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

A Program to Stabilize the Economy in Four Words: No further credit expansion!

September 7, 2017

The way out of a credit influenced crisis is ….give more credit,  goes the mantra. This is how most policies around the world are…

Joseph Salerno points to Mises 4 words which can stabilize the economy in 4 words:

Paul Cantor, Clifton Waller Barrett Professor of English at the University of Virginia and Associated Scholar of the Mises Institute, attended Ludwig von Mises’s seminar at NYU as a young man. He recently surprised and delighted a few of us by revealing that the line that he remembers Mises speaking most frequently in the seminar was “No farzer credit expansion!”  As a native German speaker with an accent and less than complete familiarity with English usage, what Mises meant to say, of course, was “No further credit expansion!” Upon hearing this, it struck me that Mises pithily summed up in four words a program for “stabilizing” the economy, that is, abolishing booms, bubbles, and recessions. Why the entire program could—and should—be printed on a T-shirt.

No further credit expansion!


They should send these Tees to all finance minstries and central banks across the world as gifts!


Should we raise prices during a natural calamity?

September 7, 2017

There was a huge uproar when price of flights increased sharply during Chennai floods in 2015. Likewise, there is always this criticism on Uber/Ola who increase prices due to huge demand.

Prof.  Mark Steckbeck of Campbell University thinks otherwise. It was due to the high prices he could get milk  as snowfall was expected:


African protests over CFA Franc colonial currency..

September 7, 2017

Troubling set of developments in West Africa. Even if colonial powers have ceded control they continue to shape the destinies of their colonies via laws, institutions and of course money.

It so happened that French-Beninese national, Kemi Seba burned a 5000 CFA Franc note protesting against the colonial currency. He appealed to the African countries to issue their own name currency.


From monetary money to fiscal money: Should Governments issue their own money?

September 6, 2017

Yanis Varoufakis has a puzzling column.

He says we think most money is created by central banks which is not really right. Most money these days is being created by banks who lend to each other using Govt bonds as collateral.


Will we see a return of the city-state?

September 5, 2017

Interesting piece by Jamie Barlett , Director at the think-tank Demos in London.


How is it that ECB understands role/importance of cash where cash usage is declining?

September 5, 2017

Yves Mersch member of ECB Executive Board has a piece on role of cash in the system. It is interesting to note that despite the fact that some of the European countries are seeing a decline in cash usage, ECB thinks cash still plays an important role in the system. He made an earlier speech on the issue as well.

In this piece he says:

There is much talk about the demise of cash. But to paraphrase Mark Twain, reports of its death are an exaggeration. Cash remains popular. A crucial point for banks to understand, since respecting clients’ needs and wishes is a precondition to ensuring their loyalty and support. This not only applies to the relationship between private banks and their clients, but also between central banks and the public, where cash provides a tangible daily link. I will discuss each in turn.


In this context, some see major business opportunities arising from abolishing cash, by eliminating the high storage, issuance, and handling costs that the financial industry currently faces. Customers would benefit, too, as they would no longer need to carry wads of cash or search for ATMs.

But this assumed increase in convenience would come at a cost. There are a wide range of legal, governance and operational questions that need to be considered carefully before switching away from cash. Just as cash has a number of technological safeguards to protect from counterfeiting, innovative payment systems require significant safeguards to protect individuals from theft and from loss of personal information. That protection of personal information extends to ensuring the ability of law-abiding citizens to maintain their anonymity and addressing legitimate concerns surrounding the use of Big Data for personal profiling.

Most importantly, empirical evidence suggests that the lobbying to abolish cash fails to respect the will of the people: cash remains popular. Recent research for the ECB finds that 80% of transactions at point of sale are in cash. Even adjusting for the value of transactions, cash still accounts for the majority. Indeed, the demand for cash currently outstrips the growth in nominal GDP.

Banks should see such developments as a positive opportunity to engage with customers, without actively pushing them away from cash where it remains their preference. Enabling customers to manage their finances in the manner that most appeals to them encourages loyalty and supports customer retention.

He then discusses how cash provides the crucial link between central bank and public…

The integration of economic history into economics

September 4, 2017

Prof Robert Margo of Boston Univ has a piece (detailed paper here):

Whatever the forces, the brunt is always on the history inclined…


In the 21st-century economy, many millions of workers are being treated as costs which have be minimized….

