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

Federal Reserve undergoing changes in banking and monetary policy matters…

November 16, 2018

Several changes underway at Federal Reserve.



Paradise lost? A brief history of DSGE macroeconomics

November 14, 2018

Gulan Adam of Bank of Finland provides a brief overview in this paper:

Since the Global Financial Crisis, academic economists and policymakers have had to deal with uncomfortable questions about the quality of their models and the state of macroeconomics as a profession. This note offers a summary of this discussion, focusing on the Dynamic Stochastic General Equilibrium (DSGE) framework and its underpinnings. This class of models reflects both theoretical advances and perennial modeling challenges.

While DSGE modeling developed in times of scarce micro data and limited computational resources, it has much room for improvement given progress along these dimensions and advances in other branches of economics. Key tasks on the to-do-list for model improvement include the modeling on the financial sector, departures from the representative agent and rationality, as well as clarification of the empirical relevance of the Lucas critique. The framework is likely to remain a major research and policy tool, although its limitations call for greater robustness, validation and open recognition of uncertainty in drawing real-life quantitative conclusions.

We need more and more of such papers to help demystify the acronym DSGE…

50 years of Gunnar Myrdal’s Asian Drama: History of Indian economy since 1968…

November 13, 2018

Swedish economist Gunnar Myrdal published his book – Asian Drama- 50 years ago in 1968.

Prof Kaushik Basu reviews India’s economic history since 1968 in this paper:

This paper is a short history of the Indian economy since 1968. India today is a changed country from what it was half a century ago, when Myrdal published his Asian Drama. The stranglehold of low growth has been broken, its population below the poverty line has fallen markedly, and India has joined the pantheon of major players globally. This paper analyses the economic policies and the politics behind this transformation; and uses that as a backdrop to take
stock of the huge challenges that lie ahead.

Here is another piece from Prof Ravi Kanbur:

100 Years of World War I: When history rhymes

November 12, 2018

Christine Lagarde of IMF on history lessons from World War I:

Mark Twain once said that “History never repeats itself, but it does often rhyme.” As heads of state gather in Paris this week to mark 100 years since the end of World War I, they should listen closely to the echoes of history and avoid replaying the discordant notes of the past.

For centuries, our global economic fortunes have been shaped by the twin forces of technological advancement and global integration. These forces have the prospect to drive prosperity across nations. But if mismanaged, they also have the potential to provoke calamity. World War I is a searing example of everything going wrong.  

The 50 years leading up the to the Great War were a period of remarkable technological advances such as steamships, locomotion, electrification, and telecommunications. It was this period that shaped the contours of our modern world. It was also a period of previously unprecedented global integration—what many refer to as the first era of globalization, where goods, money, and people could move across borders with relatively minimal impediments. Between 1870 and 1913 we saw large gains in exports as a share of GDP in many economies—a sign of increasing openness.  

All of this created great wealth. But it was not distributed evenly or fairly. This was the era of the dark and dangerous factories and the robber barons. It was an era of massively rising inequality. In 1910 in the United Kingdom the top 1% controlled nearly 70% of the nation’s wealth—a disparity never reached before or after.

Times are again similar:


How rising commuting time keeps women away from workforce..

November 12, 2018

Interesting research on lines of Beckerian economics. It is by Francesca Carta and Marta De Philippis of Bank of Italy:


Pink Floyd on government-central banks frictions

November 9, 2018

It is not just India, but we are seeing rising cases of frictions between governments and central banks.

Have reworded the iconic Pink Floyd song “We don’t need no education”.  This is perhaps what central banks could/would like to sing to governments:

We don’t need no intervention
We don’t need no policy control
No dark sarcasm in the boardroom
Government, leave us central banks alone

Hey,  Government, leave us central banks alone  

All in all it’s a another crack in our wall 
(All in all you’re just) another crack in our wall.


Happy to figure what governments would sing in reaction….

Policy dilemmas and the role of the central bank in advising government (Lessons for India?)

