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

The Fall of the Economists’ Empire (and their imperialism)

July 23, 2019

Another scathing piece on state of economics and its carrier which is economist. This one is by Robert Skidelsky:



Bretton Woods @ 75: A few surprises here, some similarities there

July 22, 2019

My new article in Moneycontrol on the 75th anniversary of Bretton Woods.

Why and how geographic differences matter in economic well-being?

July 22, 2019

Superb interview of University of California, Berkeley economist Enrico Moretti.

He explains why despite the internet people continue to work in select concentrated locations:

EF: During perhaps the first decade or so of the World Wide Web, there were numerous predictions that geography would disappear or almost disappear as an issue in knowledge work. It seemed as if white-collar workers, if one believed the predictions, would be able to work from anywhere.

Moretti: Yes.

EF: What happened?


Case for a Fiscal policy institution on the lines of a central bank/Federal Reserve

July 22, 2019

Benjamin Cohen argues that fiscal policy should be given to technocrats just like monetary policy.

Central bankers are often heard saying monetary policy is not the only game in town and time for fiscal policy to act and so on. But the problem with fiscal policy is it is politicised. But what is fiscal policy is also in the hands of independent agencies such as central banks? He calls it Fiscal Fed:

But what if fiscal policy was as depoliticized as monetary policy? An autonomous public agency with a defined range of fiscal-policymaking powers would be free to respond proactively to fluctuations in the economy. Like an independent central bank, a “fiscal Fed” could be staffed with politically disinterested professionals operating within limits established by statute. Ultimately, it would still be fully accountable to elected officials, but it would be able to make crucial budget decisions much faster than what is possible today.

To be sure, there would be little room for a new delegated authority to appropriate additional funds. After all, most of the expenditure side of the budget is nondiscretionary or relatively “sticky,” and thus difficult to start or stop on short notice. On the revenue side, however, a fiscal Fed could accomplish quite a lot through the levers of taxes and transfers. Its overarching objective would be to vary tax-withholding rates and transfer payments at the margin as needed, much as what central banks do with interest rates.

In creating such an agency, the political authorities would set basic goals and parameters, and elected officials would exercise active oversight on a continuing basis, to ensure responsible behavior. But within its statutory limits, the agency would be authorized to implement timely adjustments to the government’s revenues in response to changing economic conditions.

The scope of potential adjustments could be agreed in advance as part of the annual budget process, leaving the fiscal Fed with sole authority to determine the magnitude and timing of specific changes. Alternatively, the agency could be granted greater latitude to make such decisions on its own, provided the legislature does not issue a veto within a specified time period. At any rate, there are many ways to reconcile democratic accountability with depoliticized policymaking.

Needless to say, the same kind of objections that apply to central-bank independence would be made against a fiscal Fed. But there is nothing unusual about representative governments delegating key areas of policymaking to professionals. There are always tradeoffs between democratic prerogative and technocratic necessity, and different countries draw different lines between the two domains.

In the US, no one questions the legitimacy of independent agencies like the Securities and Exchange Commission or the Food and Drug Administration. There is no reason why an autonomous fiscal agency could not operate in a similar fashion. As long as its mandate is carefully circumscribed and its operations closely monitored, a fiscal Fed is an idea worth considering.

Zimbabwe’s inflation and economic mismanagement impacts its cricket..

July 19, 2019

International Cricket Council has suspended Zimbabwe as its member:

Zimbabwe have been suspended from the ICC with immediate effect. ICC funding to Zimbabwe Cricket has been frozen, and representative teams from Zimbabwe will not be allowed to participate in any ICC events while under suspension, making Zimbabwe’s participation in the Women’s T20 World Cup Qualifier in August and Men’s T20 World Cup Qualifier in October highly unlikely.

After several rounds of meetings in London this week, the ICC Board unanimously decided that Zimbabwe Cricket was in breach of Article 2.4 (c) and (d) of the ICC Constitution, and that the actions of the Sports and Recreation Commission (SRC) in suspending the board in June constituted government interference in Zimbabwe Cricket’s affairs.

“We do not take the decision to suspend a Member lightly, but we must keep our sport free from political interference,” ICC Chairman Shashank Manohar said. “What has happened in Zimbabwe is a serious breach of the ICC Constitution and we cannot allow it to continue unchecked.”

