Oct 31, 2008
This is my reaction to the comic Mankiw posted today. Happy halloween!
Oct 30, 2008
Christopher Ruhm , Professor at University of Carolina, has published extensively on the positive effects of the recession on our health. The economics is simple: recessions induce healthier lifestyle. Have you ever thought about quitting smoking? There you go: stop buying cigarettes now and you'll save a lot of a year. Anything we were not doing before bacause too busy, will now suddenly become possible. From a 2003 IZA working paper called "Healthy living in hard times" he says:
"Individuals might adopt healthier lifestyles when the economy weakens because increases in non-market time make it less costly to undertake health-producing activities such as exercise or the consumption of a healthy diet. Reductions in incomes and employment related stress could also decrease the frequency of 'self-medication' by smoking and drinking."
This makes sense, but of course, other factors come into play. How do you finance your health expenditure may still matter a lot. For example in this article, a study conducted in Denmark, it has been found that children born in a recession live on average 15 months less than chlidren born under better conditions. The reason is, as explained by Gerard Van Berg from the Free University of Amsterdam here, that under recession children lack access to good healthcare, or parents are stressed.
So all in all, things aren't good, but neither as bad as we think!
Oct 28, 2008
A simple look at my favourite graph of today, makes this point as well (stock price of Volkswagen):
According to the market price Volkswagen a German carmaker (which essentially is owned by Porsche and the state of Niedersachsen which has a veto right) doubled its value today and became temporarily the world largest company......
...too bad I had no shares of the company to sell at 10am.
Soon we should know who was on the looser side in this gamble.
The Rigotnomics working papers series is a new feature of Rigotnomics that aims to contribute to the intellectual emancipation of our readers and research affiliates. We aim to reflect a broad spectrum of perspectives in the current sphere of academic research and policy debate, and therefore contribute to the attainment of greater economic outcomes. Any student, professor or alumni is welcomed to submit his paper to the Editor and we will be pleased to promote it.
Efficient exploitation of an oil well is a complex process involving sophisticated technology and equipment. This is why the majority, if not all, of the oil-producing developing nations rely on foreign companies specialized in oil-field development. The present study examines the interaction between the resource-rich economy and a foreign firm that provides extraction services. I analyze the country's optimal investment, consumption, and extraction profiles, as well as the optimal price-setting behavior of the foreign firm and the resulting allocation of resource rents between the two parties. The emphasis is put on the role of access to international credit markets for the resource-rich economy. It is shown that if the country is a price-taker in the oil market, access to credit does not matter at all. By contrast, if the country is a monopolist in the oil market and can lend and borrow internationally, it finds itself in a stronger bargaining position vis-à-vis the foreign provider and can, therefore, appropriate a larger share of resource rents. The country's capital stock and technological efficiency of the local extraction industry are two other important ingredients that affect the distribution of resource rents.
The meeting will be convened from April 23 to 25, 2009, and will be hosted by Marmara University. Researches, young lecturers, PhD students, post doctoral students and assistant professors across all economic disciplines from all over the world are welcomed to participate in the conference.
Oct 27, 2008
with just over a week to go until the US presidential election, here is a great documentary about the prevalence of voter fraud in the USA and the problems with electronic voting machines.
No matter which of the candidates gets up next Tuesday, I think that we should all be a bit sceptical about the result and realise that the big winners will inevitably be the American law firms that specialise in election related litigation (which it seems is a guaranteed business in the US at least every 4 years.......)
Two nice articles concerning the same topic can be found here and here.
Oct 23, 2008
so these are all big numbers, I agree. but at the same time, Russia's public external debt is a puny 2-3% of GDP, its forex reserves are 30% of GDP, oil funds another 14%, government budget and CA are all in surplus. so I am not reeeeally worried about its ability to pay back its debts. What is more, Russia is actually lending to other countries, like Iceland and Belarus.
I wouldn't care about S&P ratings, but the potential downgrade raises the costs of insuring the debt against default, with the debt now classified as distressed. Now, if you look at the US, with all its troubles and deficits, the credit ratings is an AAA (stable) against Russia's BBB+ (negative).
is it just me or there is something wrong with the picture?
The International Monetary Fund (IMF), which has announced its readiness to lend billions of dollars to support nations hit by fallout from the global financial turmoil, is holding talks with several countries about possible new lending programs.