November 9, 2018

Karnit Flug, the outgoing Governor of Bank of Israel gave her farewell speech.

In Israel, the Governor plays an official role as an advisor to the government. This often leads to questions over independence:

A natural question that arises in this respect is why at the Central Bank? Should the economic advisor to the government be the Governor of the Central Bank?

This question was debated within the bank of Israel, among some of the people sitting here today. While we were discussing the new Bank of Israel Law, Stan was initially of the view that the role of an economic advisor to the government puts the bank in a constantly contentious position Vis a Vis the government and may undermine the banks’ independence in its core responsibility. I was the Director of the Research Department at that time, and argued in favor of maintaining the role of economic advisor in the law, which was eventually what was decided. Several years later, when I became Governor, I met Stan (in Basel, at a BIS meeting) following one of the heated debates I had with the government, and told him that now I understand and sympathize with his initial view against having the role of the economic advisor. Stan surprised me when he said that looking from the outside, he is even more convinced of the importance of this role of the Bank of Israel.

 This question was also posed to an independent evaluation committee which was invited to evaluate the BOI’s research department back in 2012. In their report, they said, and I quote: “We came to the Bank very skeptical of any central bank having the responsibility of being an advisor, much less the advisor, to the government on economic policy”. Following a thorough discussion with many relevant stakeholders within and outside the bank, they concluded: “Absent fundamental changes in other Israeli institutions, we agree that the Bank must continue to play the critical role of advisor to the government policy”

 Indeed, the argument against the CB’s role in economic policy advice because it enhances the friction between the Bank and the government and thus may undermine the Bank’s independence in its core responsibilities is not unique to the role of economic advisor.  In fact, this debate resembles the discussion regarding the question that is debated extensively among central bankers as to how wide should our responsibilities and mandates be defined. I have heard the argument that in some issues the decisions reflect political priorities as opposed to pure economic welfare maximization decisions, and therefore should be left to the politicians, or that they may undermine the central banks’ credibility or independence. These are valid arguments, and certainly, my tenure as governor has demonstrated that providing a well-grounded position on some sensitive or publically debated policy issues does raise the level of friction with the government.

 However, when we think about designing institutions, we should not think in the abstract, and we never start from scratch. We should take the starting point into account, and asses what is the likelihood that a change will get us closer to some “ideal institutional design” (if such exists). Given that this role has been defined in the original BOI law from 1954 as one of the main responsibilities of the BOI and its Governor, the basic infrastructure of knowledge and highly professional staff, and reputation has been built at the BOI to serve this responsibility. I also believe that the credibility of the central bank is enhanced, not damaged, by the quality research and policy recommendations it provides. In that regard, it may even contribute to the public support of an independent central bank. 

And as to friction between the central bank and the political system, during my term it was in fact most intense around issues related to the core activity of the Bank of Israel in supporting financial stability. The quest for enhancing competition in the provision of financial services, which we all share, led to heated debate as to the scope, the speed and the specifics of the financial sector reform. It centered around our insistence on ensuring that the reform does not undermine financial stability that was sometimes taken for granted by our partners in the design of the reform. In the past, the friction was most intense regarding the disinflation process, and Jacob Frankel who sits here, can certainty testify to that.

So, we’ve had frictions in the past and will probably have them in the future, and we should be able to withstand them. We should provide a quiet, behind closed doors policy advice in some cases, and contribute to a better-informed public debate on key policy questions. I believe that within the current political context, where policies tend, more than in the past, to focus more on short term benefits and ignore longer term risks and costs, it is essential that an independent well regarded institution provides solid policy analysis and advice, and helps explain this to the public.  So, I believe that retaining the economic advisory role by the Central Bank in the 2010 BOI law has served the country well.

Official or non-official, central bankers are advisers to the government. Frictions between central banks and government should be celebrated as it gives different viewpoints. But these frictions are best held behind closed doors as Governor Flug says.

This is how it used to be in India/RBI as well. Reading volumes of RBI History, one goes through several of these frictions. Pity and tragic that these frictions are coming out in open and bit too regularly at that…

Kalecki’s insights on coordinating India’s fiscal and monetary policy (lessons from Pakistan?)

