Reflections of an economics textbook author: Greg Mankiw

March 18, 2019

Nice essay by Prof Greg Mankiw. He recently stepped down as the instructor of Harvard’s EC10 course (introductory economics). This is a huge moment in economic teaching as people believe this would give an opportunity for other textbooks such as Core economics to get their dues.

In the essay, Mankiw takes one through what led him to write a book on economics. Also how should one write write a book and the changes brought to the books world by digital technologies:

In this essay I reflect on textbook writing after three decades participating in the activity. I address the following questions: What perspective should textbooks take? What is the best approach to teaching microeconomics? What is the best approach to teaching macroeconomics? How does the content of the introductory course evolve? How much material should textbooks include? Are textbooks too expensive? How is digital technology changing the market for
textbooks? Who should become a textbook author?

Some more from Prof Tim Taylor on Mankiw’s essay and his own experiences..


IDBI Bank re-categorised as private sector bank..

March 15, 2019

I had written on this interesting history of IDBI as a Development Financial Institution which started in 1964.

In 1990s, IDBI started a new bank as part of Govt/RBI policy to open new private banks. Then in 2005, IDBI Bank merged into IDBI and became a commercial bank. Thus, it came back into public sector.

Post LIC’s acquisition of IDBI Bank, it is back into private sector.


Independent monetary policy versus a common currency: case of Czech Republic

March 15, 2019

Interesting research by Jan Br˚uha and Jaromír Tonner of Czech National Bank.

The Czech Republic joined the EU in 2004, i.e. after 1993, and it is therefore obliged to adopt the euro sometime in the future. Obviously, euro adoption would have its benefits and costs. This paper aims to contribute to the macroeconomic analysis of the costs and benefits. By “macroeconomic”, we mean those costs and benefits which are related to business cycle fluctuations, to positive trade effects and to the nominal convergence of the Czech economy. We therefore do not investigate other costs and benefits, such as the change of legal tender, the change in the country’s credibility after adopting the euro and the costs of potential fiscal free riding by other member countries. This is not to say that these other aspects are not important, but this paper concentrates on the above-mentioned well-defined aspects of euro adoption.

The main macroeconomic benefit of adopting the euro is the elimination of exchange rate risk, which should be beneficial to trade, as the euro area countries are dominant trading partners for the Czech Republic. The macroeconomic costs include a reduction in the effectiveness of domestic macroeconomic policies and the risk of greater volatility in economic activity and consumption due to the loss of independent interest rate and exchange rate policy. This is because the common  monetary policy of the ECB cannot respond sufficiently to shocks which affect only a small part
of the euro area economy. The relative importance of the costs and benefits of adopting the common currency is ex ante unclear and the literature offers conflicting results. Therefore, it is worth investigating the macroeconomic costs of joining the euro area.

To contribute to this research agenda, we use simulations performed using the CNB’s official “g3” macroeconomic forecasting model, which is a typical small open economy new Keynesian model. As a counterfactual, we build a modified version of the g3 model with a fixed nominal exchange
rate and with the monetary policy rate equal to the ECB rate.

To evaluate the effects of euro adoption on the Czech economy, we employ two approaches. We compare the unconditional volatilities of important macro variables implied by the two macroeconomic models. The volatility of nominal variables increases after joining the common currency, as the common monetary policy does not react to purely domestic shocks.

We also simulate the counterfactual outcomes of macroeconomic variables that would have happened if the euro had been adopted in the past. We find that euro adoption would have meant an increase in the volatility of macroeconomic variables, while the effects on the levels of real output and consumption would have been positive. These positive effects on the real economy are due  mainly to the trade effect, but temporarily lower real interest rates would also have contributed. Nominal exchange rate appreciation during the ERM II phase could partly alleviate the nominal volatility caused by euro adoption.


Airport anthropology and new behavioural patterns

March 15, 2019

Ramakant Bijapurkar in this interesting piece in Mint observes ongoing changes in Indian airports. No more are Indian airports clones of western airports but are having their own regional identities:

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Can Economics Shake Its Shibboleths and move to a bolder economics?

March 15, 2019

Two related pieces:

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Why Latin American central banks follow Fed closely?

March 15, 2019

Andres Velasco, currently Dean of School of Public Policy at the London School of Economics in this piece:

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Indian economists/social science researchers raise red flags over interference in data estimation…

March 15, 2019

108 Indian economists/social science researchers have issued this joint statement:

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James Watt: The 18th-Century Scotsman Who Became a Hero of Human Progress

March 14, 2019

Brilliant article by Alex Hammond on James Watt.