"I have been on the phone with leaders in several capitals who have asked the Fund for assistance. We now have mission teams in some of these countries assessing their needs and, where asked to do, discussing programs that could be supported by an IMF loan," says IMF Managing Director Dominique Strauss-Kahn.
The IMF is currently discussing possible loan packages for Hungary, Iceland, Pakistan, and Ukraine. It is also in discussions with a number of other countries about possible financing needs, and is providing confidential policy advice to governments in emerging and developing economies on how to adapt to the current turmoil. It said on October 22 that it would also begin discussions with Belarus.
Now you know the reason why there are new job offers available, as you have read in Rigot lately, and you know whom to talk to ask for advice....
Oct 22, 2008
There are indeed decreasing returns to traveling, at least for some of us. Here's a way to grow old and keep on having fun traveling. It's all about technological progress in the pleasure production function as can be seen below.
Oct 21, 2008
Just for your information, this top-rated Bank has a long standing tradition of encouraging his alumni to work into the public sector. You are not a "Goldman Alumn Star" until you have made a breakthrough contribution it into the public sphere. For example, Mario Draghi, the current President of Bank of Italy, or Mark Carney, the current Governor of Bank of Canada, have bought worked for Goldman. I believe this is an impressing achievement and signals the capacity of the Bank to attract the most talented. The above mentioned people have an outstanding and impeccable reputation as the "best" suited for their respective job (at least Mario Draghi for what I know, but can any Canadian confirm please for Mr. Carney?). Furthermore, I think it's more a praise than a critique for the Bank to encourage his most talented employees to quit the company and make their way through the difficulties of a public sector job. What is special about the US? Maybe, it's just that time pressure forced Paulson to hire the people he knew better and trusted more.
But the fundamental point remain: should private sector people be encouraged to work in the public sector later in their career?Or does this fundamentally entail a natural emergence of a conflict of interests? The debate is open.
I just found this super cool website - MIT Open Courseware, where you can download lecture notes from a whole range of courses taught at MIT, including a variety of economics courses (topics such Macro, Micro, Development Economics, Economics and Psychology, Industrial Organisation etc. are available). Thought it might be of interest / help to everybody.
Oct 20, 2008
Oct 17, 2008
Oct 16, 2008
Of the economics students that took the survey (39 of them):
- 21% would prefer to work in a bank than a development agency;
- 73% favour relatively high wages for public officials;
- 94% would work for an International Organization;
- 23% think we should accept corruption as a fact of life.
Not surprisingly, people who prefer banks to development agencies are completely against high salaries in government.
People with lower grades tend to prefer banking and are more likely to tolerate corruption as they also come from more corrupt countries (according to Transparency International).
Finally, people from corrupt countries seem to tolerate corruption more, being more likely to accept it as a part of life. Furthermore, they would rather work in development agencies.
None of these results are significant.The winner of the free lunch is Tadashi Ito.
I wanna teach at NYU! He almost makes me wanna join the dark side of the force (that's macro by the way). More party pics here. In case you haven't read it yet, here's his required reading profile from the NY Times Magazine.
Oct 15, 2008
The story is here and is about Chris Fish, a senior banker, who spun his Porsche Carrera 2 on a corner and mounted a curb. An eyewitness said "It was a brand new car but it ended up perched on top of a bollard. He just lost it on a corner. What with all the turmoil in the markets it probably topped a very bad week." Yeah, probably...let me guess: is this what you are feeling when looking at the picture?
Extra: Central Bank Logo contest
Here is the Banca d'Italia logo
Oct 14, 2008
Here's for the central bank logo competition. I guess Chile is still way in front...hands down!
Oct 13, 2008
Oct 12, 2008
it recently occurred to me that one of the most interesting things about this current financial crisis is the way it has been reported in the media. If you for example flick on CNN or BBC or any other mainstream news, you are more than likely to encounter a plethora of talking heads, each of them pretending to offer an in depth analysis of what is going on in terms of the financial crisis whilst in reality serving up some of the most banal and facile description (not analysis) of the crisis ever seen (this incidentally is why it's brilliant that the Professors, such as Professor Wyplosz in this radio interview, are getting in on the act to offer some cogent analysis of what is going on).
