolis surrounded by massive walls some 12 kilometres in length that encompass an area of 750 hectares (7.5km2) in size. While official statistics on the population of Nineveh are not available, it reportedly takes three days to cross the city.

This cosmopolitan city is located on the eastern bank of the River Tigris at the intersection of the road which connects the highlands of the north with the prosperous lands of Babylonia and Chaldea in the south.

A veritable paradise on earth, the fertile lands surrounding Nineveh are perfect for growing the huge volumes of staple crops such as wheat and barley needed to feed the population of this colossal city. Benefitting from plentiful rainfall, the city is also situated where the River Khosr meets the River Tigris, which guarantees an abundant supply of water. A monumental aqueduct brings water over a vast distance to feed the city’s network of canals. Upstream from the city you will find orchards planted with vines, fruit trees and olive groves.

When to visit

The summer months in Assyria are ferociously hot and are best avoided. Winters are often very wet and the city is transformed into a quagmire. The best times to visit are autumn and spring, when the city has warm days with cool mornings and evenings. 

Getting there

By river

Travelling from the north, the city can be easily reached via the River Tigris using the quppu ferry service, a local round-boat woven from bundles of reeds and waterproofed with bitumen. If travelling by river from the south expect a longer journey as you sail against the flow of the river. Most quppus dock in the city quay.


Thanks to the Assyria royal road network, travelling to the city on donkey or mule is quick and convenient. Major routes include the north-south road from the foothills of the Taurus Mountains down to Babylonia, and the east-west road from the Zagros Mountains to the Levantine coast. Accommodation and food stalls are plentiful along the major routes.



The need to issue long-dated gilts

May 19, 2020

Charles Goodhart and Duncan Needham in this voxeu piece:

A charter city finally in Honduras?

May 19, 2020

Few years ago, Paul Romer had argued the need to build charter cities. He even got permission to build one in Honduras but was later denied.

Tyler Cowen informs that Honduras has once again given a green signal to the project:

Prospera, Honduras just launched on the island of Roatan. It is a ZEDE (Zona de Empleo y Desarollo Economico), the legacy of Paul Romer’s time in Honduras promoting charter cities. It has substantial autonomy, different taxes, different courts, different labor law, and more. It is one of the most innovative jurisdictions in the world.

First, a bit of history. The ZEDE legislation was passed in 2013. It allows for the creation of a special jurisdiction with an almost unprecedented amount of autonomy. The only recent comparison is the Dubai International Financial Center, which, as the name suggests, focuses exclusively on finance. The ZEDE legislation allows for different labor law, environmental law, business registration, dispute resolution, and more. It is more analogous to Hong Kong, or at least the Hong Kong ideal, of one country, two systems.

In 2013 and 2014 rumors swirled about ZEDE projects, including a port in the Gulf of Fonseca, but nothing materialized. I even moved to Honduras in 2014, at the time the murder capital of the world, to be closer to the action. As late as 2017, the Honduran government was saying projects were about to begin.

The ZEDE legislation is the successor to the RED (Regiones Especiales de Desarrollo) legislation, which Romer helped introduce to build charter cities. Romer had a falling out with the Honduran government in 2012. Shortly after his departure, the RED legislation was declared unconstitutional. The ZEDE legislation was passed to address the constitutional shortcomings of the RED legislation, though it also benefitted from seeing the Supreme Court judges who ruled against the RED legislation fired. To be fair, the government claims they were fired for a ruling on a police brutality case, which I am wont to believe. If there was sufficient government support behind ZEDEs to fire Supreme Court justices, it would not have taken seven years for the first ZEDE to be launched.

I worked with much of the Prospera team under the previous incarnation, NeWAY Capital (I’m not sure of the formal relationship between the two). I left around the time they pivoted to Honduras, 2.5 years ago. I was skeptical, as Honduras was the place projects went to die. Years had gone by without projects gaining meaningful traction and I expected them to run out of funding before launching. I’m happy to have been proven wrong.

Congratulations to Erick Brimen and the team. It is a lot of work to create a new jurisdiction, especially one as innovative as Prospera. The Charter Cities Institute has two team members spending approximately two thirds of their time on developing a “Governance Handbook,” a guide to the governance of a new jurisdiction. It will likely take about 9 months to complete, and that is just for the handbook, not implementation…

Residency costs $1300 annually, unless you’re Honduran, in which case it costs $260. Becoming a resident also requires signing an “Agreement of Coexistence,” a legally binding contract between Prospera and the resident. Prospera, therefore, cannot change the terms without exposing itself to legal liability. Most governments have sovereign immunity, this goes a step beyond removing that, with a contract that clearly defines the rights and obligations on both sides.