This one takes the key:

Watt’s first profitable dual-cylinder steam engine entered the market on March 8, 1776, a day before Adam Smith’s Wealth of Nations was first published. Little did the two Scotsmen know that they were about to change the world forever.

Hammond runs a series of people who have made an extraordinary contribution to the wellbeing of humanity. Watt is 13th in the series:

Today marks the 13th installment in a series of articles by titled Heroes of Progress. This bi-weekly column provides a short introduction to heroes who have made an extraordinary contribution to the wellbeing of humanity. You can find the 12th part of this series here.

Our 13th Hero of Progress is James Watt, the 18th-century Scottish engineer and inventor who enhanced the design of the steam engine. Watt’s steam engine made energy supply more efficient and reliable than ever before. It was fundamental to kick-starting the Industrial Revolution.


11 March 1935: First official Canada banknotes were issued

March 14, 2019

Nice bit on monetary history of Canada.

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Time to look at kidney markets in India?

March 14, 2019

The frequency with which kidney (or organ) scams have been emerging in India is alarming. It started with the infamous Gurgaon scam in 2008 wherein a Gurgaon-based doctor was caught in a kidney transplant racket. During that time, a loophole in Transplant of Human Organs Act (1994) led to the scam. The Act only allowed “near relatives” (parents, children, brother, sister and spouse) to donate organs and prohibiting commercial transactions. However, a donor could donate his organs before his death to any person (i.e., not his relative) “by reason of affection or attachment towards the recipient or for any other special reasons.” This legalese can lead to all kinds of interpretations and possible scams.

I had written about the issue in the newly printed Mint newspaper in 2008. It was also special as it was my debut piece for any newspaper.

I had highlighted the work of Prof Alvin Roth in the article. In his work, Prof Roth highlights how we do not think of markets and economics when it comes to repugnance goods such as human organs, horse meat and so on. The laws against buying or selling kidneys reflect a reasonably widespread repugnance, making it difficult for arguments that focus only on the gains from trade to help in changing these laws. Apart from repugnance there are also issues of morality as highlighted by Prof Michael Sendel of Harvard University.

Roth advocates not just the need to get over repugnance but also designing commercial markets for kidney donation. As it was difficult to move towards a commercial market right away, he suggested a swap exchange and chains in case of mismatch between several pairs via algorithms. This eased the congestion in the demand and supply for kidneys. The Indian government also allowed for two-pair exchange as shown above, perhaps inspired by Roth.

Since then, Prof Roth has become the recipient of the Nobel Prize in economics in 2012 (jointly with Prof Lloyd Shapley) “for the theory of stable allocations and the practice of market design”.

We have also made changes in the Organs Act with two amendments in 2011 and 2014.

In 2011, “near relative” was expanded to include grandparents and grandchildren. The bill permitted a pair of donor and recipient who are near relatives but whose organs do not medically match for transplantation to swap organs with another pair of such persons. It was decided to maintain a national registry of donors.

In 2014, a transplant was allowed even if the two parties were not ‘near relatives’ with a condition. There will be an Authorisation Committee which shall evaluate and confirm absence of commercial transaction between the recipient and the donor. Technology was brought in with display of donors and recipients to be displayed on the notice board within 24 hours of grant of permission or rejection of transplant. Every transplant centre should have a website inter-linked with other centres for sharing information.

However, none of these measures have been enough. The scams keep emerging fairly frequently. The recent scam which broke out in Kanpur shows not just deep inter-state linkages but even foreign ones with people tricked on both sides of demand and supply. Even more worrisome is that masterminds of 2016 scam are believed to be behind this scam as well, while being on a bail!

Perhaps, it is time to revisit ideas of Prof Roth.

Interestingly, Iran is the only country which allows for such a market. Prof Farshad Fatemi of Sharif University of Technology explains functioning of Iran’s kidney market ( The political troubles in 1980s along with economic sanctions led to lack of funds. There was scarcity in dialysis equipment which encouraged nephrologists to perform kidney transplants. The huge demand and supply mismatch forced the authorities to establish a regulated market for living unrelated donations. Under this, the donor receives a monetary compensation from the recipient and enjoys additional monetary and non-monetary bonuses from the government. Fatemi even points to lessons from behavioural economics to improve donations. We could nudge countries to shift from an opt-in system to an opt-out system. Spain follows an opt-out system and has highest rates of cadaveric donations in Europe.