September 4, 2017

Interesting essay by Neil Irwin which is doing the rounds of internet.

It tells the story of two janitors employed by two different companies and 35 years between their jobs. The first started as janitor at Kodak and eventually  promoted to a professional-track job in information technology. The second  was employee of a contractor that Apple uses to keep its facilities clean. She just remained where she was.

The end of the article sums up:


Business history of emerging markets should be seen as an alternative rather than merely adding new settings…

September 4, 2017

Nice and important paper by Profs. Gareth Austin, Carlos Dávila, and Geoffrey Jones.

It is fashionable to present economic and business history research of non-developed world very superficially. Moreover, it is just seen as complimenting the history of the developed world despite some very different contexts in the two sets of countries. Infact, the developed world differentiates its country-specific research but sums all non-developed world experience as emerging markets or some other term.

But this is not how it should be:


How economists are the new astrologers…

September 1, 2017

As one was reading this piece, popped this piece in the mailbox.

The first piece features an this economist whose projection/prediction of India’s GDP for Q1 2017-18 was as per the printed numbers.

The second one says economists are the new astrologers:


The interdependence of research and (monetary) policymaking

August 29, 2017

ECB chief Mario Draghi gives a nice speech on the topic. It is at Lindau Nobel Laureate Meeting.

He looks at how research has impacted policies over the years summarising many years of research and policy. In the end points t0 5 lessons:

This account of how policymakers and researchers have interacted in the past ten years shows how indebted the former are to the latter. From my point of view, one can draw five lessons for policymakers.

First, sudden shocks often make visible the flaws in our policy frameworks and challenge the explanatory power of existing theories in ways that have been previously overlooked. But analysis conducted by researchers and embraced by policymakers remains essential in designing the policy response.

Second, a policy response that has its foundation in rigorous research is less prone to being impaired by political compromise and easier to explain to the general public.

Third, Keynes is often quoted as saying, “When the facts change, I change my mind. What do you do, sir?” Well, for policymakers, it is not that simple, and research helps us to decide whether a change in the facts deserves a policy response or, as we say, we should look through it.

Fourth, when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power.

Fifth, we must be aware of the gaps that still remain in our knowledge. Our mainstream macroeconomic models still have little to say, for instance, about the non-linear propagation of shocks, the distributional impacts of policies, or how endogenous firm entry and exit can affect economic performance.[15] Policy actions undertaken in the last ten years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges.

The changes that we have discussed, profound as they are, often hinge on one fundamental idea. A natural question to ask is whether such an idea sprang out as a response to a specific policy problem or was rather conceived previously in an entirely different, unrelated intellectual environment, perhaps addressing a different set of problems. It is a question that is especially relevant in economics, when previously held consensus views change. But it is a question that is unlikely to have a precise answer.

Let me rather use the 1939 words of Abraham Flexner, the first director of the Princeton Institute for Advanced Study: “Almost every discovery has a long precarious history. Someone finds a bit here, another a bit there. A third step succeeds later, and thus onward till a genius pieces the bits together and makes the decisive contribution.”[16]

Today, I have had the privilege of addressing such people – geniuses who have pieced the bits together and made decisive contributions.

He misses the 6th and most important lesson: avoiding hubris and need for humility in both research and policymaking. We often see a lot of problems when both research and policymaking think they have solved all economic problems  and nothing can go wrong, is when all wrongs happen…

What is its working at a sprawling bitcoin mine in Inner Mongolia (China)..

August 28, 2017

Superb piece about a firm behind bitcoin mining.

The article is quite in the Coasean spirit. People often talked about markets but Coase saw that most exchanges are actually governed by firms. Which led to one of the most amazing insights of economics that it is firms which via lower transaction costs enable exchanges.

Likewise, we talk about how cryptocurrencies shall usher in a new world of decentralised digital currency and lead to better monetary markets. But we really do not look at the back-office of these cryptocurrencies and ask who is doing all this stuff?

This interesting article speaks about this Chinese firm Bitmain which provides 4% of the processing power in the global bitcoin network. It was fascinating to connection between old industry and new one. The region was first a coal bed and thus was a natural home to electricity which is needed immensely in these operations:


How William Baumol created cultural economics in sleep!