Reason? ICC knows that the funds released to Zimbabwe cricket will be used by the Government for its own expenditure:


Rules in cricket and economics are fallible

July 19, 2019

My new piece in Business Standard

Cannot get over the WC final match! 🙂

Revisiting the Coyne Affair: A singular event that changed the course of Canadian monetary history

July 18, 2019

Given how central bankers are being put under all kinds of pressure and even threatened, the affair of James Coyne, Governor of Bank of Canada (1955-61) is worth reading. He could not be fired so the Government actually declared the Governor’s position as vacant and advertised others to apply.

Pierre Siklos in this paper reviews the events and circumstances which forced Coyne to resign:

The Coyne Affair is the greatest institutional crisis faced by the Bank of Canada in its history. The crisis took place in 1959-1961 and led to the resignation of the Governor, once he was cleared of any wrongdoing. The crisis eventually resulted in a major reform of the Bank of
Canada Act. Archival and empirical evidence is used to assess the performance of monetary policy throughout the 1950s. In doing so, a real-time dataset is constructed for both Canada and the US that permit estimation of reaction functions. I find that the case against James Coyne is ‘not proven’.

It was Coyne saga which paved way for better appointment rules for Canada’s central bankers.

Here is another interesting account written in 1963:

At 5.45 p.m.. a Bank of Canada official flashes the word to the parliamentary press gallery that the governor will be leaving his office at 6.15. Reporters and photographers rush across Wellington Street.

At 6.21. six minutes behind schedule, a bulging black briefcase in his left arm. and guiding his misty-eyed wife with his other hand, Coyne steps out of the bank’s elevator. He shakes hands with the elevator operator. Seeing the wall of newsmen, he barks out a brusque “No comment.” then catching one of the reporters questions. “Do you have any 1 st words?” he replies: “No. Not for another forty years.” Then he walks out of public life.


The Banco de España and its promotion of economic history research

July 18, 2019

Spain’s central bank has been actively promoting research in economic history.

Governor Pablo Hernández de Cos in a speech lists the steps take to promote history:

Firstly, the Banco de España regularly organises conferences focusing on the discussion of aspects relating to economic history. This year, for example, on the occasion of the sixtieth anniversary of the Stabilisation Plan, the Banco de España will, next October, be organising
a conference in Barcelona focusing on the analysis of the Plan. It will likewise pay tribute to the figure of Joan Sardà. I trust you will be able to join us at this conference.

Also, since 2015 the Bank has organised annually a top-level international economic history conference aimed at academia. In recent years, both our central bank researchers and external researchers financed by us have been selected to present their papers. In this year’s edition, the conference has been jointly organised with the CEPR’s Economic History section.

Secondly, since 2009, the Banco de España has had a biannual programme in place for economic history research grants. Under the programme, universities commit themselves, following an agreement signed with the Bank, to pursuing the research selected and to
presenting and publishing their findings. The possibility of collaboration between researchers from both institutions is also envisaged.

Since 1980, under the initial backing of Luis Ángel Rojo, the Bank has published a collection of monographs relating to monetary and financial history, Spanish and international alike, under the name “Economic History Studies” (more familiarly known as the “Red Series”). To
date, this collection had solely included papers prepared or financed by the Banco de España. Currently, however, with a view to extending and maintaining its continuity, we are assessing opening it up to other research not necessarily financed by the Bank.

Lastly, allow me to stress another of the grounds for a publication such as that we are presenting today. It is a question of transparency, understood as the possibility of sharing information with society as a whole. As I pointed out in one of my early public appearances
as governor of the Banco de España, I consider making high-quality statistical information available to researchers as absolutely crucial for sound analyses and research enabling better-founded economic policy decision-making. In this respect, we intend in the coming years to pursue various projects that allow these researchers to have access to our statistical information, thereby enabling different avenues of analysis and research of benefit to society as a whole.  

Reserve Bank of New Zealand’s Financial Dashboard celebrates first year of operations

July 17, 2019

One has been fascinated by RBNZ’s financial dashboard ever since it was launched last year. I also argued for RBI to have a similar dashboard in this piece. It won innovation of the year award this year.

The central bank celebrates one year of the dashboard with this article:

Just over a year ago, we launched the Bank Financial Strength Dashboard, a website all about the financial health of registered banks in New Zealand. This article discusses our experience with running the Dashboard as well as the Dashboard’s role in promoting a sound and efficient financial system.

We use website user statistics to get an early indication of how well the Dashboard is achieving its objective of better informing market participants about the financial strength of banks.

