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

The constitution won’t save American democracy, only its people can..

September 26, 2019

Daron Acemoglu and James Robinson write a timely piece. Fair bit of world leaders are justifying their actions saying they are doing things as per Constitution. Any Constitution for all you know is a human creation and has many gaps. It requires the leadership to understand the gaps and not exploit them, but we are hardly seeing this.

A & R write:

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In medieval England magic was a service industry used by rich and poor alike

September 25, 2019

Interesting article by Tabitha Stanmore of Univ of Bristol.

Magic is a universal phenomenon. Every society in every age has carried some system of belief and in every society there have been those who claim the ability to harness or manipulate the supernatural powers behind it. Even today, magic subtly pervades our lives – some of us have charms we wear to exams or interviews and others nod at lone magpies to ward off bad luck. Iceland has a government-recognised elf-whisperer, who claims the ability to see, speak to, and negotiate with the supernatural creatures still believed to live in Iceland’s landscape.

While today we might write this off as an overactive imagination or the stuff of fantasy, in the medieval period magic was widely accepted to be very real. A spell or charm could change a person’s life: sometimes for the worse, as with curses – but equally, if not more often, for the better.

Magic was understood to be capable of doing a range of things, from the marvellous to the surprisingly mundane. At the mundane end, magic spells were in many ways little more than a tool. They were used to find lost objects, inspire love, predict the future, heal illnesses and discover buried treasure. In this way, magic provided solutions to everyday problems, especially problems that could not be solved through other means.

This all may sound far-fetched: magic was against the law – and surely most people would neither tolerate nor believe in it? The answer is no on both counts. Magic did not become a secular crime until the Act against Witchcraft and Conjurations in 1542. Before then it was only counted as a moral misdemeanour and was policed by the church. And, unless magic was used to cause harm – for example, attempted murder (see below) – the church was not especially concerned. Often it was simply treated as a form of superstition. As the church did not have the authority to mete out corporal punishments, magic was normally punished by fines or, in extreme cases, public penance and a stint in the pillory.

Changing nature of services industry..:-)

Financial conditions and purchasing managers’ indices: exploring the links

September 25, 2019

Purchasing Managers’ Indices (PMI) is becoming increasingly popular with analysts.

In the BIS quarterly review (Sep-19), Burcu Erik, Marco Jacopo Lombardi, Dubravko Mihaljek and Hyun Song Shin explore links between PMI and Financial conditions:

Purchasing managers’ indices (PMIs) have found a place in global conjunctural analysis and quarterly GDP nowcasting, serving as reliable concurrent indicators of real economic activity. They also closely mirror changes in equity prices and corporate bond spreads. More surprisingly, PMIs react to changes in the dollar index, and do so in a way that runs counter to a trade competitiveness explanation. We show that the financial variables help predict PMIs and explain a significant proportion of their variation. The two seem to be linked through shifts in macroeconomic sentiment and global financing conditions.

 

When central bankers use Montesquieu’s quote of “sweet ties of commerce”….you know we are living in tough times

September 25, 2019

We are living in tough times for sure. It is not very often when you see a central banker say that it is “sweet ties of commerce” which are keeping us away from military conflict! Charles Louis de Secondat, Baron de Montesquieu, a 18th century thinker, was a votary of using commerce for progress and peace.

Who better than François Villeroy De Galhau, Governor of Banque de France to say these words in this speech. After all France has been central to all such conflicts. He says world faces three conflicts:

It gives me great pleasure to speak before you today. I follow in the footsteps of several Ministers of Foreign Affairs, including Jean-Yves Le Drian and Nathalie Loiseau. Caro Enrico, thank you for your invitation, knowing this makes me feel all the more grateful and honoured! The decision to switch from diplomats to a central banker such as myself perhaps sends out three signals.

First, rarely have geopolitics and economics been so closely intertwined. Faced with the rise in protectionist tensions and the verbal volleys, which unfortunately intensified again this summer, some even say that economic interdependence – the “sweet ties of commerce” praised by Montesquieu – is the only thing still shielding us from military conflict. Conversely, rarely has a global economic slowdown been so clearly attributable to political causes: nearly everywhere, public policy instability and uncertainty are on the rise and are damaging private sector confidence; I shall come back to this.