November 6, 2018

Good to read and learn from article which bring a key idea/ideas from past to make better policies of today.

Rathin Roy of NIPFP in this piece brings Kaleckian ideas to improve coordination in our fiscal and monetary policies:


Montagu Norman: learning economic history from his home at St Clere

November 5, 2018

Superb guest post from Prof Barry Eichengreen on Bank of England’s blog.

Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers, Barry Eichengreen from the University of California Berkeley, looks back at Montagu Norman’s time as governor.

Montagu Norman’s aura is palpable at St. Clere. It is said that Norman spent many of his weekends and holidays at his estate in Kent, overseeing improvements and admiring the vistas. His legacy is, if anything, even more prominent at the Bank of England. Norman supervised the design of the present Bank building. His portrait, along with those of the other members of his Court, was displayed on the first-floor landing in the Bank’s main atrium; he is only a handful of governors so honored. The Bank’s recent St. Clere workshop thus provided an opportunity to ponder some of the enduring themes and legacies of Norman’s quarter-century as governor.

It will not surprise the reader that many of these, to my mind, revolve around the decision to return to the gold standard at the prewar parity in 1925 and abandonment of that arrangement in 1931.

Prof Eichngreen lists several lessons to learn from Norman’s tenure and even suggests writing a new biography of the person…

Should a country print its own banknotes or outsource it?

November 2, 2018

JP Koning has a knack for writing amazing pieces on money.

In this new  piece, he looks at business of printing currency. Should one print own currency or outsource it? The history throws all kinds of lessons:


Primer: The Neutral Rate of Interest

November 2, 2018

Dallas Fed President Robert Kaplan writes a primer on neutral rate of interest:

In the September Federal Open Market Committee (FOMC) meeting, the Federal Reserve raised the federal funds rate to a range of 2 to 2.25 percent. In our statement announcing the decision, we ceased to include language that described the current stance of monetary policy as “accommodative.”

I supported the most recent federal funds rate increase. In my recent speeches and essays, I have been arguing that the Federal Reserve should be gradually and patiently raising the federal funds rate until we get into the range of a “neutral stance.” Once we’ve reached that point, I intend to assess the outlook for the U.S. economy and look at a broad range of factors before deciding what further actions, if any, might then be appropriate.

One challenge in moving toward a neutral stance is the inherently imprecise and uncertain nature of estimating what constitutes “neutral.” This judgment is more of an art than a science and involves observing and analyzing a wide variety of factors. The uncertainty of this judgment is complicated by the fact that 2018 U.S. gross domestic product (GDP) growth has been substantially aided by sizable fiscal stimulus, whose impact is likely to fade somewhat in 2019 and further in 2020.

The purpose of this essay is to explore a number of the key issues associated with using the neutral rate concept in formulating monetary policy. In particular, I will discuss several of the challenges associated with estimating this rate, describe limitations on the use of this concept, and explain how it might best be used in debating and determining the appropriate path for the U.S. federal funds rate.

What is neutral rate?


Hunting for a Hot Job in High Tech? Try ‘Digitization Economist’

November 1, 2018

HBSWK reports that Amazon has hired more than 150 PhD economists in last 5 years.

Under chief economist Pat Bajari, Amazon has hired more than 150 PhD economists in five years. He’s also cornered the market on what might be called “rookie economists” just out of school. That crowns Amazon the largest employer of tech economists—with more working full-time than even the largest academic economics department. Amazon is far from alone in this trend.

Some 50 tech companies “have been snapping up economists at a remarkable scale,” says Michael Luca, the Lee J. Styslinger III Associate Professor of Business Administration at Harvard Business School. “All of the big Bay Area tech companies have teams of economists, and lots of the smaller companies are starting to hire handfuls of them.” The list includes Google, Microsoft, Airbnb, Uber, Facebook, and numerous smaller companies.

