Archive for the ‘Economist’ Category

Does the hawk-dove distinction still matter in the modern Fed?

March 2, 2015

Interesting article by Tim Sablik of Richmond Fed.

Comparing Fed/central bank members as birds goes back to war generals:


Ukraine has the highest inflation in the world today..

February 26, 2015

Prof. Steve Hanke, the hyperinflation tracker  writes on this.

He says going by recent estimates, Ukraine is the 57th hyperinflation episode in history:


Bank of England’s multiple challenges..

February 25, 2015

Bank of England is fighting many a battle and is trying hard to keep itself in the game. UK economy’s dependence on financial sector is like putting all eggs in one basket. As most eggs are wither broke or cracked, BoE and Govt are trying to play a rescue act.

It just issued these guidelines which will punish top bankers if they are found messing around:

The Prudential Regulation Authority (PRA) has today set out how it will hold senior managers in banks, building societies and designated investment firms to account if they do not take reasonable steps to prevent or stop breaches of regulatory requirements in their areas of responsibility.

In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published its report “Changing Banking for Good” setting out recommendations for legislative and other action to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013.

The Banking Reform Act introduced new powers which allow the PRA and Financial Conduct Authority (FCA) to impose regulatory sanctions on individual senior managers when a bank breaches a regulatory requirement if the senior manager responsible for the area where the breach occurred cannot demonstrate that they took reasonable steps to avoid or stop it.

The PRA has today published guidance for banks clarifying how it will exercise this new power; including examples of the kind of actions which may constitute reasonable preventive steps and how firms and individuals may evidence them.

The Banking Reform Act also creates a separate offence which could result in individual senior managers being held criminally liable for reckless decisions leading to the failure of a bank. This new criminal offence will, however, be subject to the usual standard of proof in criminal cases (‘beyond reasonable doubt’).

Before the crisis, such things done by central banks and that too in UK were just such a taboo. I mean how could you ask bankers to behave? Markets shall take care..

In another initiative, it has launched a fancy program – One Bank research. So was it a multiple bank agenda earlier?:

The Bank of England today launched its new One Bank Research Agenda – an ambitious and wide-ranging framework to transform the way research is done at the Bank. 

The Agenda aims to improve the coordination and openness of our research across all policy areas, to ensure the Bank makes the best use of our data, and to cultivate an extensive research community that spans the Bank and beyond.

After in-depth consultation with researchers across the Bank and the wider academic community, the Bank has developed five core themes to guide its research: Policy frameworks and interactions; Evaluating regulation, resolution and market structures; Policy operationalisation and implementation; New data, methodologies and approaches; and Response to fundamental change.

They are sharing a lot of historical data under this and should be good for researchers.

the Bank published a supporting discussion paper as well as a high level summary of the five research themes, and released a number of new Bank datasets for use by external researchers. 

Finally, to catalyse interest in the One Bank Research Agenda, the Governor today announced two new competitions sponsored by the Bank – a data visualisation competition using the newly released Bank datasets, and a One Bank research paper competition.

The Governor summarised today’s launch of the One Bank Research Agenda, saying: “Economies are complex, dynamic and constantly evolving systems that are underpinned by social interactions and behavioural change, shaped by fundamental forces like technology and globalisation and supported – or at times disrupted – by finance.

Policymakers need research to help understand these phenomena and to craft our responses to them. And research can make some of its most effective contributions by speaking to the priorities of policy.

Research can help us to discover insights and build them into our policymaking processes.

By focussing on a clear set of research priorities, by opening up our datasets, and by creating tighter links between policymakers and researchers, both within the Bank and across the broader research community, we can advance our mission – promoting the good of the people of the United Kingdom.”

Becoming more and more multiple indicator targeting central bank. The new research themes are also on similar lines.

China’s GIFT city model..

February 25, 2015

Finance is hot again. Despite the west having  serious troubles over regulating their finance sector, the eastern world remains excited.

Indian FinMin recently released a paper on Finance SEZs  where the special zone will have complete freedom in finance. Just like in trade, SEZs are allowed near complete freedom same thing can be applied to Finance SEZs as well. This is of course keeping GIFT city in mind, Indian PM’s pet project when he was the CM of Gujarat.

