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

Cutting hours of work to fight recessions: evidence from France

July 17, 2018

Pierre Cahuc, Francis Kramarz and Sandra Nevoux provide evidence that cutting hours of work helped firms during the 2008 crisis in France.

Short-time work, also called short-time compensation, is a public programme intended to preserve jobs at firms or establishments experiencing temporarily low revenues, by providing wage support to the employees the firm wishes to keep with reduced work hours. The 2008–2009 Great Recession gave OECD countries the opportunity to expand on such short-time work programmes – whereas the OECD average take-up rate was less than 0.2% in the fourth quarter of 2007, just before the Recession, it increased six-fold, to 1.3%, in the fourth quarter of 2009 (Hijzen and Venn 2011, Hizjen and Martin 2013). However, despite short-time work increasing in popularity, even in recent academic work, very little is known about its causal impact on employment.   

Our recent paper helps to fill this gap by taking advantage of the massive expansion of the French short-time work programme during the Great Recession (Cahunc et al. 2018). From the end of 2008, the Ministry of Labour not only expanded the policy’s budget, but also wrote circulars and directives, in order to promote the use of short-time work as rapidly as possible. As a result, the share of employees on short-time work increased from 0.3%, in 2007 just before the Great Recession, to 4% in 2009, the year of programme expansion. Subsidies per non-worked hour and subsidies per employee were respectively multiplied by 1.4 and by 2.5 between these two dates. The cost of the policy trebled, multiplied by a factor of 20. By precisely analysing the programme, both in its principles and in its practical implementation, we show the extent to which, and explain why, short-time work works – both from a theoretical and an empirical perspective. 

Even in general times, one wonders why should one work more hours than required? This is particularly true in most Indian offices where most work late just to impress bosses who also have this habit of staying late to show they have been working hard. I mean if one can’t finish work in 8 hours it is unlikely he/she will finish it in few extra hours.

In most types of labour, even this 8 hour work schedule is too long. One could cut this and let people do something more valuable than mere sitting in office.


Should central banks get a target to raise productivity?

July 12, 2018

There have been talks in UK to give Bank of England a productivity target

Croaking Cassandra blog points to a survey of economists where all have rejected this idea. The key is not the rejection but to realise that monetary policy and banking regulation are limited in scope.


A Note on Comparative Advantage: It Changes Frequently

July 12, 2018

Donald J. Boudreaux in this post:

Suppose that Jane started off her adult life as plain. She possessed neither unusual skills nor impressive learning. On the day that she turned 18 years old, her comparative advantage was as working as a motel maid, which she commenced to do.

On Jane’s 19th birthday she decided that she no longer wished to work as a motel maid, so she enrolled in college. After sixteen years of determined application of her mind and energies—and finances—Jane became a board-certified cardiovascular surgeon, boasting a medical degree from Harvard’s medical school.

Jane consciously strove to change her comparative advantage. And she succeeded. Her comparative advantage today no longer is found in cleaning bathrooms and changing bed linens; it is in treating people with cardiovascular illnesses. Obviously, her pay today is far higher than it was sixteen years earlier. But her becoming a cardiovascular surgeon caused other cardiovascular surgeons to earn less than they would have had Jane remained a motel maid.

Does anyone think that what Jane has done is unusual? Is there anyone who supposes that Jane’s successful effort to improve her skills violates some foundational assumptions or laws of economics? Would anyone claim that the theory that explains why the 18-year-old Jane found it advantageous to specialize at being a motel maid, and why motel owners found it advantageous to pay her to perform those maid services, cannot explain why the 35-year-old Jane finds it advantageous to specialize at being a cardiovascular surgeon, and why hospitals find it advantageous to pay her to perform those health-care services?

Of course not.

Further he argues even if governments intervene and create so called champions, principles of comparative advantage apply…

How your flip-flops reveal the dark side of globalisation?

July 11, 2018

Caroline Knowles Professor of Sociology at Univ of London in this piece tracks the making of flip-flops:


History revisiting: Kazakhstan gearing upto play a major role in New Silk Route just as it played in the Old Route

July 5, 2018

Interesting bit of news on how history is being played again with the One Silk One Road project New Silk Route) .  Kazakhstan which played a key role in the Old route is again getting ready to play a key role in the New route.