Second signal: rarely have central banks been called upon to do so much.  I’m not going to bore you with a lesson on the technical delights and subtleties of monetary policy. Let’s just say that we have a central mandate – price stability – and a main instrument for achieving this – the short-term interest rate. But for the past ten years, since the great financial crisis, we have been using new instruments: quantitative easing (QE), forward guidance[i] and even negative rates. These non-standard policies have been effective; but they can also create the – mistaken – illusion that monetary policy is omnipotent.

Third signal: rarely has Europe appeared so necessary and at the same time so divided. I am a French and European official, I was in Maastricht 28 years ago to launch the euro; every two weeks I take part in meetings of the ECB Governing Council which manages the currency. I stand by this conviction in Europe and in the belief that the joint work carried out by France and Germany is an indispensable driver, even if it is not enough. Nearly 30 years ago, the fall of the Berlin Wall injected new impetus into the construction of Europe.

Today, Europe is turning in on itself, is on the defensive. Yet it is vital that it make itself heard in the face of the threats that it is facing, and that it do so with one voice if it doesn’t want to be inaudible. But beyond the threats, and at the risk of sounding paradoxical and even a little provocative, I would like to present you with an opportunity: in the current crisis of globalisation, Europe doesn’t need to keep its head down; it should assert and propose a model – its own social, environmental and mutilateral model.

I propose that we do this in the spirit of Stefan Zweig, who as early as 1934, admirably described the state of mind of the great European Erasmus of Rotterdam: “Instead of listening to the vainglorious claims of petty princelings, of fantastical sectarians and of national egoists, the mission of the European is on the contrary to emphasise that which unites the peoples.

Hmm..

Why are economists letting down the world on climate change?

September 25, 2019

Andrew Oswald and Nicholas Stern in this voxeu piece argue that climate/environment barely feature in economics:

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We suspect that modern economics is stuck in a kind of Nash equilibrium.  Academic economists are obsessed with publishing per se and with pleasing potential referees.  The reason there are few economists who write climate change articles, we think, is because other economists do not write climate change articles. 

Attack on econs from all possible fronts..

Draghi Says ECB should examine new ideas like MMT.. (Draghi shown as devil in German newspapers!)

September 24, 2019

Mario Draghi, President of ECB appeared before Committee on Economic and Monetary Affairs of the European Parliament to discuss economic developments and ECB policy.

In one of the questions, he said ECB should be open to new ideas like MMT. He said MMT and helicopter money are more to do with distribution and this is something which becomes a fiscal task.

MMT supporters would be surprised and tell Draghi: “Told ya!”.

Bill Mitchell in this post reflects on the recent ECB monetary policy decision on 12 Sep 2019:

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Impact of Foreign Trade Agreements on India’s trade (some history too)

September 24, 2019

Rekha Misra and Sonam Choudhry of RBI in this paper (in RBI’s Sep-2019 Bulletin) research India’s foreign trade agreements.

The impact of trade agreements (TA) is more on imports than exports:

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The persistent low interest rates might lead governments to become pension provider of last resort…

September 23, 2019

As governments push their central banks to lower policy rates (Trump succeeds as well), they should know most economics decisions imply trade-offs. The luring prospect of trying to remain in power by all means could lead to disastrous consequences.

Lars Rhode, Governor of Denmark central bank in this speech points to some of the risks. It is interesting to note that the entire yield curve in Denmark is negative! He says the big impact of low/negative interest rates are pension markets:

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When banks use economic nationalism to drive up customers: Case from NZ

September 23, 2019

With Nationalism being the flavour of the day, how can economic nationalism remain behind? Infact both have coexisted for as long as one can imagine.

Recently Kiwibank, a NZ based bank issued an ad hitting out at competitors.

Kiwibank 1

Michael Reddell, who writes a terrific blog on NZ economy disapproves the tactic:

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Are Trump’s tweets undermining Federal Reserve’s independence?

September 23, 2019

Reinhart and Reinhart in a Proj Syndicate Piece wrote how Federal Reserve’s easy monetary policy will basically lead to Trump reelection:

Probably to Powell’s deep and never-to-be-expressed frustration, the Fed is setting monetary policy in a way that increases the likelihood that Trump will be reelected next year. That instruction is not contained in the Federal Reserve Act, of course, but the Fed is supposed to deliver maximum employment and stable prices. Its mandate of sustainable economic growth thus requires Powell to attempt to offset the effects of policy uncertainty under Trump.