Interestingly, China has already done something on those lines (how come they are always ahead when we make most of the noise and hype??). Prof. John Whalley has a piece on this:


Did Adam Smith give grades to students?

February 23, 2015

Prof. Humberto Barreto of  posed this question on a history email forum:


The calamity behind formation of Fed — an Austrian school perspective..

February 20, 2015

As audit the Fed movement picks up heat, we need to again go back to historical reasons for setting up the central bank. Those who agree with the idea argue Fed has become way too powerful and has created enormous damage with its mon pol. So if we cant end the fed let us audit it. Those who are against the move, say just leave the Fed.

The Austrian school a long critic of central banking and Fed, are surely enjoying this. Long ignored by economists, their arguments are coming to fore pretty naturally given the errors central banks have made across the world.


How Kuwait can use fiscal instruments to cut congestion?

February 20, 2015

Good to see useful papers from likes of Kuwait Univ.

It is written by Dr. Fatima Al Matar and is a decent read on traffic issues and how to reduce congestion:


Why gender equity is elusive in economics?

February 20, 2015

Pranjal Rawat of Presidency College Kolkata has this piece in DNA.

She reflects on the poor representation of women in dismal science:


Greece policymakers and game theory..

February 19, 2015

Nice piece by Anatole Kaltesky of Gavecal Dragonomics.

Using game theory he says the policymakers are playing to loose:


Love, money, and old age in China..Does Parental Matchmaking Matter?

February 19, 2015

Interesting research on arranged marriages in China (paper here).

They look at choices made by parents while selecting a match:


Battle for San Francisco between traditionalistas and newbies..

February 19, 2015

San Francisco is battling what most cities go through — clash of cultures.


Kuznets Nobel medal up for auction!

February 18, 2015

It seems Nobel Prize winners are fed up of their medals. After Prof James Watson’s decision to auction the medal, another one is up for grabs.

This one is of Prof Simon Kuznets (HT: Greg Mankiw blog)who won the Bank Prize in memory of Alfred Nobel. And it is Kuznets son who has decided to auction it:


Premature deindustrialisation in the developing world..

February 18, 2015

Dani Rodrik has an interesting post on the topic. Prof Rodrik has always been a supporter for industrialisation using all kinds of policies.

In this one he shows how deindustrialisation has become a trend across the world:


Should central banks worry about bottom line?

February 13, 2015

Barry Eichengreen and Beatrice Weder Di Mauro write on the topic.

They say bottom line is the last thing central banks should be worried about. Unlike traditional banks, CBs can remain functional with losses:

Around the world, central banks’ balance sheets are becoming an increasingly serious concern – most notably for monetary policymakers themselves. When the Swiss National Bank (SNB) abandoned its exchange-rate peg last month, causing the franc to soar by a nosebleed-inducing 20%, it seemed to be acting out of fear that it would suffer balance-sheet losses if it kept purchasing euros and other foreign currencies.

Similarly, critics of the decision to embark on quantitative easing in the eurozone worry that the European Central Bank is dangerously exposed to losses on the southern eurozone members’ government bonds. This prompted the ECB Council to leave 80% of those bond purchases on the balance sheets of national central banks, where they will be the responsibility of national governments.

In the United States, meanwhile, the “Audit the Fed” movement is back. Motivated by growth in the Federal Reserve’s assets and liabilities, Republicans are introducing bills in both chambers of Congress to require the Fed to reveal more information about its monetary and financial operations.

But should central banks really worry so much about balance-sheet profits and losses? The answer, to put it bluntly, is no.
To be sure, central bankers, like other bankers, do not like losses. But central banks are not like other banks. They are not profit-oriented businesses. Rather, they are agencies for pursuing the public good. Their first responsibility is hitting their inflation target. Their second responsibility is to help close the output gap. Their third responsibility is to ensure financial stability. Balance-sheet considerations rank, at best, a distant fourth on the list of worthy monetary-policy goals.

Equally important, central banks have limited tools with which to pursue these objectives. It follows that a consideration that ranks only fourth in terms of priorities should not be allowed to dictate policy.