Tech companies are turning to sharp economic minds to provide their unique lens on business problems like advertising auctions and market design. The accelerating phenomenon has given rise to a new field within economics called the economics of digitization. Research from the field is quickly finding its way into practice, directly through the work of PhD economists, and in the classroom, as HBS and other business schools add more tech-germane courses to their MBA offerings.

What do econs do there?


Trust and ethics in finance and why Friedman’s quote on “…business should only make profits” is misrepresented

November 1, 2018

Andrew Bailey, chief executive of Financial Conduct Authority in this speech speaks about lack of trust and ethics in finance. He reviews the experience since 1930s when the idea of making money at all costs was not there. This has changed overtime:

I want to illustrate this trend of declining trust by spending a little time on the history of senior executive remuneration in the US.

My starting point is the period from the end of the Second World War until at least the early 1970s. What is striking is the absence of emphasis on pay for performance, and the rejection of excessive executive remuneration. At the time, there was a broad cultural aversion to high pay. Fear of moral outrage kept executive salaries in check, pointing to a social norm. This social norm may have held, at least in the US, until the mid 1980s. 

In essence, the system that operated from the Great Depression until the 1980s relied on the legacy of the 1930s and an almost unstated code in society that the remuneration of senior executives should not increase beyond a quite limited multiple of average pay on the basis that to breach this relationship would be viewed as ostentatious and breaking a norm that acted as a glue in society more broadly. I would go further and argue that this formed the basis of trust, with an expectation of future behaviour and a common value or ethic.

Things changed from around the early 1980s. You can label it the ‘Greed is Good’ era if you can remember the first Wall Street film with Michael Douglas. It is also often labelled as the era in which so-called agency theory came to prominence, in which corporate governance was used to change the policies under which a manager (agent) operates, and thereby emphasise the interests of the owner (principal). This led to a rapid increase in senior executive pay as the limits of the previous social norm were replaced by an approach which used remuneration to incentivise performance.

He says Friedman’s quote was an intellectual shift but people have just picked parts of the quote:

One of the intellectual origins of this shift away from the traditional post-Depression approach came in September 1970, in an article written in the New York Times by Milton Friedman. It went under the title: ‘The Social Responsibility of Business is to Increase its Profits’. Here is a key quote:

‘In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom’.

Friedman started by setting out the essence of agency theory. Some people who know the piece tend to stop there. But let’s go on, because the interesting part for me is when he wrote that the responsibility to make as much money as possible should conform with the basic rules of society, as embodied in the law, and ‘in ethical custom’. Here to my mind we have the essence of the issue around trust and ethics.


I mean similarly few ideas are stretched and misrepresented: Adam Smith’s invisible hand, Keynes as a crusader for more government….

Remembering Albert Hirschman’s tunnel effect

October 31, 2018

Prof Timothy Taylor in his blog remembers Hirshman’s tunnel effect and links it to inequality debate:

Hirschman was focused on issues of economic development. He offers examples of a number of countries where many poor people welcome signs of economic development before it touches them personally in any way–presumably because they are in the position of that driver stuck in the left lane who is taking hope from the movement of the right-hand lane.  He also points out that this tunnel effect can lead to a sense of complacency among leaders, when most people seem to be supportive of the processes that are leading to inequality, so that the leaders are unprepared when people start to denounce those same practices.

“Providential and tremendously helpful as the tunnel effect is in one respect (because it accommodates the inequalities almost inevitably arising in the course of development), it is also treacherous: the rulers are not necessarily given any advance notice about its decay and exhaustion, that is, about the time at which they ought to be on the lookout for a drastically different climate of public and popular opinion; on the contrary, they are lulled into complacency by the easy early stage when everybody seems to be enjoying the very process that will later be vehemently denounced and damned as one consisting essentially in `the rich becoming richer.'”

Writing back in 1973, Hirschman offers examples of “development disasters,” in which those stuck in the left lane have come to strongly suspect that economic development will not benefit them, and thus a high degree of social unrest emerges. and he cites Nigeria, Pakistan, Brazil and Mexico as facing these issues in various ways.