Fed officials are not thinking of intentionally letting the economy stumble between now and the 2020 election. Thus, if Powell succeeds, Trump will not bear the cost of his words and actions. This will invite more of the same.

There is a reason that Powell often has a haunted look, and not just at Jackson Hole.

In a new NBER paper, authors actually show how Trump’s tweetstorm (hatestorm?) leads to lower Federal Funds rate:

This paper presents market-based evidence that President Trump influences expectations about monetary policy. The main estimates use tick-by-tick fed funds futures data and a large collection of Trump tweets criticizing the conduct of monetary policy. These collected tweets consistently advocate that the Fed lowers interest rates.

Identification in our high-frequency event study exploits a small time window around the precise time stamp for each tweet.

The average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps. Therefore, we provide evidence that market participants believe that the Fed will succumb to the political pressure from the President, which poses a significant threat to central bank independence.

Interesting times!

How advent of pension policy led to lower education in children: Case of Indonesia and Ghana

September 20, 2019

Prof Natalie Bau of UCLA in this voxeu piece point to really interesting findings from her new research.

She says that families funded children’s education so that latter could take care of former during old age. However, as pension policy was introduced, this old age care was not needed which led to decline in education!

In the paper, I examine whether the introduction of government pension plans changed cultural practices in Indonesia and Ghana. I study a set of cultural traditions that determine whether daughters (matrilocal), sons (patrilocal), or neither gender (neolocal) continue to live with parents after marriage and care for them in their old age. In matrilocal ethnic groups, daughters stay with parents, while in patrilocal ethnic groups, sons stay with them. Traditionally, both practices are widespread, and therefore potentially important determinants of economic behaviour. In anthropological data on 1,265 ethnic groups around the world, 69% are traditionally patrilocal and 16% are traditionally matrilocal (Morduck 1967). Studying these practices provides me with an unusual opportunity to measure how cultural practices change in response to new policies. This is because, unlike the practice of many other customs, whether households practice matrilocality or patrilocality can be directly observed in most census or survey data.

I hypothesise that when households belong to matrilocal ethnic groups, parents are relatively more likely to invest in their daughters’ education. This is because they will share in the returns from that educational investment when their daughter supports them in their old age. Similarly, parents from patrilocal ethnic groups will be relatively more likely to invest in a son’s education. I further hypothesise that when governments introduce pension policies, parents – who no longer need as much old-age support – will be less likely to transmit matrilocal and patrilocal traditions to their children. As a result, both the educational investment incentivised by these traditions and the practice of these traditions themselves will decline. So, the new social policies that often accompany economic growth may lead to the decline of traditional cultural practices. 

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To establish whether the Indonesia results apply in another, very different, context, I then turn to Ghana. Like Indonesia, Ghana instituted a pension plan in the 1970s. However, Ghana and Indonesia have very different cultural and religious make-ups. Indonesia is predominantly Muslim, and Ghana is predominantly Christian. While in Indonesia I compare traditionally matrilocal and non-matrilocal females, in Ghana the variation is between traditionally patrilocal and non-patrilocal males. Therefore, studying different genders and cultural traits in these very different countries provides further evidence that the results in Indonesia are not driven by an unobserved variable correlated specifically with matrilocality.

In Ghana, sons in traditionally patrilocal ethnic groups receive more educational investment (relative to their sisters) than sons in non-patrilocal groups, resulting in approximately 0.18 more years of schooling. The timing of the pension plan, which was introduced in 1972, allows me to evaluate whether traditionally patrilocal males who were more exposed to the plan as children behave differently. Indeed, these males were less likely to complete primary school and are less likely to practice patrilocality as adults. 

Altogether, the results from Indonesia and Ghana are symmetric. Matrilocality incentivises educational investment in females, while patrilocality incentivises it in males. The introduction of pension plans crowds out these educational investments and reduces traditional practices. So, though culture is often persistent, the introduction of new laws and policies can cause cultural change. 

Talk about unintended consequences of policy!