I find this of particular interest because during my recent internship at the Australian central bank, I ended up developing a passionate loathing of the way the media (mis)reports happenings in the financial and economic world. That is, through going to to a whole bunch of internal meetings where various data series were discussed and analysed, and comparing this discussion with what was written in the newspapers, I became thoroughly convinced that even some of the most 'respected' financial / economic journalists literally had no idea what they were writing / talking about, to the extent where they seemed at various points to inhabit a completely different universe to the one in which economic events were actually happening. Moreover, in Australia, in news articles which reported on economic outcomes, you would never see an academic economist talking about what was happening, rather it would be left to some guy from a private investment bank to explain things (these investment banker guys have been doing great recently haven't they? - as if they have any where near the legitimacy and gravitas that academics do).
Another surprising thing about Australia is the way that the place would go absolutely nuts on the first Tuesday of every month when the decision about what to do with the policy interest rate would be announced. On these days, you couldn't move without hearing what has happened to the interest rate, there is absolutely saturation coverage. And what is written is not objective reporting of the policy rate move, rather it is completely subjective editorialising about what happened, why it happened, what should have happened, etc. And more often than not, this sensationalist 'sexing up' of monetary policy movements and economic events in general was absolutely dead wrong.
I have tried to rationalise the above two outcomes as simply a byproduct of the uniquely feral nature of the financial press in Australia. The former Governor of the Australian central bank, Ian Macfarlane, maintained that Australia had the highest per capita ratio of financial journalists in the world and that the press in Australia therefore devoted more space to financial / economic events.
This above contention was backed up some firm empirical evidence. In this speech, entitled 'Economic News: Do We Get Too Much of it', Governor Macfarlane describes the following survey:
'......So far I have made a lot of generalisations without any empirical support. I would like to remedy that deficiency by reporting on a little survey we conducted about a year ago in the Reserve Bank comparing media coverage in Australia, the United States, and the United Kingdom.
- We looked at newspaper coverage the day before, the day of and the day after monetary policy announcements by their respective central banks over two consecutive policy meetings. In each country interest rates were raised at least once in these two meetings.
- We chose three newspapers in each country – one financial newspaper and the other two quality dailies.
- In the United Kingdom it was The Financial Times, The Times and The Independent.
- In the United States it was The Wall Street Journal, The New York Times and The Washington Post.
- In Australia it was The Australian Financial Review, The Australian and The Sydney Morning Herald.
- We added up the number of articles mentioning monetary policy that had appeared in the three newspapers in each country in the days surrounding these two consecutive policy meetings.
- In the United States there were 35 articles.
- In the United Kingdom there were 46 articles.
- In Australia there were 131 articles, (In case you think we are exaggerating, we have a copy of each one.)
- The equivalent for the number of front page articles:
- In the United States there was 1.
- In the United Kingdom there was 1.
- In Australia there were 14.
So to summarise, in Australia, the reporting on interest rates decisions is around 3 to 4 times as intense as the reporting on equivalent decisions in the UK and USA (this is particularly surprising given that in world terms, Australia could best be described as an economic backwater). I reckon that this must have as its consequence that there are so many more column inches to fill, and that the only way they can be filled is with utter rubbish.
In case you are wondering, the above diatribe simply wasn't a rant just for the sake of it - there is actually an important message behind it. That is, isn't a media that is either ignorant, that willfully distorts economic information / events in order to get a sensational headline, or that is simply out of control, a highly dangerous thing? When so much importance these days is placed on central bank communication, is it not a problem that the media gets the reporting wrong (perhaps on purpose for a sensational headline)? During my internship I saw so many instances where the media would generate the most stupid and ridiculous expectations in the markets about the direction and magnitude of the next interest rate decision, and then when the decision didn't go the way it was 'expected' to and economic agents were 'disappointed', markets would move in an adverse fashion, which in turn affected people's wealth.
Just a bit of food for thought - does anyone see this as a problem, or is it completely trivial??
Oh, and here is my entry into the 'Best Central Bank Logo Competition' - the logo of the Reserve Bank of Australia. Just don't ask me what it means........
I remember that last week during the presentation by Axel Leijonhuvud concerning monetary policy and the financial crisis, there was some animated discussion regarding the usefulness of DSGE models as a robust tool for guiding the formulation of monetary policy.