I find myself thinking about the tunnel effect and expectations about future social mobility in the current context of the United States. Rising economic inequality in the United States goes back to the 1970s, and the single biggest jump in inequality at the very top of the income distribution happened in the 1990s when stock options and executive compensation took off. But my unscientific sense is that at that time, during the dot-com boom of the 1990s, many people who were either pleased, or not that unhappy, with the rise in inequality of that time. There seemed to be new economic opportunities opening up, new businesses were starting, unemployment rates were low, cool new products and services were becoming available. Even if you were for the time stuck in the left lane, all that movement in the right lane seemed to offer opportunities.

But that optimistic view of high and rising inequality came apart in the 2000s, under pressure from a from a number of factors: the sharp rise in imports from China in the early 2000s that hit a number of local areas so hard; the rise of the opioid epidemic, with its dramatically rising death toll exceeding 40,000 in 2016; and the carnage in employment and housing markets in the aftermath of the Great Recession.  In Hirschman’s words, it seems to me that many politicians were “lulled into complacency by the easy early stage when everybody seems to be enjoying the very process that will later be vehemently denounced and damned as one consisting essentially in `the rich becoming richer.'”

Of course, no country is really one big tunnel. When people look at high or rising inequality, their views will often depend on the extent to which they feel some commonality–Hirschman calls it “shared historical experience”–with those who are moving ahead more briskly. In turn, this feeling may depend on the extent to which those who are moving ahead more briskly segment themselves off as a special and separate guild, with an implicit claim that they are just more worthy, or the extent to which they act in ways that embody broader and more inclusive outcomes.


Hirschman was from a different league altogether. What a thinker and communicator of economic ideas…

Milton Friedman’s presidential address at 50: One of the defining moments in history of macroeconomics…

October 25, 2018

The year 2018 marks the 50 years of the celebrated and much talked about lecture given by Milton Friedman: The role of monetary policy. It is seen as one of those key moments in history of macroeconomics where Friedman questioned the trade-off between inflation and unemployment as espoused in Philips curve.

It is rather odd to see a journal – Review of Keynesian economics – to dedicate an entire issue on the 50th anniversary.

Milton Friedman’s American Economic Association (AEA) presidential address, ‘The role of monetary policy,’ was published 50 years ago in the 1968 Papers and Proceedings issue of the American Economic Review. Friedman’s influence as an economist is undeniable and he is widely viewed, together with John Maynard Keynes, as the most important macroeconomist of the twentieth century. His contributions were extensive but, in our view, his AEA address has been the most influential.

In that address, Friedman introduced the concept of the natural rate of unemployment (NRU), which can be paired with Wicksell’s notion of a natural rate of interest. The idea of the NRU represents a clear theoretical return to pre-Keynesian views, which Friedman had tacitly defended throughout his career and which were connected to his revival of the quantity theory of money in his book, A Monetary History of the United States, co-authored with Anna Schwartz. However, as shown in the monetarist debates of the 1960s, his earlier work on monetary theory lacked a convincing macroeconomic theory in which to ground his policy conclusions.

Friedman’s address provided that missing theory by revamping the Keynesian IS–LM model to include a Phillips curve which was vertical at the NRU in the long run. Thus, not only did Friedman fill the gap in his own thinking, he also co-opted the Keynesian macro model.

The idea of the NRU provided an anchor for the simple monetary rules that have since come to dominate the theory of monetary policy. In effect, in the same way that Keynes’s The General Theory of Employment, Interest and Money had done a generation earlier, Friedman’s address provided both a theoretical framework and a simple policy prescription. That framework and prescription fell on fertile ground in the 1970s, when the neoliberal revolution swept through the political landscape.

It should be clear that Friedman’s monetary rule for a constant rate of money-supply growth never became dominant, and these days most central banks are concerned with rules about the rate of interest. However, Friedman’s concept of the NRU remains overwhelmingly dominant within the profession and has proven incredibly resilient. Indeed, the founding of the Review of Keynesian Economics (ROKE) was to some extent a reaction to the dominance of the Friedmanite notion of an NRU.