A brief (and fascinating) history of currency counterfeiting: Focusing on Australia and some other cases

September 19, 2019

Richard Finlay and Anny Francis of RBA in this research note give a fascinating account of currency counterfeiting. They focus on Australia but pull examples from other countries too. Perhaps one of the best things that have read in this year so far.

Counterfeiting has a rich and varied history going back to the very earliest forms of money. It has been pursued for personal gain – although at the significant risk of jail time, or, in the past, death – as well as for economic and political destabilisation by hostile countries. Both high- and low-value denominations are liable to be attacked. Currency issuers and counterfeiters are, and always have been, locked in a battle of innovation, with government authorities adapting and innovating in order to deter counterfeiting. Acceleration in the rate of technological development, however, seems to have shortened the timeframe over which each new security feature remains counterfeit-resistant and, in response, currency issuers are having to upgrade their banknotes and coins more frequently to ensure that counterfeiting remains low.

Regarding Australia, government and Reserve Bank policies concerning banknote issuance have evolved over time, with past counterfeiting episodes playing a major role in this change. Early banknotes were issued by multiple banks, contained few security features and were often worn and tatty, making the passing of counterfeits relatively easy. Today the Reserve Bank is the sole banknote issuer and has in place a system of incentives that serve to ensure that dirty and worn banknotes are removed from circulation. Australian banknotes are among the most secure in the world; and absent banknote upgrades (as are currently taking place), there is typically only a single series of banknotes circulating. Past policies of paying for counterfeits served to encourage their manufacture, whereas now counterfeits are recognised as worthless. And on the law enforcement side, badly drafted laws, which potentially could criminalise every printer in the country, have been amended. It has also been recognised that federal oversight of counterfeit policing can be beneficial; this resulted in the establishment of a team within the AFP dedicated to counterfeit deterrence.

I found this case of Portugal most intriguing. A counterfeiter used Portugal’s corruption history in a really clever way:

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Opening the toolbox: how does the Reserve Bank of NZ analyse the world?

September 18, 2019

Team of RBNZ econs in this article:

This article describes how the Reserve Bank analyses international shocks and their implications for monetary policy. As a small open economy, New Zealand is particularly vulnerable to international shocks. The Bank has a long tradition of using a wide range of models to assess the impact of different types of international shocks and their spillovers to New Zealand through various channels. This modelling has explored the transmission of these shocks through trade, financial, and confidence or uncertainty linkages. As the international economy and financial markets continue to evolve, the Bank will continue to refine its modelling strategy to better understand how these shocks evolve and transmit through to the domestic economy.

Good way to review world economy and then showing how the domestic economy is placed..

Will the digital money be like the one-sided coin? History of one-sided and two-sided coins..

September 18, 2019

Superb speech by Johannes Beermann of Bundesbank.

She says the advent of digital money is like a toss with the coin still hanging in the air. Which way it will land we have to see.

She starts with how football matches are started with the toss of a coin and why two sided coins matter:

Welcome to the Seehaus right at the heart of the English Garden.

This park is a true landmark of the city of Munich, with a design inspired by British landscape architecture.

It probably comes as no surprise that football – another at least originally English pastime – is popular around here as well.

Of course, “kicking a ball” with friends in a park such as the English Garden is a more informal affair than the matches you might see in the professional football leagues, where the stakes are arguably much higher.

But the basic principles of football apply everywhere. The direction of play is the first decision to be made before any match can begin.

Depending on the position of the sun or the direction of the wind, the choice of which goal to defend first could make a difference to the game’s outcome.

A neutral mechanism needs to be put in place to decide who obtains this “first mover advantage”.

A coin toss is one such mechanism. The coin is considered “fair” if both events – the coin landing on heads or the coin landing on tails – have an equal probability of occurring.

In the history of minting, heads on the obverse and tails on the reverse have emerged as the two sides shown on coins which serve as legal tender. Although the details on each side differ at first sight, they are closely related.

To “coin” a well-known expression, heads and tails are literally two sides of the same coin. Together, they complete the coin, which also means both sides have to be taken into consideration.

In the world of payments, that is precisely what central banks do. On the one hand, we provide payment systems that function purely electronically while, on the other hand, we take part in the production and distribution of physical cash. In the prevailing set-up, one aspect of payments cannot work without the other.