Recent research by Julio Elias, Nicola Lacetera and Mario Macis shows that people are willing to trade-off deep dislike for higher efficiency. The topic has gained a lot of traction recently as the Institute of New Thinking has a series of videos with top thinkers discussing the several issues:

So, should we have a market for kidneys in India? Some observers might point that we are already moving towards a market. We have moved from only ‘near relatives’ to ‘non-relatives’ provided there is a ‘visible hand of the committee’ which confirms there is no commerce involved between the two parties.  Even the idea of displaying the decision within 24 hours is nothing but an attempt to move towards transparency.

The next step could be a move to a more ‘invisible hand’ approach where more markets than committees can decide the transplant.

But for this, we first need to think about the repugnance and morality which come with the very idea of this market and is an equally important topic.  A market driven approach could also lead to inequality as only those with higher incomes will be recipients and those in sheer poverty will be the most likely donors.

Challenges of plenty actually.


How Singapore manages its forex reserves?

March 14, 2019

Ravi Menon, head of Monetary Authority of Singapore in this nice speech:

Singapore has official foreign reserves (OFR) of almost US$300 billion. 

  • In absolute terms, this is the eleventh highest stock of OFR in the world. 
  • As a percentage of GDP and on a per capita basis, it is the third highest in the world.
  • Singapore’s OFR sit on the balance sheet of the Monetary Authority of Singapore (MAS), the central bank and integrated financial regulator.

Besides the OFR, there are two other pots of national reserves in Singapore:

  • The Government of Singapore Investment Corporation (GIC), a fund management company, manages on behalf of the Singapore Government a diverse portfolio of foreign assets – well in excess of US$100 billion.
  • Temasek Holdings, an investment company wholly owned by the Singapore Government, holds equity stakes in a variety of domestic and foreign corporates, amounting to more than US$200 billion.

This morning, let me try to answer three questions:

  • What role do the reserves play?
  • How are the reserves accumulated and managed?
  • How are the OFR managed?


Historically, GDP Growth has been Higher than the Interest Rate

March 14, 2019

Olivier Blanchard points to this chart from his new paper:

Historically, GDP Growth has been Higher than the Interest Rate
In his presidential address entitled “Public Debt and Low Interest Rates” at the annual American Economic Association, Olivier Blanchard said that public debt was not as inherently undesirable as many analysts say. In the current era of low interest rates, when GDP growth rates are higher than the interest rate on safe assets, limited deficits and debt may allow governments to expand investment and improve social welfare without producing an undue fiscal burden. This chart shows that for the United States, nominal GDP growth at a rate higher than the interest rate on risk-free assets has been the norm.


Woori Bank: witness to Korea’s modern economic history

March 13, 2019

Nice bit on Korea’s banking and economic history:

South Korea’s financial districts Yeouido and Jung-gu have experienced the country’s ups and downs throughout modern history, with few businesses surviving the political and financial upheavals.

And only a few are as steeped in the nation’s financial history as Woori Bank, one of South Korea’s four major lenders, established 119 years ago. 

The bank’s roots are embedded in Daehan Cheon-il Bank, which was established by Emperor Gojong in January 1899 with funds from the Joseon-era imperial family, according to a report from Woori on its history.


How WhatsApp forwards are ‘powering’ India GDP growth

March 13, 2019

Vivek Kaul in this satire titled Mint piece dispels the hype around India growth story.

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Bringing epistemology back into economics curriculum..

March 13, 2019

Fascinating short paper in EPW by M.A. Oommen, honorary fellow at the Centre for Development Studies, Thiruvananthapuram.

The concept of epistemology, derived from the Greek word episteme (knowledge) and logos (reason) refers to the theory of knowledge. An important branch of philosophy, it is the study of the nature, origin and limits of human knowledge. The nature of knowledge is as important as the origin of knowledge in generating relevant epistemology.

No scientific study can be evaluated or justified by the norms of faith or dictates of authority. For example, the discoveries of Copernicus (1473–1543) and Galileo (1564–1642) were epistemologically shocking to the College of Cardinals who had the monopoly of knowledge in the 16th century in Europe. Ultimately only scientific truth and not beliefs can promote and sustain progress. Kuhn’s (1962) view of the evolution of science as characterised by long periods of gradual “puzzle-solving normal science” followed by paradigm shifts offers an explanatory hypothesis about the nature of knowledge creation. Ola Olsson (2000: 254) argues that knowledge is created through convex combinations of older ideas and through paradigm shifts. We investigate in what manner this happened in economics.