Uptake for the Dashboard has been strong. It receives nearly 10,000 visits each quarter. To put this in perspective, the Dashboard’s predecessor (the little known G1 table) received about 500 visits per quarter. The Dashboard has also received international acclaim by winning the Initiative of the year award from the Central Banking Publication. These are both good indications that the Dashboard is meeting our admittedly lofty expectations. However, there is always room to do more and do better.

Further improvements to the Dashboard are being considered. This includes a Te Reo Māori version of the Dashboard; API functionality; better information on trends; and the possible addition of new metrics. The Reserve Bank is also considering a dashboard approach to improve prudential disclosures in the insurance sector.

The Reserve Bank is committed to supporting the broader effort to help build the financial capability of New Zealanders. The Dashboard contributes to this broader effort by providing relevant and accessible information on the financial strength of banks to the public.

Not suprised by the response. It is one of its kind.

Taking Malthus seriously

July 15, 2019

Jakob Brøchner Madsen, Peter Robertson and Longfeng Ye present new evidence showing Malthus was right:

The econometric evidence for the Malthusian trap in pre-industrial Europe has been weak. The column presents a new Malthusian model that, combined with new historical data for 17 countries, provides evidence of a much stronger Malthusian trap than the one found by previous research. This helps to explain the economic stagnation from the dark ages to the industrial revolution.

When central bankers speak about cloud services instead of the usual monetary policy stuff..

July 15, 2019

Central bankers/policymakers use the metaphor of looking up to clouds/skies for saying how economic growth is likely to be in future. Some say dark, some say blue and so on. In India (and South Asia), policymakers actually look at skies to figure state of monsoons.

With technology, using the word cloud means something much more. Mr Burkhard Balz of Bundesbank in this speech looks at how digitisation means central banks also have to change and look at their cloud services:


Inflation Co-Movement in Emerging and Developing Asia: The Monsoon Effect

July 12, 2019

Patrick Blagrave of IMF in this paper looks at the monsoon effect on inflation in developing Asia:

Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement.

By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation.

In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.


What drives demand for banknotes? Swiss edition

July 11, 2019

Interesting paper by Katrin Assenmacher, Franz Seitz and Jorn Tenhofen:

Knowing the part of currency in circulation that is used for transactions is important information for a central bank. For several countries, the share of banknotes that is hoarded or circulates abroad is sizeable, which may be particularly relevant for largedenomination banknotes. We analyse the demand for Swiss banknotes over a period starting in 1950 to 2017 and use different methods to derive the evolution of the amount that is hoarded.

Our findings indicate a sizeable amount of hoarding, in particular for large denominations. The hoarding shares increased around the break-up of the Bretton Woods system, were comparatively low in the mid-1990s and have increased significantly since the turn of the millennium and the recent financial and economic crises.

Well, the results are just opposite of what central bankers and government will tell you. They say people hoard money for all kinds of illegal transactions, black money and so on. They never tell you that most of the time common people hoard money for all the policy problems created by the government and central banks.

Safeguarding the euro in times of crisis: The inside story of the European Stability Mechanism (ESM)

July 10, 2019

In the backdrop of European sovereign debt crisis, the leaders first established European Financial Stability Facility in 2010 followed by European Stability Mechanism in 2012.

ESM has released a book (free pdf available) reflecting on the experiences of establishing the facility and so on:

Global financial leaders and ESM insiders provide a rich stock of perspectives and anecdotes that bring to life the urgency of the euro area crisis as well as the innovative solutions found to resolve it. As Europe strives to further strengthen its financial architecture, this books provides important lessons for future crisis management.
Should be a good read…

From optimal currency areas to digital currency areas..

July 10, 2019

Markus K Brunnermeier, Harold James and Jean-Pierre Landau envisage that we will have digital currency areas in future:

Global Dimensions of U.S. Monetary Policy

July 9, 2019

Maurice Obstfeld of Univ of California Berkeley in this research paper says there are 3 channels:

This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that U.S. monetary policy faces. It considers three main channels.

The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations.

The second channel is the determination of asset returns (including the natural real safe rate of interest, r*) and financial conditions, given integration with global financial markets.

The third channel, which is particular to the United States, is the potential spillback onto the U.S. economy from the disproportionate impact of U.S. monetary policy on the outside world.

In themselves, global factors need not undermine a central bank’s ability to control the price level over the long term — after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.


6 tips on how to read old economics books

July 8, 2019

Nice tips from Luka Nikolic (incredible for someone who is a Master’s student at the University of Ljubljana):

It is one thing to pick up a book and read it and a different thing to actually understand it. Attempting to read Adam Smith’s The Wealth of Nations (1776) or other old texts will give many lay readers a headache. The main reason for this confusion is the incomprehensible “King James” English in which those works were written. As a result, students rely on professors’ interpretations of some key concepts during lectures and focus on reading more contemporary literature, which is easier to read.

