Archive for the ‘Policy’ Category

Argentina lessons for Greece/EMU and India??

October 25, 2011

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:


From negatively sloping Philips curve to Backward Bending Philips Curve

October 20, 2011

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.

Table-1: Growth-Inflation Tradeoff in Theory– from NAIRU to MURI

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(πee                                                      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..





Economic adjustment in EMU.. lessons from Latvia?

October 13, 2011

Jurgen Stark in his last few days at ECB gives a food for thought speech on the topic.

First, when a mon union faces a shock what should it do? He says there are 3 ways to adjust (based on Robert Mundell):


Does improvement in Doing Business rankings lead to higher FDI?

September 29, 2011

One would think so. But  Dinuk Jayasuriya of WB says the relation is not as robust.


Using Industrial Organisation approach to understand financial firms and regulation

September 21, 2011

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:


Any hope of recovery in advanced economies should perhaps end with this research paper..

September 19, 2011

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.

Their findings:


Who should supervise banks? Central Banks or Independent Financial Regulators?

September 8, 2011

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.


RTI and RBI….

September 7, 2011

This is a nice speech from Mr V. S. Das, Executive Director, Reserve Bank of India.

He has handled implementation of Right to Information Act (RTI) in RBI, so knows the challenges, issues etc:


Going back to gold standard…possible?

September 2, 2011

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!


Hayek vs. Keynes

August 25, 2011

, biography of John Maynard Keynes writes this nice article.

He says biggest advantage Hayek enjoyed was he outlived Keynes by nearly 50 years. This allowed Hayek to spread his influence and Keynes to lose out his.


Biggest threat for urbanisation – earthquakes/natural disasters

August 24, 2011

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:


Fed’s New Communication Strategy: Will it Work?

August 23, 2011

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..

Indian growths story is a case of trickle up not trickle down!!

August 9, 2011

SS Aiyar writes this rather surprising paper. Like the several papers on Indian growth story, he discusses Indian economy over last twenty years. He says Indian reforms is about two things – economic reforms and governance reforms. Latter lags big time over former as econ reforms have led to growth of 8.5%.


Buses vs High Speed Trains/Cars vs cycles – Which is better?

August 5, 2011

I always thought it is better to have high-speed trains given the scale of activity in that domain. It was deemed as energy-efficient, low pollution and a better way for mass transit.

However, this interview of one of the best urban economists Edward Glaesar made me sit up.  He says:


We should rename the Great recession as Great contraction

August 3, 2011

Ken Rogoff tries to settle the debate on severity of the downturn and policy measures needed (HT: Divya Iyer).

He says the first thing to fix is the name – Great recession. By recession people simply assume a cyclical downturn which has standard policy measures (cutting rates, some stimulus etc). This is anything but a simple recession. This approach in turn has led to policies etc which are not suited for the harsh times:


Classifying various monetary economics fields

August 1, 2011

Philip Arestis and Alexander Mihailov have this amazing paper which classifies various fields of monetary economics.

It has this super Venn diagram at the end in which you have three major strands of monetary economics:


Fed penalises Wells Fargo in the largest consumer-protection enforcement action

July 21, 2011

This is a pretty intersting and sad reflection of what was happening before the crisis.

Wells Fargo was imposed a $85 million penalty for pushing prime loan customers into subprime loan categors and falsified loan docs as well. All for making more salaries. This is the largest penalty on a consumer protection case:


Blaming Smoot Hawley for Great Depression is not really correct

July 15, 2011

The research on Great Depression continues and gets even more interesting.

Economic historian Douglas Irwin looks at the issue of Smoot Hawley Act (SHA) in what looks like a super book on great depression. The intro free chapter is here. Here is a videowhere Irwin discusses the book at Cato. It has a video of a movie starring Ben Stein (1986 movie — Ferris Bueller’s Day Off) and a debate between Al Gore and Ross Perot in 1990s over NAFTA. In both SHA  is criticized and suggested as a main reason for the Great Depression.