The nature of knowledge creation in the discipline of economics, has not been subjected to any in-depth analysis or interrogation. The almost unquestioned dominance (certainly during 1980–2008) of neoclassical economics in the academic profession and the rather pathological antipathy to Marxian epistemology and institutional economics has not been subjected to proper scrutiny. What I am concerned here is not Marxism as a creed but Marx’s unique contributions to the knowledge of understanding the dynamics of economic progress and the nature of the process of social history.

On economics curriculum in India:

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RBI’s museum at Calcutta

March 12, 2019

It was really surprising to see this logo on the homepage of RBI’s website:

The RBI Museum

On clicking, one realised it is RBI’s museum at Calcutta. There is one in Mumbai in Fort area too.

The Calcutta museum website says:

Welcome to the The Reserve Bank of India Museum. The Museum will immerse you in a one-of-a-kind experience that explains the money, its role in the economy and your role in it, in a fun and interactive way. 

You can also explore how money has evolved over the centuries, how and why gold still holds an important place in our society and also about the genesis of RBI. The Museum also features a 7 ft. ‘Yap’ Stone, an interactive exhibit on gold mining, a 12 ft. high sculpture and much more. 

You can read more about ‘The RBI Museum’ in this brochure here and get a preview of the exhibits. Engage in a hands-on journey through exhibits that are brought to life through interactive displays, games, sculptures and videos.

Wow! It rarely happens that India’s museums welcome people. It is also nice that RBI has put up the link to the museum on its homepage. One is wondering, whether RBI is listening to the constant cry of this blogger to include history in its analysis? Too much to imagine but this is welcome…


ILFS fallout on GIFT city’s future

March 12, 2019

GIFT City is a 50:50 JV between IL&FS and state government-owned Gujarat Urban Development Company.

Maulik Pathak of ToI reports that with IL&FS in trouble, future of GIFT City is also in jeopardy. The State Government is likely to take the 50% stake but there are complications.



11 economic stats that sum Venezuela’s misery

March 12, 2019

Jon Miltimore in this piece:

A tragedy common to human history is unfolding in Venezuela. It’s impossible to predict how it will end or what the human toll will be.

As we watch events and hope for a peaceful resolution that restores liberty in Venezuela, here are some noteworthy facts about the Land of Grace.

    1. Venezuela has the largest oil reserves in the world. While the US is the top producer of oil, its total reserves represent a mere fraction—roughly 10 percent—of Venezuela’s 300-plus billion barrels of oil. (Source: UPI)
    2. In Venezuela today, the median monthly income is $8. (source: FEE)
    3. A two-pound bag of onions currently costs about $2 in Venezuela. (source: FEE)
    4. In 2016, the price of a gallon of gasoline in Venezuela was less than one cent per gallon. (source: Washington Post)
    5. Roughly 90 percent of Venezuelans today live below the poverty line. (source: The Borgen Project)
    6. In 1950, Venezuela ranked among the top ten most prosperous nations in the world. (source: Human Progress)
    7. In 2018, inflation in Venezuela topped 1 million percent. (source: Reuters)
    8. Economic projections show inflation in Venezuela is expected to hit 10 million percent in 2019. (source: Miami Herald)
    9. In 1959, the Venezuelan GDP per capita was 10 percent higher than America’s. (source: Human Progress)
    10. As of June 2018, about 2.3 million people had emigrated from Venezuela following its economic collapse, or 13 percent of its population. (Source: The Panam Post)
    11. When Hugo Chavez came to power in 1999, the Venezuelan GDP per capita was 27 percent higher than the average in Latin America. (source: Human Progress)

The fiscal health of states and the limits of federalism

March 12, 2019

V. Anantha Nageshwaran in his new article points to this new book by Dr YV Reddy on fiscal federalism. It is co-authored with Mr. GR Reddy, adviser to the government of Telangana.

Anantha takes us through the release of the book which is critical of the terms of reference of 15th Finance Commission:

On 8 March, I had the privilege and honour of being a panellist at an event organized at the Madras School of Economics for the release of the book Indian Fiscal Federalism authored by Y.V. Reddy, former governor of the Reserve Bank of India (RBI), and G.R. Reddy, adviser to the government of Telangana. The book was released by C. Rangarajan, another former RBI governor and chairman of the 12th Finance Commission.

Y.V. Reddy, with his self-deprecating humour, used to begin his speeches (during his tenure as chairperson of the 14th Finance Commission) by saying that he did not need an introduction but only a conclusion. He would be alluding to his tendency to couch his views and opinions as self-evident questions, leaving the audience and readers to draw their own inferences.