After signing the Agreement of Coexistence, all residents are required to buy general liability insurance which will ensure themselves against both civil and criminal liability. General liability insurance, as well as criminal liability insurance, has been proposed by economist Robin Hanson, among others


What AIDS taught us about fighting pandemics: Don’t live in denial..

May 19, 2020

William A. Haseltine, infectious disease expert, in this Proj Synd piece:

After HIV/AIDS, SARS, MERS, and other recent epidemics, periods of heightened awareness and important scientific research have given way to complacency and reduced funding. If the response to COVID-19 follows a similar path, we will have only ourselves to blame when – not if – an even more lethal biological threat emerges.

AS I argued earlier, Hubris, Luck and Ignorance explains much of our lack of preparedness for each crisis.

The Impact of Interwar Protection: Evidence from India

May 18, 2020

Vellore Arthi, Markus Lampe, Ashwin R Nair and Kevin Hjortshøj O’Rourke in this NBER paper:

Research on the quantitative impact of interwar protection on trade flows remains scarce, and much of it has concluded that the impact was surprisingly small. In this paper we ask: Did Indian interwar protection hurt UK manufacturers, by raising tariffs on manufactured imports? Or did it favour UK interests, by discriminating against “foreign” (i.e. non- British) producers?

We answer this question by quantifying the impact of trade policy on the value and composition of Indian imports, using novel disaggregated data on both trade policies and imports for 114 commodity categories coming from 42 countries.

Indian trade elasticities were generally larger than those in the United Kingdom at the same time.

We find that even though Indian protection lowered total imports, it substantially boosted imports from the UK. Trade policy had a big impact on trade flows.


Measuring excess mortality: England is the European outlier in the Covid-19 pandemic

May 18, 2020

Janine Aron and John Muellbauer in this voxeu research:

Using prospect theory to explain 22 stock market anomalies

May 18, 2020

Nicholas Barberis, Lawrence Jin and Baolian Wang in this new NBER paper:

We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 22 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors’ prior gains and losses, and makes quantitative predictions about an asset’s average return based on empirical estimates of its volatility, skewness, and past capital gain. We find that the model is helpful for thinking about a majority of the 22 anomalies.


Designing fiscal policy support by segregating districts into vulnerability and resilience metrics

May 18, 2020

Good Friend, Prof Vipul Mathur of IIM Calcutta has been busy trying to find ways to make our pandemic policy data driven.

In an earlier paper he divided India’s districts based on economic contact intensity to argue which districts should remain in lockdown and which should be opened. We soon saw how everyone including policymakers were talking about red, orange and green zones.

In a second paper, he has divided households of districts into vulnerable and resilient categories. The fiscal support should go to the regions which are more vulnerable and less resilient.

In this work I try to understand the micro-implications of the COVID shock at the level of households. Using CMIE database, I create a metric of vulnerability and resilience of households, by analyzing the (wage) income, (consumption) expenditure, (liquid) assets and (short-term) liabilities of the households. Vulnerability can be interpreted as the extent of financial exposure to an adverse shock and Resilience is the capacity of the household to weather such an adverse shock.

The analysis suggests that around 14.4% of the households are the most robust with low-mid vulnerability and mid-high resilience. On the other hand, about 48.4% of the households are the most fragile, falling in high-mid vulnerability region with low-mid resilience. About 37.2% households fall in between the two extremes and have a mixed exposure with muddled resilience. I also consider two hypothetical scenarios, where I consider an aggregate shock to employment and prices to determine the impact at the margin. The analysis suggest that upon a 10% and 25% shock, approximately 23 and 75 million individuals may be find themselves at the margin of financial distress, respectively.

Policy Implication: Fiscal transfers are a scarce resource. This study attempts to inform the policy on fiscal transfers by proposing a way to fine-tune both the quantum and the sequence of such transfers by identifying and segregating the households in the two dimensional array of vulnerability and resilience. First, it charters out a possible sequencing path for fiscal transfers. For instance, in the order of sequence, the fiscal support will be most productive for households which rank the highest on vulnerability and lowest on resilience. Second, depending upon the vulnerability and resilience of a household, the optimal quantum of fiscal support needed will vary across households. To be most effective, the amount of household level fiscal transfers could be made conditional on the extent of exposure and capacity of a household to the economic shock

He has written an article on Moneycontrol explaining the paper.

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