In the book Irwin says, S-H act criticism is overdone. He did argue the same in a paper written with Eichengreen and expands on the idea in this book.

What are the main ideas?

  • SHA was not in response to economic contraction. It was to gain political advantage and support agricultural sector. The latter was doing poorly and the act was initially to raise tariffs in agri sector. Infact it was proposed in peak of the business cycle not middle of depression as it is perceived.
  • As it always happens finalisation of the Act took time and by that time manufacturing items were added as well. There was lot of lobbying and rent seeking to get one’s items included.
  • By the time it was enacted, depression conditions had started to set it. Other policymakers enacted tariffs looking at US leading to further issues. So, it did lead to international reactions.
  • Economists opposed the Act but was still done leading to further conformations that politicians do what leads to winning elections. Economics is no where in the picture.
  • So though it was a factor in great depression, it was not responsible for it. GD would have remained GD without SH act as well. Monetary and financial factors set up the depression.
  • The debacle of the Act led to a change in policymaking design in US. Congress did not look at trade policy and it was assigned to US president to deal with trade policy issues
Very interesting. So we still debate GD and not sure about its causes/factors etc. The well known lessons from GD are being questioned. Some of them are:
  • One paper said Fed doubling reserves in 1937-38 was not responsible for double dip depression as banks had raised reserves earlier.
  • Another paper says Fed may have committed mistakes but Atlanta Fed did help by providing liquidity to struggling banks.
And now this bit on SH act. Pretty interesting stuff.
Here are some reviews —Economist, (very good one), Roger Lowenstein.
However, one thing came good because of SH act. Politicians are atleast serious about not doing anything with trade protections. They refer to SH act and say I am not touching this. This was seen in this crisis too. Imagine the chaos if countries implemented trade restrictions in this crisis.
The act should have been named HS Act:

Because the Constitution provides that revenue measures must originate in the House before going to the Senate, tariff legislation was often named for the Ways and Means Committee chair first and the Senate Finance Committee chair second. This implies that the legislation should be known as the HawleySmoot tariff, but Smoot played such a large role in its passage that contemporaries began to refer to it as the Smoot-Hawley tariff.

FinMin’s expenditure management measures…

July 12, 2011

India’s Ministry of Finance initiated a few measures to cut its expenditure mainly the revenue expenditure.I saw some of these measures earlier as well but were not successful it seems. This time we have some more measures and there are efforts to monitor them as well.

What are the measures?


Traffic and environment Management: US vs Europe

July 4, 2011

Gulzar has a fab post on the topic. s

He points how the two areas differ in their traffic management systems.

The prevailing traffic management paradigms on both sides of the Atlantic could not have been more contrasting. On the one side American cities are implementing policies that adapt cities to accommodate driving (by intelligent transport systems to improve traffic flow and apps to help drivers find parking spaces), while on the other hand European cities are creating environments that are hostile to cars (congestion pricing, outright car bans from green and pedestrian zones, closely spaced red lights, speed and parking restrictions, pedestrianization etc). 

The strategies employed by European cities aims to make car use expensive and difficult and thereby force them into using other modes of transport.

As Europe was built much before US, it has narrow roads and needs to stop congestion. US has much wider roads barring old areas and hence has different policies. In Swiss, it is not odd to see parliament members take trams to work.

Barring this there are some other interesting restrictions as well:

Further, even as American cities try to synchronize green lights to expedite traffic flow, European cities have been shortening the green-light periods and lengthening the red light times so as to reduce waiting times for pedestrians. In stark contrast to countries like US and India which stipulate minimum parking space for apartment units and new buildings, building codes in Europe cap the number of parking spaces in new buildings to discourage car ownership. Store owners in Zurich who had worried that road closings and pedestrianization would reduce business have been pleasantly surprised to see 30-40% increase in pedestrian traffic. 

Then in Europe no one really breaks these rules which is very different from the experiences in India where traffic rules are not followed. Infactit is rare for people following the rules.

Nice perspective..



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