He has been speaking his mind on many issues of late, and in his co-authored book Indian Fiscal Federalism, he continues that practice. For example, he pulls no punches while talking of the functioning of Niti Aayog and about the Terms of Reference (ToR) of the 15th Finance Commission. Take this bit for instance: “Just a day after the presentation of the report of the Sub-group of Chief Ministers on rationalization of Centrally Sponsored Schemes, the Ministry of Finance issued a notification without taking on board most of the recommendations.” In another instance, he writes that the scope and remit of the Niti Aayog had been expanded and its stature reduced, with the result that there was little evidence of focus in its working.

The authors are quite critical of some of the “Terms of Reference” of the 15th Finance Commission. While they have sympathy for the use of the population figures of 2011, they feel that the union government directing the Commission to take “expenditure on populist welfare measures” into account while devising performance-based incentives is as problematic as many of the other criteria spelt out for determining performance-based incentives. For example, achievements in the implementation of the flagship schemes of the government of India cannot be a criterion. Some of the schemes may not be necessary or relevant for some states.

Interestingly, I had pointed to this paper by Kerela’s State Finance Minister Dr Issac (co-authored) which discusses the same points.

Looking forward to reading Dr Reddy’s book..

Pass-through of Bank of England’s policy rate to household interest rates

March 12, 2019

Michael Saunders,  External MPC Member at Bank of England in this speech discusses the monetary transmission in UK.

The transmission has been weak due to low policy rates:

Let me summarise the argument so far. Household deposit rates are unlikely to respond fully to policy rate hikes until the spread between deposit and policy rates has normalised further. With the funding gap closed, mortgage lending rates are now more sensitive to deposit rates and less sensitive to wholesale unsecured funding rates. Hence, for as long as deposit rates remain less sensitive to policy rate changes, rates on new mortgages may also respond by less than usual to changes in Bank Rate (and corresponding swap rates). 

The link from changes in the policy rate set by the MPC to changes in households’ deposit and lending rates is not permanently broken, but is likely to be less effective while the policy rate is very low. This has some general implications for monetary policy. Since the crisis, policymakers have had to pay more
attention to the issue that there may be an effective lower bound (ELB) for the policy rate – not necessarily at zero – below which a further reduction generates no extra stimulus and may even be counter-productive.

However, as the policy rate approaches the ELB, there also may be a range in which policy rate changes have progressively less impact on banks’ deposit and lending rates. Close to the ELB, a lower policy rate would be reflected mainly in wider lending spreads (over riskless rates) rather than lower mortgage rates.
Conversely, a slight rise in the policy rate would produce narrower lending spreads. Lending and deposit rates would not move much either way.

This is only part of the monetary transmission mechanism (MTM). But it is a fairly important part.

BoE models suggest that monetary policy in the UK operates through four main channels: the exchange rate; cost of capital and non-housing wealth; the cashflow effect on households and their willingness to bring forward or delay purchases; and a housing channel. The latter two channels rely on the pass-through of policy rate changes to household interest rates. For example, a higher policy rate pushes up mortgage rates and hence weakens housing activity and house prices, reducing the value of households’ collateral (the housing channel). And the combined rise in deposit and mortgage rates squeezes consumer spending because the spending of people with a mortgage is more sensitive to interest rate changes than the spending of net savers (the cashflow channel), even if this effect is less marked than it used to be.20 The Bank’s suite of models suggest that these two channels typically account for between a third and two thirds of the total expected medium-term impact on output from policy rate changes, depending on how persistent the interest rate change is and the extent to which it is anticipated. If these channels are less effective, then the overall MTM also may be less effective than usual.

It is not possible to be precise about where the threshold for such a zone of reduced policy effectiveness might be. It probably starts when sight deposit rates reach or are close to their effective lower bound, and hence when the policy rate itself is clearly above the ELB. As a rough estimate, my guess is it that for the UK this might occur at a policy rate of roughly 2% or so, reflecting a near-zero floor for sight deposit rates plus an equilibrium spread of 150-200bp between household sight deposit rates and the policy rate.

The reduction in policy effectiveness may become more marked as the policy rate approaches the ELB and a higher share of deposit rates (eg time deposits) become constrained. Of course, this is still very uncertain  and we are still learning about the effects of policy rate changes at low levels. But this issue may be a fairly regular occurrence given that the neutral policy rate is much lower than previously.


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