Digital payments are in a state of flux. New competitors enter the market, at times trying to disrupt existing structures.

The direction of play remains unclear at this stage. It may be that the rise of one form of digital payment will lead to the fall of another. It is also possible that physical cash is used to a lesser and lesser extent until it effectively fades from existence, at least as far as transactions are concerned.

None of us have a crystal ball to tell us how the match will end. But we can look at existing evidence.  

In my brief remarks this evening, let us turn to the hypothetical question: how would the coin toss change, if one of the sides were to vanish?

She defends why we still need cash and it should coexist with the digi payments.

In the end, some history of one sided and two sided coins:

One-sided coins are not without historical precedent.

Some 800 years ago, a variety of pfennig coinage dominated monetary circulation in German-speaking areas. Known as bracteates, these coins were embossed on one side and often hollow on the other.

The relatively simple technique employed to make them was also reflected in their limited function as a store of value. In fact, these one-sided coins were infamous for their frequent and sharp devaluations.

As a result, stable coinages were introduced in the 14th century. Those were, of course, two-sided and have become a true symbol of monetary stability that has endured to this day.

Central bank money is the most recognisable means of payment. It is the local unit of account and the only legal tender. Ensuring its adequate supply is a key task for central banks, which we need to fulfil at all times.  

As technologies advance and digital forms of money increasingly enter the field, policymakers will not be able to remain “on the sidelines”.

There are two sides to every coin, after all.

On that note, I would like to wish you all a very pleasant and interesting evening. You still have to decide between an excellent red and an equally excellent white wine. The choice is yours. Perhaps a coin toss will help.

Hmmm…

Lesson from history of Rothschilds and US free banking

September 17, 2019

Lars Rhode, Governor of Denmark Central bank in this speech speaks on trust in financial services (what else to talk!).

My topic is trust and transparency in the financial system.

In recent years, the topic has surfaced again following a number of unfortunate issues that have accumulated since the financial crisis. For a long time we may have thought that this was primarily a problem that existed outside Denmark’s borders. But then cases emerged in Denmark too. There have been money laundering cases, there have been deliveries of very large banknotes to bureaux de change, and incorrect advice has been provided in connection with investment  products. The financial sector has been involved in transactions that have drained the government  coffers of many billions of kroner in dividend tax. And I am sure we could find more examples.

What these examples have in common is that they contributed to undermining trust in the financial system. Trust is low at the global level. That  has been documented by the Edelman Trust Barometer. In fact, one of the key messages in the Edelman analysis is that the financial sector is the sector that people trust the least. Danish surveys also point to low trust in the financial sector.

He picks examples from Rothschild and US free banking:

How can we learn more about the present and about how to shape the future? One way is to look back and learn from history. So I would like to start with two examples from the past.

I will begin in the 18th century. More specifically with the Rothschild family dynasty. It was founded by Mayer Amschel Rothschild. He was the head
of a poor family comprising his wife and 10 children. The family lived in Frankfurt in the late 18th century. Good ideas combined with unusual
willpower gave Mayer Rothschild a point of departure for forging business relationships with powerful men in the area. He also dispersed his
sons across Europe. The sons established their separate trading firms and were successful. Especially the son in London was doing well. He
soon became so rich that he could lend money to the Duke of Wellington. In 1814, this son became the British government’s secret banker for funding the Napoleonic wars.

My other retrospective example relates to a period of around 30 years in mid-19th century USA. Before this period, every single bank in the USA
had to have a charter through special legislation for that specific bank.  However, this changed when many states began to introduce state charters describing the general requirements to be met by banks that wanted a licence to operate. This period has been called the “free banking” era .because anyone meeting the relevant state’s banking requirements could establish a bank. 

Lessons:

What can we learn from these two historical examples? Firstly, I note that the people involved also took on the risk – they all had something at  stake. It was their own money – or their close business partners’ money – that was lent. That gave them an incentive for sound risk management. They were focused on behaving in such a way that their good names and reputations and their wealth were not jeopardised. That is no longer the case.