However, there is a way to read these pioneering books yourself and actually have fun in the process. Studying the forefathers of economics is key to understanding how the science evolved. You can find that some of the main problems of today—from protectionism to crony capitalism—were some of the key issues debated over 200 years ago, as well. The following instructions are meant for students or simply the layman economist. However, certain bits (especially the first point) may come in handy for the well-established individual in the profession, as well. 

1. Read Abridged/Modernized Versions 

2. Chapter Summaries

3. Focusing on Key Concepts: Most early books on economics run well into 800-1,000 pages. If you’ve ever read older fictional literature, especially Victorian-era, you might have noticed that the writers of that period really enjoyed writing long sentences. One of the reasons for this is that they were usually paid by publishers by the word/letter. Unfortunately, the same also holds for non-fiction literature.  

4. Read About the History of Economic Thought 

5. Do Not Focus Solely on Economics 

6. Be Familiar with the Times

Useful bit…

Sea change in global economic outlook

July 8, 2019

Mark Carney in this speech points how global economic outlook has gone through a sea change from optimistic to pessimistic.  He quotes from who other but Shakespeare:

A sea change is a profound transformation. The term was originally coined by Shakespeare in The Tempest,
of which there are five productions across Dorset this summer.These productions will mix tragedy and comedy in a play whose themes range from magic and creation to betrayal and revenge.

My focus is more limited and prosaic – but also more immediately relevant to your work. In recent months, there has been a sea change in financial markets driven by growing concerns over the global economic outlook. I will assess these global developments before turning to what they may mean for the UK’s economic prospects.

A good account of economic conditions…

Decline of economist as a central banker

July 8, 2019

My new piece in Business Standard.

I reflect on the recent nomination of Christine Lagarde as head of European Central Bank. It is interesting how French dominate Germans, on the Bundesbank styled European Central Bank.

In recent months we have seen how governments worldwide are preferring non-economists to head the central banks. Lagarde is an addition to the list.

Though, it is a choice which would be seen as not really a good one. Lagarde is former French Minister of Finance and you do not want to see former Ministers heading central banks, atleast not in European Central Bank, which prides on independence and autonomy.

Much more in the piece.


Does Japan vindicate MMT?

July 5, 2019

Koichi Hamada, advisor to Shinzo Abe in this piece says Japanese economy has followed MMT but one has to be careful drawing lessons:

Some MMT advocates – including Stephanie Kelton, a former economic adviser to Sanders – point to Japanas proof that the approach works. Despite high public debt, its economy is steadily recovering, and standards of living are high.

Moreover, MMT advocates point out, Japan’s expansionary monetary policies – a central feature of Prime Minister Shinzo Abe’s economic-revitalization strategy, Abenomics – have not generated a much-feared surge in inflation. Even within Japan, some argue that there is no need for a consumption-tax hike to fund public spending.

But there is a serious problem with this logic: Japan’s government is not as heavily indebted as is generally believed. Though Japan’s gross debt-to-GDP ratio, at 240%, is the highest in the developed world, what really matters – for the government, just like for private firms – is the net debt-to-GDP ratio, which accounts for real and financial assets. And Japan’s public companies have very large real assets.

In fact, by this measure, Japan is about on par with the US, and doing much better than France and Germany, according to the International Monetary Fund’s October 2018 Fiscal Monitor report, “Managing Public Wealth.” Further challenging Kelton’s assessment, Japan’s primary balance has improved under Abenomics, thanks to its economic recovery.

This does not mean that MMT has no merit, in Japan or elsewhere. In its campaign to increase consumption taxes, Japan’s Ministry of Finance drilled into the public psyche the concept of “Ricardian equivalence”: a government cannot stimulate consumer demand with debt-financed spending, because people assume that whatever is gained now will be offset by higher taxes due in the future. (It was this campaign that drove the MOF constantly to advertise the 240% figure.)

MMT can challenge this strict Ricardian belief, drawing attention to the potential of deficit financing, say, to boost employment through targeted social spending. And, indeed, Olivier Blanchard and Takeshi Tashiro have already proposed using limited deficit financing to help bring Japan’s interest rates up to zero, at a time when the government’s borrowing costs are low and the effectiveness of monetary policy is weak.


MMT works but upto the point inflation comes back:


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