It has set up a financial hub which is financed by EBRD:


It’s when markets are running hot that flags need raising

June 29, 2018

Agustin Cartens in this speech:

At first glance, the skies above financial markets look sunny, notably for credit markets. Term and credit spreads as well as volatility are very low by historical standards, while valuation and asset prices are high. But, as we argue in our just-released BIS Annual Economic Report, clouds are gathering on the horizon.

Indeed, showers have already dampened spirits in some emerging markets. And worse could come if a further rise in the US dollar tightened financial conditions around the world: after all, post-crisis, companies in emerging economies and elsewhere have been all too eager to tap markets, while investors have been all too eager to oblige them.

Will the stresses remain isolated? Or should we be worried about a more intense and widespread build-up of pressure? 

Central banks still find it hard to forecast financial markets, just as meteorologists are not always successful in predicting the weather. At the BIS, we have come to appreciate how unrewarding it can be to flag risks when markets are running hot. Yet that is precisely when risks tend to be highest.

Indeed, our analysis indicates that the risks ahead are material. A decade of unusually low interest rates and large-scale central bank asset purchases may have left many market participants unprepared, and have contributed to a legacy of overblown balance sheets. Financial conditions are easier than before the financial crisis, when many investors, households, corporations and sovereigns were caught out in the rain with no umbrella. And there is no denying that the room for manoeuvre in terms of monetary and fiscal policies is narrower today than at that time.


Reviewing free banking in different US States and lessons for cryptocurrencies

June 29, 2018

Nice article by Helen Fessenden of Richmond Fed.

The idea of an “unregulated” currency, however, isn’t new. Before the Civil War, the United States ran a vast natural experiment by leaving “free banking” to the states, even while other major economies were adopting central banking. From the demise of the Second Bank of the United StatesOffsite in 1836 until the passage of National Banking ActsOffsite of 1863 and 1864, the United States lacked a federal authority to issue and redeem banknotes, act as a fiscal agent for the federal government, or keep banknote issuance in check. Instead, banking was run by the states, and “free banks” could issue their own banknotes. But just how much did this amount to the kind of free-entry, highly decentralized currency competition that some cryptocurrency backers advocate today?

Helen says free banking experiences differed across States. It was successful in New York and New England. This was largely due to the fact that their private notes were backed by safer assets. However, in Michigan, Wisconsin and Illinios free banks suffered as they invested in all kinds of assets. Read the piece for details.

What lessons for cryptos?

What are the lessons from this era? Some banknotes in New York and New England did indeed come closest to fulfilling the functions of money under a regulatory regime, enforced by the government or the private sector. Given that the attraction of cryptocurrencies today lies in the fact that their issuance is not determined by government fiat and that they are not publicly regulated, then, this historical record might give pause to those who see them as a potential substitute for money. The free-banking era also illustrates numerous examples of failures, especially in the Midwest, due to idiosyncratic regulation. This history suggests that effective regulation should involve a way to ensure that a new currency enjoys stable liquidity. This was a clear challenge for some states before the Civil War and for cryptocurrencies today.

Policymakers have recently pointed to some of these fea­tures as constraints on cryptocurrencies’ utility in the long run. Fed Vice Chairman for Supervision Randal Quarles noted in a speech last NovemberOffsite that among the dan­gers posed by cryptocurrencies is that during crises, “the demand for liquidity can increase significantly, including the demand for the central asset used in settling payments.”

“Even private-sector banks and certainly nonbanks can have a hard time meeting large-scale demands for extra liquidity,” he added. “Without the backing of a central bank asset and institutional support, it is not clear how a private digital currency at the center of a large-scale pay­ment system would behave … in times of stress.”

In a speech last MarchOffsite, Bank of England Gov. Mark Carney also underscored this point in a broader critique of cryptocurrencies, charging that they are “failing” as money for now. He warned that the inherently “fixed supply rules” of these currencies would run the risk of repeating another, less successful, historical experiment. “[R]ecreating a virtual global gold standard,” he said, “would be a criminal act of monetary amnesia.”


Preparing for a world without Libor

June 28, 2018

William Dudley, Former President of NY Fed in this important speech says how we need to prepare for a world without Libor.

The reference rates are important but Libor has serious defects:


Has inflation targeting become less credible?

June 28, 2018

New paper by by  Nathan Sussman and Osnat Zohar of BIS.