August 28, 2017

Prof. Victor Ginsburgh of Université Libre de Bruxelles pays a tribute to Prof Baumol who just passed away. He points to this interview Alan Krueger takes of Baumol:

William Baumol is the ‘inventor’ of the cost disease, an idea that initiated the field of cultural economics. According to Blaug (2001: 123), “cultural economics or the Economics of the Arts, as it used to be called, may be said to have been created almost de novo 30 years ago by Baumol and Bowen’s (1966) book.”

Instead of defining the disease – every cultural economist should know what it says – here, according to Baumol himself, is the story of its birth:

“John D. Rockefeller III and August Heckscher of Twentieth Century Fund had decided that it was time for the United States to do something to encourage the arts. So they decided they would have a two-pronged operation. One was a panel composed of good, solid business people who could show that the arts were not a Communist homosexual plot. Then they wanted a serious study. They talked to a number of people, and then someone told them that there was this crazy economist at Princeton who was interested in art. Well, it was the wrong art. I was interested in painting and sculpture. So they called me in, and I told them how I would go about selecting somebody to study it… And then the next day they called me and said, ‘We’d like to give you those instructions.’ I said, ‘I’m terribly busy. I can’t do it.’ And they called again, and I said, ‘Well, I’ll do it on one condition. There’s a young assistant professor here, in whose work I have great confidence. If he’s willing to do it and you’ll pay him…’ And they agreed and Bill Bowen came and took over the whole thing, as you can imagine. It was such a pleasure working with him. So we started to work on it, and he laid out all the things that had to be covered, how one should go about covering them. And then we started to get all these statistics about budgets. Then one night, it was 4:00 in the morning, I suddenly woke up and said I know why those costs are going up! I got up, wrote down a few notes, and went to sleep again. That’s literally how it happened.” (Krueger 2001: 217-18).

The productive nature of sleeping seems to recur in science: a French mathematician called Andre Lichnerowicz once said that there is no difference between a mathematician who sleeps and a mathematician who works. This is very close to what Baumol’s son, Daniel, recounted about his father: “During a long trip, he would sit in the back of the car, oblivious to the world, and as we pulled in, he would announce, ‘I just finished that article’” (New York Times 2017).


Though these gifts are possessed by rare few. Most of us struggle to come with any ideas despite all eyes awake…

Learning Game theory the Sholay way…(are happy endings just Nash Equilibrium audience likes to see?)

August 22, 2017

What started as a series of Tweets has become a very interesting Mint column today.

Avinash Tripathi explains game theory basics using one of the iconic scenes of iconic movie Sholay:


The policymakers also join the deflation chorus in India..

August 22, 2017

The deflation chorus keeps coming in India. A drop in inflation is termed as deflationary by media every now and then. Former ECB member Lorenzo Bini Smaghi had earlier warned that one should use the two D words – deflation and depression with caution. The reason is that both suggest really difficult times for both economy and policy. However, we seem to be using the word deflation with little caution.

For instance, this time around even Economic Survey says India suffers from deflationary impulses atleast in short term:

Optimism about the medium term and gathering anxiety about near-term deflationary impulses simultaneously reign over the Indian economy. Optimism stems from the launch of the historic Goods and Services Tax (GST), the decision in principle to privatize Air India; actions to address the Twin Balance Sheet (TBS) challenge; and growing confidence that macro-economic stability has become entrenched. Optimism, even exuberance,
is manifested in financial markets’ high and rising valuations of bonds, and especially stocks. At the same time, anxiety reigns because a series of deflationary impulses are weighing on an economy yet to gather its full momentum and still away from its potential. These include: stressed farm revenues, as non-cereal food prices have declined; farm loan waivers and the fiscal tightening they will entail; and declining profitability in the power
and telecommunication sectors, further exacerbating the TBS problem. For the year ahead, the structural reform agenda will be one of implementing actual and promised actions— GST, Air-India, and critically the TBS. The macro-economic challenge will be to counter the deflationary impulses through key monetary, fiscal, and agricultural policies. The opportunities created by the “sweet spot” that recent Economic Surveys have highlighted
must be seized and not allowed to recede.

Even in RBI MPC Minutes, both Governor and Deputy Governor mention deflation in food prices:

Statement by Dr. Viral V. Acharya

Inflation prints since the last policy have turned out even lower, though there are emerging signs that certain deflating food items are on a price rebound. 