Not sure whether previous examples will work this time. Earlier CBs could work with losses as no one really cared who they were. Now CBs are all over the place and anyone reporting or expected to report losses is going to face huge political ramifications. CBs after fighting for so called independence for many years have just lost it. By trying to be a replacement to Finance Ministry, they have exposed themselves to all kinds of pressures. It will actually be interesting to see how markets react to any major CB reporting losses.

The bottom line is not really in terms of balance sheet. It simply is CBs have become way too big and powerful for anyone’s comfort. Efforts should be made to make them as anonymous as they once were..

Politicians too benefited from toxic loans before the 2008 crisis…

February 12, 2015

HBSWK discusses a paper on the topic.

It is based on French politicians who have used fancy finance to make political inroads:

Talk of the recent financial crisis often falls into a simplistic narrative of villainous banks, marketing toxic financial products to innocent customers who did not understand their risks. Among the storied victims are municipal governments that took out loans with initially low interest rates, only to see the rates skyrocket when the crisis hit. Many mayors cried foul, insisting that they had been hoodwinked.

But were the local politicians really unwitting fools? “There is no doubt the transactions were very risky, as interest rates on these loans frequently exceeded 20 percent,” says Boris Vallée, an assistant professor in the Finance unit at Harvard Business School. “The question is, Did local politicians get fooled into engaging in risky transactions, or did they take the risks knowingly, opting for the short-term benefits in spite of the risks?”

Vallée recently tackled that question in the paper The Political Economy of Financial Innovation: Evidence from Local Governments, cowritten with Christophe Pérignon, a finance professor at HEC Paris. The study offers empirical evidence that politicians routinely used high-risk loans on purpose, for political gain, in spite of the risks. Furthermore, the strategy worked: Toxic loans helped incumbent mayors get reelected.

The researchers focused their study on France, having gained access to two valuable data sets: The first contained the entire debt portfolio for most of the 300 largest French local governments as of December 31, 2007; and the second contained the loan-level data for all the outstanding structured transactions of Dexia, the leading bank in the market as of December 31, 2009. (Shortly thereafter, Dexia fell apart in the European debt crisis.) The data showed that so-called structured loans accounted for 20.1 percent of the 52 billion euros in total debt for the municipal sample.

Similar to subprime mortgages, structured loans usually carry a few years of guaranteed low interest, which allows local governments to reduce the cost of their debt quickly and obviously. But after the honeymoon period, these loans end up carrying highly variable interest rates resulting from exotic exposures. For example, the City of Saint-Etienne saw the interest rates on one of its major loans rise from 4 percent to 24 percent in 2010, due to the depreciation of the pound sterling. In total, losses on toxic loans doubled the city’s debt levels.

The politicians reaped rewards till gains were made. Post-crisis they blamed it on banks for misselling:

Vallée and Pérignon analyzed how the politicians used the loans—whether they had invested the money in equipment or services for the city, or used the cash to lower taxes for their constituents, or both. It turned out that for the most part, they had used the short-term savings from the loans to lower taxes. “This action is consistent with politicians seeking reelection by catering to taxpayers’ preference for low taxes, which represents a likely channel for the previous result on the effects on reelection,” the researchers write.

The strategy apparently worked. Controlling for potential selection effects, the researchers found that using structured loans led to an increase in the likelihood that a politician was reelected.

“These financial innovative products appear, therefore, to have aligned banks’ incentives, as the transactions were highly profitable, with local politicians [who] had an interest in getting reelected,” Vallée says. “However, this happened at a large cost to the taxpayer, as the positive effects of the loans were short-lived, and interest on toxic loans ballooned when the crisis hit.”

In the wake of the financial crisis, many local politicians filed suits against their banks, claiming that they had not comprehended the risky nature of the loans they undertook.

“Local politicians have been vocal ex post both in the media and in [the] French Congress,” the researchers write. “For instance, in his testimony before the French Congress’s committee on toxic loans, the deputy mayor of the City of Saint-Etienne, who originally decided to take on some toxic loans, stated that ‘[he] was not able to read the information [he] received because [he was] not a financial expert.’ “

Vallée, who holds a doctorate in finance from HEC Paris, is currently working on a study of byzantine banking behavior toward individual investors. But in the case of structured loans, he argues that a borrower need not be a financial expert to realize the stakes. “They are not that complex, and after spending 10 minutes on it, someone with a college education will be able to understand the risks,” he says.