BIS has also adopted a new way to summarise its research papers:


Since the 2008 financial crisis, oil prices have become highly correlated with inflation expectations for the medium term. This occurred in several countries, implying a global phenomenon. To trace its origins, we decompose oil prices into two factors: one capturing global aggregate demand and the second capturing oil-specific elements. Our measure of global demand is based on the strong co-movement of commodity prices. The oil-specific elements include OPEC’s strategic behavior and shocks to oil demand caused by the weather. We use this decomposition to explain changes in global inflation expectations.


Central bankers were concerned that the increased correlation between inflation expectations and oil prices might indicate an un-anchoring of expectations. If this were the case, the credibility of inflation targeting might be declining. We test for un-anchoring using a framework based on a global Phillips curve. This framework allows us to trace the origins of the change that occurred after the global crisis.


We find that global aggregate demand has affected inflation expectations more since the crisis than it did in the past. Meanwhile, the effect of oil-specific factors remained low and stable. Since oil prices convey information about aggregate demand, their correlation with expectations has increased. Does this change indicate that expectations became un-anchored? Our model for global expectations suggests otherwise. We find that, after the crisis, inflation itself was perceived to react more strongly to aggregate demand. Rational agents thus adjusted their expectations more strongly when aggregate conditions changed. It appears that inflation targeting has remained credible.

Hmm.. Much simpler to figure research this way..

Have economists changed since the 2008 crash?

June 26, 2018

Cédric Durand Prof of economics at the University of Paris says some progress has been made but long way to go: 

Economists are not innocent people. The 2007-08 financial crisis that almost sent the world economy into a great depression was, to a large extent, a consequence of the designs dreamt up by leading economists. This raises three concerns about the economics profession. The first is a basic moral failure resulting from a lack of integrity in some of its prominent representatives; the second is the idiotic collective fascination with the technicalities of the discipline, reinforced by an inclination for group-thinking; the third is a deeper, intellectual challenge that questions the very role economics ought to play in society.

In 1971, neoliberal icon Milton Friedman was paid by the Chicago Mercantile Exchange for a report that decisively tilted the balance in favour of opening a market that allowed betting on the variation of currency values – a kind of financial product that was illegal under the strict regulation imposed in the post-war era. Ever since, studies by economists have played a legitimating role in each phase of finance’s liberalization. This close connection was not without its ethical problems. Take the lesson learned from Charles Ferguson’s documentary Inside Job (2010). This notes that Larry Summers – former Harvard president, Treasury Secretary in the Clinton administration and an adviser to President Obama – untiringly defended financial liberalization throughout the 2000s, a period in which his ties with the industry brought him more than $20 million. In the wake of the financial crisis, a study of 19 eminent financial economic specialists showed that, in addition to their university posts, most had affiliations with the private sector that were not publicly disclosed.

On this front, some progress has been made. The American Economic Association has set up a new disclosure policy stating that authors submitting papers to academic journals should identify each interested party from whom they have received at least $10,000 in the past three years. Moreover, it calls for disclosure during media appearances. Professor Gerald Epstein, who was at the forefront of this battle, calls the change ‘a very big step forward’. He particularly stresses that disclosure in non-academic work could help ‘set norms of behavior that colleagues, the press, students and citizens can help make economists accountable to’.

Another, more mildly positive, evolution concerns the content of economic curriculain universities. Academic thought influences political decisions; or, as JM Keynes memorably put it: ‘Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.’ In the realm of university teaching there has, during the past few decades, been a growing fascination with the technical sophistication of analyzing abstract dynamics of markets at the expense of thinking about economic history and institutions. This created an intellectual climate favorable to opening a Pandora’s box of financial ‘innovation’ during the neoliberal era. It supported the comforting view that by spreading the risk, complex products – like the subprime mortgages that were sold to low-income Americans and then bundled up to be sold to institutional investors like pensions funds – were reducing financial instability. Of course, as it should be clear now, it was the exact opposite.

In 2014, the International Student Initiative for Pluralism in Economics sounded the alarm: ‘A lack of intellectual diversity,’ they claimed, ‘does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century – from financial stability, to food security and climate change.’ They call for bringing the real world into the classroom through paying greater attention to economic history and developing a deeper dialogue with other social sciences. They also demand a greater diversity of theoretical perspectives by adding post-Keynesian, ecological, feminist, Marxist and other economic traditions to the commonly taught ‘neoclassical’ approach. Thanks to student pressure, some openings have been made. For example, CORE, a new open-access online syllabus funded by the Institute for New Economic Thinking, is introducing some elements of intellectual variety into the economics departments of tens of leading universities.