Statement by Dr. Urjit R. Patel

…….An assessment of whether the recent deflation in food items is sustainable, despite a normal monsoon, would require more hard data going forward.

There is always this confusion when the term deflation is mentioned. What people perhaps mean is disinflation but they end up calling it deflation.

Robert Ophele, then Deputy GOvernor of Banque de France clarified:

Inflation refers to a sustained increase in the general price level in an economy. It is not an instantaneous shock limited to the prices of certain goods. It is a persistent and general process. Inflation is fuelled by expectations – when workers and companies expect prices to rise, they adjust upwards their prices and wages accordingly.

Conversely, deflation is a sustained decrease in the general price level in an economy. If only certain prices fall, it is not deflation. For example, the price of laptop computers or hi-fi equipment may decrease due to technological progress, but this is not deflation.

Disinflation is a reduction in the rate of inflation or a temporary decrease in the general price level in an economy. For example, if inflation falls from 3% to 1% per year, this is disinflation. If, however, the rate of inflation falls into negative territory, to 1% per year for example, and this decrease is expected to last, this is deflation.

In a recent piece Tandit Kandu of Mint clarifies the so called deflation only on account of fruits and veggies:

The second volume of the Economic Survey released a little over a week ago by the Union finance ministry warned that the Indian economy faces deflation risks owing to the problem of over-leveraged private sector balance sheetsand other headwinds such as GST and rural distress. Concerns over deflation risks are understandable, given the recent downward trend in retail price inflation.

However, a Mint analysis suggests that the sharp drop in inflation below the Reserve Bank of India’s (RBI’s) 4% target has been driven by only two items—pulses and vegetables. The analysis shows that consumer price index (CPI), excluding pulses and vegetables, rose at the rate of 3.8% in July, much higher than the official headline figure of 2.4% inflation for the month. The re-calculated CPI is based on adjusted weights after excluding pulses and vegetables from the basket of goods and services.


Thus, there does not seem to be any imminent threat of deflation in India. A more apt characterization of the recent trends in prices may be ‘disinflation’ (a fall in the inflation rate) rather than deflation (falling prices) given that overall inflation, excluding pulses and vegetables, is close to the RBI target of 4%.

This is pretty much the story each time deflation is mentioned in India. One or two items/categories lead to decline in inflation levels and we call it deflation in India and clamoring for monetary and fiscal stimulus.  Whereas deflation is persistent decline in most prices (if not all) and there is nothing of this sort happening here.

How women started but got crowded out of the computing revolution…

August 21, 2017

One just blogged about women stockbrokers in NYSE.

Then was reading this article by Tamal Bandypadhyaya on how with each subsequent data, men are being seperated from boys in Indian banking. To this Bindu Ananth  of IFMR Trust tweeted and rightly so : “Given that a majority of banking assets are managed by women CEOs, the title needs editing”. Indeed!

As one finished Tamal’s piece, popped another piece from Stephen Mihm in Bloomberg View.


What are the moral limits of markets? Michael Sandel edition..

August 18, 2017

An alternate perspective from Prof Sandel. Persuasive stuff…

Why have a Museum of Finance? (Lessons for Museums of Finance in India..)

August 18, 2017

A nice piece (old piece in 2012) by Prof Richard Sylla of NYU in the Financial History publication released by Museum of American Finance.

He narrates several examples from financial history to show why a Museum of Finance is really important. These several examples show the importance and power of finance. Apart from this, these museums also shows importance of financial education which is poor amidst most people. A museum with right kind of communication technologies helps in many ways where dozens of government programs just fail.

In India, have seen three Finance Museums. The RBI Museum in Mumbai, the RBI Archives Museum in Pune and Corporation Bank Museum in Udupi. With RBI it is expected but to see Corporation bank having such a useful museum is quite surprising. It has amazing anecdotes which even likes RBI does not have in its resources. The unseen ones there is SBI Museum in Calcutta and former State Bank of Travancore which opened one just before it got merged with SBI.

So five museums of finance are there in India as per my limited knowledge and there could be few more. Five alone is an impressive number.

The problem with these Museums is that they do not communicate much with the outside world. They take their sole purpose as one of display and nothing else.