Today’s banks are so large that no individual or small group of people can own and operate a big bank. This means that there is no longer a close link between those bearing the risk, the owners, and the day-to-day management. When shares are as widely dispersed as they are in most Danish banks, everyone is responsible, which ultimately means that no-one takes on the responsibility. Being owned by everyone is the same as being owned by no-one.

Secondly, I note that the market plays an important role. It is good if clients vote with their feet.

You might ask whether things had been different today if we had learnt more from history.

Banking clearly has swung from one extreme to another. In earlier days it was common for banks to fail with minimal protection and markets voting with their feet. Now even bad banks do not fail..

 

MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy

September 16, 2019

A team of economists at RBA in this paper explain their macro model MARTIN:

This paper introduces MARTIN – the Reserve Bank of Australia’s (RBA) current model of the Australian economy. MARTIN is an economy-wide model used to produce forecasts and conduct counterfactual scenario analysis. In contrast to other large-scale models used at the RBA – and at many other central banks – which adhere to a narrow theoretical view of how the economy operates, MARTIN is a macroeconometric model that consists of a system of reduced form equations built to strike a balance between theoretical rigour and empirical realism.

Most of the model’s equations align closely with the way RBA staff typically interpret the behaviour of individual economic variables. However, combining these individual equations in a system can bring fresh insights that are not possible without model-based analysis. In the paper we provide an overview of the model, outline its core behavioural equations and describe its empirical properties. The Online Appendix presents the full set of model equations.

 

History of GDP goes beyond the usual narrative

September 16, 2019

Jacob Assa in this paper says GDP is more of a political construct and symbol of power:

Histories of Gross Domestic Product (GDP) – both critical and favorable – have become somewhat of a cottage-industry since the global financial crisis of 2008. Following the Stiglitz Commission, numerous general-audience books have appeared, describing the rise of GDP, analyzing its limitations, and offering reforms or alternatives. These histories, however, suffer from three key problems. First, nearly all begin in the 1930s, following the Great Depression and the lead-up to World War II. Very little if anything is said of the 250 preceding years, a period implicitly thought of as a pre-history of GDP. Second, and as a result of this limited chronological lens, GDP is considered to be a statistical measure, the shortcomings and merits of which are presented as technical and ascribed to the narrow objectives facing its 20th century architects. Third, the proposed reforms are meant to improve on GDP’s statistical limitations (e.g. using dashboards, accounting for unpaid care-work or environmental costs etc.).
These three problems are related, and this paper presents an alternative history of national accounting, considering geo-political and political-economy contexts going back to the 17th century. This longer and broader view reveals the exercise of estimating national income or wealth as a form of numerical rhetoric. Rather than a statistical measure, GDP is an indicator of power (for countries, classes and industries) as well as an instrument for advocating specific policies. Therefore, any critique must go beyond technical issues and fixes, and look at the political context and consequences of various historical versions of GDP, and any possible democratic reform of it.

Rothschild emerges from the shadows for the Centenary of the London Gold Fixing

September 16, 2019

Ronan Manly has a must read post in Bullionstar. 2019 marks the 100 years of fixing of world gold prices!:

This month in London marks the 100th anniversary of the first “London Gold Fixing”, the infamous daily meeting of a secretive cartel of bullion banks which has met since 1919 to set benchmark gold prices used throughout the international gold market, a meeting which continues to this day through its thinly disguised successor, the LBMA Gold Price auction.

London gold price benchmarks are critically important to the global gold market because they are used as a valuation source for everything from ISDA gold interest rate swap contracts to gold-backed Exchange Traded Funds (ETFs), and everything from OTC gold contracts to transaction reference prices used by physical bullion dealers when purchasing gold bars and gold coins from refineries and suppliers.

Since 2015, the London Gold Fixing has been known as the LBMA Gold Price following a rush by the London Bullion Market Association (LBMA) bullion banks to patch over the then scandalized  ‘Fixing’ in a smoke and mirrors and circle the wagons relaunch and renaming exercise. The collusive Gold Fixing first formally came into existence on 12 September 1919 when the Bank of England tapped its favorite bankers N.M. Rothschild & Sons to be the daily Fixing’s permanent chairman. Rothschild and the Bank of England had been joined at the hip since the early 1800s and would continue to be so in the Gold Fixing throughout the next century.