More in the piece..

Argentina signs up for another IMF bailout..

June 22, 2018

Argentina’s fortunes in football and economy go parallel. In 2002 , the country was facing huge crisis and expectations were on the Football team to bring some hope and respite. But a world beating team crashed out in Round one itself.

It is staring at a similar position now with the football team looking to crash after round one and the economy has already crashed. The country has again signed up for an IMF bailout. Christine Lagarde addressed the media on the plan:


Eurogroup completes its 20th anniversary…

June 21, 2018

Amidst all the European doom, Eurogroup completes its 20 years today.

Eurogroup  is the group of euro area finance ministers and they released a statement on the anniversary:


Women’s unpaid work must be included in GDP calculations: lessons from history

June 21, 2018

Prof Luke Messac has this Interesting bit of history on GDP calculations.

There was a researcher names Phyllis Deane who had pointed to the limitations of GDP in 1940s itself:


Solving rising indebtedness: learning from debt jubilees of the past…

June 19, 2018

Charles Goodhart and Michael Hudson in their research argue to learn lessons from debt jubilees:

The increasing income and wealth inequalities within countries is one of today’s great social concerns. This column describes how the tendency towards increasing indebtedness in much earlier societies was held in check by debt-cancellation Jubilees, and discusses ways to deal with today’s debt overhang and accompanying wealth inequalities. The funding of a modern Jubilee could come mostly, perhaps entirely, from a land/or property tax.

These debt jubilees were held for multiple reasons. Earlier, the governments/rulers were the main creditors and waived off debt owed to them:


Building a better economics textbook to suit Indian context..

June 18, 2018

The recent EPW edition has series of papers discussing the Core textbook.

The paper by Arjun Jayadev and AMit Bhasole of Azim Premji University speaks about the need to build a textbook to address Indian context:

Reflecting on their experience of using The Economy to teach undergraduate students in India, two teachers of economics discuss the need for a version of the alternative textbook that addresses the needs of students who seek to understand the Indian economy. The possibilities of such a version of the textbook are discussed.

They first highlight how mainstream textbooks are inadequate to understand Indian context:


Why German football team has players mainly from west part of Germany: Capitalist vs. communist football

June 15, 2018

Interesting piece by Prof Per Urlaub.

Football in East Germany was visible till unification. Post-unification, there are hardly any players from East. Why?

What happened? Why – with the exception of Kroos – are none of the other players on German’s current national squad from the Eastern part of the country?The answer lies in economics.

After the fall of the Berlin Wall, the East’s best players immediately left to join the clubs in the West that could pay them higher salaries. Meanwhile, like the economies of other former Soviet countries transitioning from communism to capitalism, the rapid reorganization of East Germany’s economy led to the collapse of entire industries.

East German clubs felt the pain. Not a single club from the East managed to establish a permanent presence in the Bundesliga, Germany’s top professional league. No longer receiving government funding – and unable to attract the steady flow of cash from television deals and corporate sponsorships like their Western counterparts – the clubs from the East were forced to radically downsized their youth academies.

Kroos, of course, is the outlier. But he owes little to East Germany’s soccer clubs.

Instead, his father, Roland Kroos, was a soccer coach. Roland not only identified his son’s athletic potential, but he was also able to develop his boy’s skills. When Kroos was a teenager, his father placed his son into the youth academy of one of Europe’s most successful soccer empires, Bayern Munich. It was in the West where Toni – dubbed by his father the “family project” – matured as a player, before moving on to Real Madrid, where he plays when he’s not playing for the German national team.

Today, the West’s dominance in German soccer symbolizes the country’s economic divisions.

Like in many other industries, West German soccer had a head start after the unification. The geographic imbalance in German soccer is emblematic of the unacknowledged economic inequalities between East and West that persist to this day.


Getting to Denmark: The role of elites in development

June 15, 2018

A group of scholars (Peter Jensen, Markus Lampe, Paul Sharp, Christian Skovsgaard) try figure the history behind the Dane model. The picture is hardly as rosy as it sounds.

There is this belief that Denmark grew via cooperating peasants. It misses the role of elites in the process:

How Keynes took over the world (and Robertson lost it)?