As this blog keeps should be weary of anything in high and sophisticated finance. Whes it bites back, it bites hard..

Transformative Rise of Austrian Economics…

February 9, 2015

Superb interview of Prof Peter Boettke of GMU.

One major loss of the economic teaching is this school is hardly taught. At best someone is going to mention it randomly or some book will have a box briefing about the school. It is a pity that with economists talking so much about free markets , do not give much space to the school which is freest of them all.

But then as Prof Boettke says, the school is finding a resurgence in popularity given massive failures of the current economic thinking. I mean it is not about figuring who is right and who is wrong. Students have to first know what the ideas of various schools are before they can decide the right and wrong.

How to translate research to policy and become a country economist…

February 4, 2015

Shantayanan Devarajan  of World Bank reviews this interesting looking book by his colleague Brian Pinto- How Does My Country Grow? Economic Advice through Storytelling.

So what is it about?


Reading Brian Pinto’s book, How Does My Country Grow? Economic Advice through Storytelling, is refreshing because it brings “middle-brow” economics back into policymaking. In a profession that is increasingly dominated either by randomised control trials of micro interventions or dynamic stochastic general-equilibrium models of macro phenomena (and I confess to having engaged in both), Pinto’s stories of Russia, Poland, Kenya, Nigeria and India remind us how simple economic models can help solve complex problems. To those who got their PhD more than 20 years ago, the book’s reassuring message is: The economics you learned in graduate school is still valid.

In addition, the book teaches three important lessons – for everybody.

(1) How to Go from Research to Policy: Most macroeconomic research involves some form of cross-country regressions. (If it is a single-country analysis, it is unlikely to be about a developing country, as Das and Do (2013) have shown.) As Pinto notes in the first part of the book, these cross-country regressions often give ambiguous, and even conflicting, results. For instance, growth regressions can yield very different implications depending on whether a neoclassical or endogenous-growth model is being estimated. Likewise, the large number of regressions linking debt and growth have not solved the problem of causality: does debt slow growth, or does growth slow debt? What the book teaches us, though, is that this ambiguity and conflict is a good thing. Since you never know which result applies to your country at a particular point in time, it is better to keep the ambiguity in your head as you approach the problem at hand – rather than come in with a preconceived notion of how the world works, based on a fragile cross-country regression.

(2) How to Give Policy Advice: Policy advice should be neither too bland nor too restrictive. An example of the former are the recommendations from international high-level panels such as the Growth Commission with which nobody would disagree; examples of the latter, sometimes labelled prior actions in World Bank loans, arethose that say “the country should adopt a new investment code by November 30th”. Pinto hits the sweet spot by offering three pieces of policy advice that are selective, prioritised and “edgy”. They are: (i) always have a hard inter-temporal budget constraint; (ii) promote competition, including competitive exchange rates; and (iii) manage volatility. Out of the litany of policies, Pinto has chosen these as the most important. Moreover, they are not innocent. Promoting competition in countries where certain industries were captured by the president’s family (as was the case in Tunisia under Ben Ali [Rijkers et al (2014)]) is tricky and possibly dangerous. Similarly, it is difficult to maintain a hard inter-temporal budget constraint when people are rioting in the streets. But that is precisely why this kind of advice is useful. It gives policymakers, who are often navigating in turbulent waters, a distilled set of guideposts that can keep their economy on an even keel, without excessively tying their hands.

(3) How To Be a Country Economist: Many people find themselves, at some point in their careers, looking over the economy of a country. Based on his long experience as a country economist at the World Bank, Pinto shows (by example) how to do the job well. First, make sure you cover both macro and micro aspects of the economy. As Pinto found in Poland, Leszek Balcerowicz’s “shock therapy” quickly produced good macroeconomic results but their sustainability depended completely on the micro: in particular, the large state-owned firms’ ability to adapt to the market. Most predicted catastrophe because the privatisation of these politically powerful firms had been held up. The surprise was that the directors nevertheless restructured their enterprises instead of stealing from them because of competitive pressure from imports and a clear signal from the government that there would be no bailout. Budgets were credibly hardened.