However, in museums like Museum of American Finance under whose publication Prof Sylla writes the idea is to reach across people:


Sunk cost lessons from Ajay Devgn..

August 17, 2017

Amit Varma’s latest article on Housefull Economics:

‘Maine pyaar tumhi se kiya hai/ Maine dil bhi tumhi ko diya hai/ Ab chaahe jo ho jaaye/ Main duniya se ab na daroon/ Tumhi se main pyaar karoon.’ — Ajay Devgan in Phool Aur Kaante

Many years ago, at the tender age of 17, I went to watch the first-day-first show of Phool Aur Kaante in a theatre in Pune. We couldn’t get balcony tickets — who remembers ‘balcony’ in this age of the multiplex? — and had to settle for front-row seats in the stalls. It was horrendous — our necks would jerk from side to side during the fight sequences, and the film itself was awful. At the interval, my friend and I considered leaving. But we figured that we had paid for the tickets, watched half the film, and that effort would be wasted if we left now.

We did not know it then, but we were making the same mistake that Ajay Devgan made in the film.

In the song above, Devgan sings: I have loved only you/ I have given my heart to only you/ Now whatever happens/ I will not be scared of the world/ I will love only you. This is equal parts sweet, naive, and downright creepy in that typical Bollywood stalking sense. Devgan is saying that now that he has made the effort of giving his heart to the lady in question, he will stick with it and go all the way. He has committed the Sunk Cost Fallacy.

A sunk cost, in economics, can be defined as “a cost that has already been incurred and cannot be recovered.” We commit the Sunk Cost Fallacy when, by one definition, we “continue a behavior or endeavor as a result of previously invested resources (time, money or effort).” For example, the time, effort and money that my friend and I had spent in watching Phool Aur Kaante until the interval was a sunk cost. It was already gone. The only factor in our decision-making should have been whether we’d have a better time sitting through the rest of the film or going off and doing something else. (The good time we could have had elsewhere was, in fact, the Opportunity Cost of finishing the film.)

The Sunk Cost Fallacy is everywhere in our lives.

Superb as always…

What economists study: A guide for the curious

August 17, 2017
Christopher Snyder of Dartmouth College provides a guide:

When you meet someone at a cocktail party who learns you are an economist, the inevitable question follows, “What’s the stock market going to do?” That’s an excellent question. If, on the day I was born, my parents had invested $100 for me in Altria, the top-performing stock since then, I would be a millionaire.

Of course, most of us economists do not spend our time thinking about the stock market.

The press has its own view of what we do, not always positive, whether criticizing our inability to predict the future (Harford 2014), our lack of engagement with the real world (The Guardian 2017), or our preference for mathematics over people (Smith 2015). How do we, as economists, combat these negative stereotypes? Perhaps by explaining better the broader set of issues economists think about and how we think about them. I recently attempted this in a chapter (Snyder 2017) published in What Are the Arts and Sciences? A Guide for the Curious.

One short answer is that economics is the social science focusing on people’s material well-being, the ‘business side’ of life. How do people earn a living? What do they buy with the money they earn? What spurs the overall economy to grow?

While a starting point, the domain of economics has continued to expand, blurring any distinctions between it and other social sciences. For example, crime was once exclusively a matter for sociologists and corruption for political scientists. But economists realised that these social problems might respond to economic incentives, and left untreated could destroy a productive economy. In this way, the issues have become part of mainstream economics.

Nice bit..

Though he does answer the stock market question at the end:

Having patiently listened to your description of what you do, your audience may still expect an answer to the million-dollar question, “What’s the stock market going to do?” Recall the stock that could have made me a millionaire by now, Altria, the top-performer over the last several decades according to Siegel (2005). Are you curious what Altria makes? A good guess might be something high-tech, perhaps computers or pharmaceuticals.

Altria makes cigarettes. Until a recent spinoff, Altria was the parent company of Phillip Morris, manufacturer of Marlboro and other cigarette brands. With smoking on the decline in rich countries due to high taxes and restrictions, it is hard to believe cigarette manufacturing would be a good investment.

The surprising performance of cigarettes provides a useful economic insight into stock prices. It is tempting for average investors to think they can beat the market, but study after study shows this is generally not true. They are better off diversifying across many stocks and holding these stocks over the long term.


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