June 14, 2018

Murray Rothbard in this long piece:

Keynes used tactics in the selling of The Genera Theory other than reliance on his charisma and on systematic deception. He curried favor with his students by praising them extravagantly, and he set them deliberately against non-Keynesians on the Cambridge faculty by ridiculing his colleagues in front of these students and by encouraging them to harass his faculty colleagues. For example, Keynes incited his students with particular viciousness against Dennis Robertson, his former close friend.

As Keynes knew all too well, Robertson was painfully and extraordinarily shy, even to the point of communicating with his faithful, longtime secretary, whose office was next to his own, only by written memoranda. Robertson’s lectures were completely written out in advance, and because of his shyness he refused to answer any questions or engage in any discussion with either his students or his colleagues. And so it was a particularly diabolic torture for Keynes’s radical disciples, led by Joan Robinson and Richard Kahn, to have baited and taunted Robertson, harassing him with spiteful questions and challenging him to debate.


The Many, Diverse ‘Main Points’ of Adam Smith’s the Wealth of Nations

June 14, 2018

Prof Barry Weingast of Stanford Univ in this paper:

The purpose of this short paper is to demonstrate that in the modern era Adam Smith scholars make a surprising variety of claims about the “main point” of the Wealth of Nations. In these notes, I collect a range of statements asserting the main point and arrange them by categories. Most statements focus on economic topics (60%), though some entries clearly fall under politics (40%). Nearly half of the statements in the literature argue that Wealth of Nations’s main purpose was to provide a theory of economic development. Other categories include the idea that self-interested individuals can support gains from cooperation; ideas about justice, morals, and liberty; and finally, contributions to economic theory.

The diversity of points is striking, indicating not only the work’s richness, but the many different topics to which it made substantive contributions. An obvious interpretation of these results is that no single, over-arching theme can be said to be the purpose or main point of the Wealth of Nations. This work made so many fundamental or foundational contributions to economics, government, history, law, politics, sociology, and normative political theory that it is difficult to say that any one contribution dominates.

It is a nice summary of different perspectives on Adam Smith’s work.

What did Max Weber mean by the ‘spirit’ of capitalism?

June 13, 2018

Prof Peter Ghosh of University of Oxford argues that we have mostly misunderstood Weber:

Max Weber’s famous text The Protestant Ethic and the Spirit of Capitalism(1905) is surely one of the most misunderstood of all the canonical works regularly taught, mangled and revered in universities across the globe. This is not to say that teachers and students are stupid, but that this is an exceptionally compact text that ranges across a very broad subject area, written by an out-and-out intellectual at the top of his game. He would have been dumb­founded to find that it was being used as an elementary introduction to sociology for undergraduate students, or even schoolchildren.

We use the word ‘capitalism’ today as if its meaning were self-evident, or else as if it came from Marx, but this casualness must be set aside. ‘Capitalism’ was Weber’s own word and he defined it as he saw fit. Its most general meaning was quite simply modernity itself: capitalism was ‘the most fateful power in our modern life’. More specifically, it controlled and generated ‘modern Kultur’, the code of values by which people lived in the 20th-century West, and now live, we may add, in much of the 21st-century globe. So the ‘spirit’ of capitalism is also an ‘ethic’, though no doubt the title would have sounded a bit flat if it had been called The Protestant Ethic and the Ethic of Capitalism.

This modern ‘ethic’ or code of values was unlike any other that had gone before. Weber supposed that all previous ethics – that is, socially accepted codes of behaviour rather than the more abstract propositions made by theologians and philosophers – were religious. Religions supplied clear messages about how to behave in society in straightforward human terms, messages that were taken to be moral absolutes binding on all people……

The ethic or code that dominated public life in the modern world was very different. Above all it was impersonal rather than personal: by Weber’s day, agreement on what was right and wrong for the individual was breaking down. The truths of religion – the basis of ethics – were now contested, and other time-honoured norms – such as those pertaining to sexuality, marriage and beauty – were also breaking down. (Here is a blast from the past: who today would think to uphold a binding idea of beauty?) Values were increasingly the property of the individual, not society. So instead of humanly warm contact, based on a shared, intuitively obvious understanding of right and wrong, public behaviour was cool, reserved, hard and sober, governed by strict personal self-control. Correct behaviour lay in the observance of correct procedures. Most obviously, it obeyed the letter of the law (for who could say what its spirit was?) and it was rational. It was logical, consistent, and coherent; or else it obeyed unquestioned modern realities such as the power of numbers, market forces and technology.


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