Second, if the underlying problem is firms’ behaviour and performance, listen to firms. The book is replete with stories of Pinto and his colleagues visiting factories, talking to the foremen, looking around – and realising the issue was different from what the macro data showed. This method of listening to firms complements and enriches the use of cross-country data such as the Doing Business indicators. I would add that, in addition to firms, country economists would benefit from speaking with workers, informal traders, farmers and households. The third lesson for country economists is to make sure you cover all sectors of the economy, even if your specialty is macroeconomics.

The last point, as well as the use of economic analysis to solve complex problems, is illustrated with a series of vignettes – “stories” – that make up the core of the book. I particularly liked two that led to counterintuitive, but ultimately convincing, results


For becoming a country economist, it is also critical that they are well versed with the country. They should be made to travel across the country and understand the issues. However, most of the time the idea is to grab a degree from selected universities and then just coolly slip in as a country economist whoever takes you. The idea should be to test how well an applicant understands the country rather than just degrees..

Persistent overoptimism about economic growth….

February 3, 2015

Kevin Lansing and Benjamin Pyle look at this perennial issue of being overoptimistic on economic growth.

They question the dominant rational expectations theory:


History of Greece’s Syriza Party and whether it can change Europe?

January 30, 2015

Yanis Varoufakis, Greece’s new Finance Minister has this interesting article on his party.

SYRIZA, a growing political party in Greece, is an acronym that stands for “Coalition of the Radical Left.” For Americans, the idea that a party on the radical left could gain power is unthinkable, and it was for Greeks, too—until very recently. But the harsh austerity measures that the European Union imposed on Greece after its economic collapse have created extreme conditions in Greece: six in ten young people are unemployed, wages and pensions have been cut, national income has fallen by one quarter.

Europe is currently caught in a negative feedback loop, from which the established political process is unable to escape. For three years now, an endless stream of spending cuts and tax hikes has dominated the Greek Parliament’s agenda. A SYRIZA win may be the jolt that Europe needs: a victory by a pro-European party committed to keeping the country both in the Eurozone and in the European Union, but a party that, importantly, because of its radical disposition, is prepared to open up the conversation at the level of the European Council so that, at long last, European leaders address the problems they have been ignoring over the past five years. Back in June, in a New York Times op-ed, James K. Galbraith and I alleged that “SYRIZA may be Europe’s best hope,” and six months later this still holds true.

Though SYRIZA has existed in some form since the early nineties, its popularity has exploded amidst the Euro Crisis, now polling somewhere between 20 and 30 percent. Since June, it has begun to take a lead in opinion polls, as the governing coalition’s promises of ‘Greek-covery’ are turning sour. Elections are not due until June 2016, but the present government has a wafer-thin majority that may dissolve after a likely electoral defeat in the May 2014 European Parliament elections. If a general election is called, SYRIZA could become the largest party in Greek Parliament.

The question then arises: what effect would such a victory have on SYRIZA itself? Can a radical party of the left maintain its cohesion in the face of neoliberal central bankers and their conservative counterparts in Germany, the Netherlands, Finland, France, and Spain? Under such circumstances, any government of the left would be short-lived. If European officials and political leaders anticipate the power SYRIZA might have, SYRIZA’s capacity to bargain, to forge new alliances, and to shatter the eerie silence in the European Union’s Brussels headquarters will be severely circumscribed.

He explains some history of the party and compares the task to Odysseus’s:

SYRIZA may have the opportunity to transform Greece and change the course of European history, but this is a task that makes Odysseus’s journey look like a walk in the park. It will not be easy to take power while remaining faithful to its radical agenda and maintaining its cohesion on the ground. It remains to be seen whether SYRIZA’s leaders can pull off this miracle. I think they can, as long as they do not issue silly promises before the next election, and maintain a truly radical agenda aimed at changing Europe by steadfastly standing their ground, proposing to German, Spanish, Dutch citizens a European agenda that restores the dream of a shared European prosperity. 

What times..

Would Keynes Have Been Fired as a Money Manager Today?

January 30, 2015

Interesting post by Ben Carlson.

Keynes managed an average return of 13.2% in the period 1928-45. The markets gave a return of -0.5% in the same period. This was an exceptional performance albeit came with much higher volatility. So would he have been fired for this performance?



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