The 1919 launch of the Gold Fixing by the Bank of England and Rothschild succeeded a more informal version of a gold fixing that had existed up to the outbreak of the First World War in 1914, which consisted of a meeting of four London gold brokers Mocatta & Goldsmid, Samuel Montagu, Sharps & Wilkins, and Pixley & Abell who between them set a daily gold price at the offices of Sharps & Wilkins.

For the next 85 years from its inception in September 1919, the Gold Fixing occurred daily at Rothschild’s headquarters in New Court, St. Swithins Lane, across the road from the Bank of England, with five men from five bullion banks religiously meeting at 10:30 am each morning. After the collapse of the London Gold Pool in 1968, the Gold Fixing moved to a twice per day pricing with an extra 3:00 pm meeting added by the fixers to ‘watch over’ the US morning hours gold market.

Rothschild would remain as the Gold Fixing’s permanent chairman until May 2004 at which point the fabled investment bank mysteriously departed the gold fixing and stepped back into the shadows after 200 years in the London Gold Market. Until now that is, for in one of its rare re-appearances, the LBMA’s seminar and cocktail reception to celebrate the Gold Fixing’s centenary took place this week at, you guessed it,  NM Rothschilds’ headquarters in St Swithins Lane.

Lots of history!

How Do Private Digital Currencies Affect Government Policy?

September 12, 2019

Max Raskin, Fahad Saleh, and David Yermack in this paper show support for digital currencies:

This paper provides a systematic evaluation of the different types of digital currencies. We express skepticism regarding centralized digital currencies and therefore focus our economic analysis on private digital currencies. Specifically, we highlight the potential for private digital currencies to improve welfare within an emerging market with a selfish government. In that setting, we demonstrate that a private digital currency not only improves citizen welfare but also encourages local investment and enhances government welfare.

 

The Well-meaning Economist: Choosing an appropriate “mean” matters..

September 12, 2019

Adam Gorajek of RBA in this paper writes why choosing “mean” matters:

Economists usually inform policymakers with conclusions that come from studying the conditional expectation, i.e. arithmetic mean, of some potential outcome. But there are other means to study, from the same ‘quasilinear’ family. And they can support very different conclusions. In trade research, for instance, studying other means can transform the perceived roles of colonial history, geography, and trade wars. In wages research, studying other means can reverse perceived earnings differentials between groups. Similar scenarios will be common in other tasks of policy evaluation and forecasting. To choose means well I propose selection criteria, which also consider options that are outside of the quasilinear family, such as quantiles. Optimal choices are application-specific and ideally accommodate the preferences of the relevant policymaker. In the wages case, policymaker aversion to inequality makes it sensible to reject the arithmetic mean for another quasilinear one.

Example:

Suppose we discover today that in 1990 a random subset of Australian schoolchildren were given a badly misprinted version of the standard mathematical textbook. Its answers were wrong and the explanations were nonsense. Suppose also that today we can survey these and the unaffected schoolchildren (all now adults) about their incomes. Besides objecting to the injustice of the misprint, an economic researcher might see this as a unique opportunity to assess the value of effective educational materials for career outcomes.

Conducting the survey, our hypothetical researcher records that half of the affected students now have annual incomes of $40k and half have $100k. For the unaffected students, half have annual incomes of $60k and half have $80k. For reasons that I leave to the paper, the standard strategy in this simplified situation would be to summarise the salaries of each group with their so-called ‘arithmetic mean’, which is a basic type of average. Since both groups have arithmetic mean incomes of $70k, the headline conclusion for the policymaker is that the misprint was unimportant. Even in complex research situations, summarising outcomes with numbers akin to these arithmetic means is a standard strategy.

But what if we choose a different summary measure, like a ‘geometric mean’, or any other mean in the ‘quasilinear’ family? Leaving an explanation of these concepts aside, the point is that often the conclusions will change. For instance, in the textbook misprint case, the geometric mean income for the affected students is $63k and for the unaffected students is $69k. Hence the headline conclusion for the policymaker is that the misprint was detrimental. The reason for the change is that the geometric mean penalises inequality, which is higher among the affected students. The penalty is an attractive feature here, because in western democracies it is evident from tax and social security systems that policymakers view income inequality as undesirable. The question is only what amount of penalty is appropriate.

Hmm..


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