The current symposium aims to reflect on the reasons for the success of Friedman’s address and its consequences for macroeconomic analysis and policy. We hope the contributions of this distinguished group of economists will enrich understanding of the current macroeconomic consensus. Beyond that, speaking from a personal point of view, we hope it will help pave the way for wider engagement with Keynesian responses to Friedman’s natural rate hypothesis, leading to reassessment of the real-world relevance of the idea of a natural rate of unemployment.


Most of the papers of the issue are gated. But there are nongated versions of some of the papers on the web…

What’s Wrong With the 2 Percent Inflation Target: False precision can lead to dangerous policies.

October 25, 2018

Paul Volcker’s new book,KEEPING AT IT – The Quest for Sound Money and Good Government, should be an interesting read.

In an extract from the book, he questions the 2% inflation target obsession:


Ethics in banking – from Gordon Gekko to George Bailey (It’s a wonderful life)

October 24, 2018

I had written a recent piece on how culture and ethics has become one of the central topics of discussion in central banking.

Danièle Nouy, Chair of the Supervisory Board of the ECB in this speech looks at two characters from the two Hollywood movies. One is Gordon Gekko of Wall Street who epitomized greed and was fine with any conduct in finance as long as it brought more returns/income. Another is George Bailey of It’s a Wonderful Life who used his own money to pay depositors and save his bank.


True finance and three lies of finance..

October 24, 2018

Interesting lecture by Mark Carney of Bank of England.

He talks about how the GFC has led to changes in the financial system for the good. But there can be no progress if we don;t know the three lies of finance:

  • Lie I: “This Time Is Different”
  • Lie II: “Markets Always Clear”
  • Lie III: “Markets Are Moral”


He says we should work towards true finance. Call it truer finance actually:


Human capital formation during the first Industrial Revolution: Evidence from the use of steam engines

October 23, 2018

Researchers- Alexandra de Pleijt , Alessandro Nuvolari, Jacob Weisdorf – look at human capital during industrial revolution.

They say it led to deskilling in UK with demand for unskilled falling quite a bit:


Inviting Government to “observe” monetary policy meetings: How RBNZ is revisiting many older ideas which were questioned…

October 19, 2018

It was interesting to read the letter exchange between Reserve Bank of New Zealand  and NZ Government.

RBNZ press release explains:

The Secretary to the Treasury, Gabriel Makhlouf, has accepted Reserve Bank Governor Adrian Orr’s invitation to attend monetary policy deliberation and decision meetings as an observer from the end of this month.

Mr Orr extended the invitation to deepen Mr Makhlouf’s understanding of the process leading into a monetary policy decision, with the aim of ensuring a smooth transition to a new monetary policy framework.

This invitation comes ahead of the proposed creation of a formal Treasury observer position in the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill. This Bill is currently being considered by the Finance and Expenditure Committee.

As outlined in his letter to the Governor, Mr Makhlouf recognises and respects the highly confidential nature of these meetings. Mr Makhlouf’s letter outlines how he intends to manage issues related to confidentiality, and any actual or perceived conflicts of interest. The letter also details how Mr Makhlouf will avoid any perception of conflict in relation to his statutory responsibility for the Treasury’s debt management function. 

This is interesting. Worldwide, the whole thinking is to minimise government’s role in central banks. The Government representative is there on central bank boards which is also seen as too much interference at times.

But in case of NZ, they are inviting a Government official to “observe” monetary policy meetings of all things. The government person has no voting power but will be preview to discussions and even share his/her views.

In many ways we came to the two ideas of “central banks for price stability only” and “keep governments away from central banks” from Reserve Bank of NZ’s adoption of inflation targeting mandate in 1989. Since the new NZ government in 2017, both these ideas have been redone quite a bit. First, The central bank has recently added employment to its price stability mandate. Second, asking government to be an observant to monetary policy decisions.

I am not saying all this is bad stuff. It is just that times are changing and we are coming back full circle.


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