This is the title of my new paper. Comments/Suggestions welcome..
Archive for the ‘Policy’ Category
One central theme which has emerged recently is rising inequality across the world. The haves and getting richer and have-nots not as much. The result is rising inequality. This has been happening for a while but it took this crisis to point to this disturbing trend. And of course the crisis has made things even worse with most people getting effected at middle and lower income quintiles.
Andrew Lo reflects on the state of economics and suggests what could be done to improve teaching in economics. He says the problem has been this economists fascination with Physics where things can be controlled in lab experiments and hence some superb research comes with accuracy etc.
Earlier economists were highly impressed with Physics and tried to model economics accordingly. Peter Boettke even said economics suffered big time because of Paul Samuelson:
CBO’s (Congressional Budget Office) independent evaluation of US fiscal deficit/debt is much celebrated. However, the crucial thing is how good are its forecasts of the US debt?
This paper by St Louis Fed econs say the record is nothing great. The idea is not to malign CBO (far from it) but to review its forecasting record and if possible help it improve. Unfortunately, the paper says it is not sure how it can advise CBO to improve. What is worse (actually only for CBO, not for most forecasters) is that random walk forecasts work better than CBO forecasts :-). So no real point is burning all that electricity and computer power churning numbers…
A British names John Cary wrote a treatise called An Essay on the State of England in 1695.
He laid out a powerful case for how England, through muscular government intervention in economic affairs, could create national wealth based on manufacturing. This production would be fueled by an imperialistic British Empire, which through its expansion would provide the needed raw materials.
The book proved extremely persuasive at home and also abroad after being translated into French, Italian, and German. Government leaders and policymakers in each of these countries were influenced by the Essay’s key idea that government should be a dominant player in helping shape economic development.
Sophus Reinert of HBS historian brings this to limelight in a book called Translating Empire: Emulation and the Origins of Political Economy.
There is a nice interview in which he explains the book:
This is an amazing must read paper on the Greece crisis. On reading this you come to three points:
- How Greece became a member of EMU despite being such a crony capitalist country?
- Those who think after bailing out Greece things will be resolved, are just making a fool of themselves. This country needs a complete overhaul starting from government and will take a while for it to be a worthwhile economy.
- In many ways Greece is like many of those companies like Enron etc that has been fooling all the stakeholders for a long time. And then comes a time when game is over embarrassing one and all. Greece became a developed economy (god knows how) despite many defaults in the past. On joining the EMU, it discovered it could borrow at rates equal to Germany without doing anything and continued to splurge. And now the game is over embarrassing all – banks, memmber EMU countries etc.
CEPR economists have been going pretty aggressive to suggest Argentina is a good success story. They suggest the growth reforms since 2001 crisis has lessons for EMU economies (and others). They also predicted that incumbent President Cristina Fernandez de Kirchner likely to be reelected given the positive developments in economy.
In this paper, the authors point Argentina is a success story for follwing reasons:
RBI has been explaining this idea of backward bending Philips curve in may speeches and papers. The concept has helped RBI explain (atleast tried to) that there is a threshold level of inflation where the curve bends backwards. Hence, instead of inflation acting as a grease for growth it acts as a sand.
This paper from RBI econs Sitikantha Pattanaik and G V Nadhanael explains the whole shift in thinking from (-ly) sloping Philips curve to backward bending Philips curve.
Table 1 in the paper is titled – From NAIRU (-ly sloping) to MURI (Minimum Unemployment Rate of Inflation or backward sloping Philips curve). In the table you have the equation of Philips curve and how it has changed over the years. It is just amazingly explained.
1. w = f(u – u*) Lipsey (1960)
2. π = f(u – u*) + πe Friedman (1968) and Phelps (1968), Lucas (1972)
3. π = f(u – u*) + λπe Tobin (1971)
4. π = f(U – U*) + λ(U)πe Palley (1994, 1997)
5. π = f(U – U*) + πe(π) Akerlof (2000)
6. π = f(U – U*) + λ(πe)πe Palley (2003)
Source: Palley (2011, 2008)
Read the paper for details. It is a must going back to basics of Macro..
The paper towards the end looks at threshold level for India and comes at the same conclusions as this paper – around 6%.
I just have one problem with these India growth-inflation papers. Indian growth story is very recent and is not even a decade old. So say you study the threshold from 1970s or 1960s, most of the data you get is of low growth and low inflation phase. Compared to other developing econs, India’s record on inflation has been more sober. So, you get much lower threshold level for inflation.
Since 2006 we have started to face both high growth and high inflation. I believe calculations will change as we move on in this current India growth story phase. I mean just like threshold inflation we have threshold growth as well where inflation starts to rise moment it crosses the threshold. This threshold is widely believed as 8-9% but is actually much lower. The potential may be much higher but for that you need adequate supply as well.
Nevertheless, nice paper explaining concepts neatly. If not every bit you get some flavor..
This is a terrific speech from Fed Governor Daniel K. Tarullo. He gives you a different perspective (not entirely new though) on thinking about financial firms and their regulation.
He says economists should use insights from Industrial Organisation Economics (IO) to help understand the developments in financial markets:
I have not blogged about the papers presented at Jackson Hole Conference – 2011 which is bad.
This paper by Stephen Cecchetti, Madhusudan Mohanty and Fabrizio Zampolli is a must read. It looks at debt levels in all 3 sectors of economy – households, public and private- of various advanced economies. They also look at threshold levels of debt for each of these sectors to understand when high debt starts impacting growth.
This is a nice paper from Barry Eichengreen and Nergiz Dincer (unable to find a free version).
Well there is huge debate on who should be looking at banks post the crisis? Independent regulator in form of FSA failed in UK whereas Fed and other multiple regulators of US failed in USA. Despite different findings, it is being increasingly felt that central banks should be bank supervisors. They have natural advantage to do so as they are lenders of last resort and should know how banks are faring.
A superb critique from Barry Eichengreen on the topic.
One keeps hearing cries for going back to gold standard but I did not know it is really popular with some US state Governors and officials. So much so, some states have actually introduced gold standard (and its variants) in their states!
Here is another superb article from City Journal. This one is by Claire Berlinski who is a contributing editor.
She says seismic risk poses the biggest risks for cities in the world. There are two reasons for this. One, an earthquake causes more damage than anything else. Two, most big cities end up naturally being in the seismic danger zone. People like to live near water and fertile ground. Over the millennia, seismic activity creates coasts, valleys that channel water, temperate microclimates. So people come and settle at these places and become big cities. As per Claire, 8 of top 10 cities are in seismic zone.
So cities should be working to address this huge risk. And there are some good examples from recent Japanese, NZ and Chilean earthquakes:
This is the title of my new paper. It looks at the Fed’s new communication strategy of keeping policy rates at near zero till mid-2013. It compares this with Bank of Canada and Bank of Japan’s communication policies. It ends with comments on recent Fed dissents.
Comments/suggestions/criticisms are welcome..