So I was interested to find by coincidence this recent working paper from the BIS concerning that very topic, which I thought that other people, who like me are on the 'dark side' of economics (i.e. macro), might be interested in. To spoil the ending of the paper, it seems to offer the perspective that whilst DSGE models are certainly useful tools which provide information relevant to the policy making process, they are subject to a number of caveats and limitations which need to be borne in mind in interpreting their results.
PL and Dany - sorry for knocking the ad for the BBL tomorrow from the top of the page!
Dany Jaimovich (HEID)
"Are Free Trade Agreements Contagious?"
(Joint with Richard Baldwin)
This paper presents empirical evidence on the extent to which FTAs are "contagious", using empirical techniques inspired by the study of contagion in exchange rate crises. It tests the null hypothesis that the signing of an FTA between one nation's trade partners has no effect on the probability of the nation signing a new FTA.
Oct 10, 2008
"FATCAT Barclays bankers flew to Italy yesterday on an all-expenses paid bash — as the rest of the country was left in the financial meltdown"
In the article it's written that more than 300 guests have been invited to the annual meeting in Villa Erba, beside Lake Como, for a "three-day jaunt believed to be costing more than £500,000."
Barclays staff admitted the event “sent out the wrong message” at a time when millions of ordinary Brits were struggling to make ends meet, but that it was essential to “help clients through the difficult markets”.
Don't worry...it's Business As Usual!
Oct 9, 2008
Today Banco Central de Chile announced that the Bank Reserve Requirements for operations in foreign currency no longer have to be in US dollars as it was before, and now can also be in Euros, Yens or Pesos. I'm posting because I'm not too sure why they are doing that now. My bet is this is a creative strategy to provide some liquidity to the system in an environment of external contraction but also high inflation pressures that limit the ability to use interest rate... any other ideas?... Is this another sign of the decadence of the dollar as dominant currency?
Oct 8, 2008
Finance has historically three functions: mobilize savings, allocate capital and manage risk. Thus, increasing productivity in the real economy. As theory says, private rewards (wages) are set in conformity with the social returns. Today’s mess suggests ironically that the return we get from bankers is not exactly as great as their wages.
But coming to the original functions of finance, let’s make an overall assessment.
What about savings? US households’ savings have fallen to zero. If the Ricardian equivalence is correct, hard times are looming ahead. And public debt, which is already rising, is not including all the unfunded liabilities that the US will face in the future, such as terror-war veterans’ subsidies.
Financial institutions did not manage, but created risk. Innovation had the shape of mainly circumventing legislation. Think of all the subprime packaging, splitting and unpackaging of risk. Moreover, they resisted “good” innovation. Wall Street, he recalls, was opposed to inflation-indexed bonds the Clinton administration had proposed back in the ‘90s. Same with GDP-based bonds for Argentina’s default, which would have allowed the country to pay less interest when in recession and more when growing.
Also, capital allocation was far from good. Too much capital was devoted to the housing market, which ended in failure. And we cannot forget the role Western banks played as regards the financial crisis in Asia and South America.
Mr Stiglitz defines finance as “modern alchemy”. It is an opaque world with “no information”, rather than “asymmetric information”. It turns out that banks don’t even know their own balance sheets, let alone their counterpart’s.
The reason why the crisis spreads to the real sector has to do with the mechanism of “leverage”. The higher the leverage, the higher the expected return. Banks raise their assets by lending, but deposits are sticky. Firms borrow hoping they get a return from investment. They expect to repay when investment yields its fruits. But this is an amplifying circle, which brings us further from stability.
Banks lent too many mortgages because they were expecting prices to go up and up. They expected people to be able to pay back thanks to ever-rising prices. Unluckily, economics also tell us that no such free meal exists. The mechanism was intrinsically unstable: real wages have stagnated since 2000 (dot bubble bust) in the US. With housing prices rising and stable incomes, it was maybe surprising that the game could go on for so long.
Then, securitization played a role in this crisis. Risks were correlated across banks, which makes it difficult for portfolio diversification to hold as a defense against reversals. Add to this, a range of dubious predicting models, some of them excluding past variables before World War II (and the Great Depression..?). Others, like Merton and Scholes’s, two Nobel laureates whose derivative model for hedge funds famously lost 4.6 bn $ in 1998.
But the main problem with securitization is that it brings a new source of asymmetric information. The risk originator does not bear the risk anymore, so we get a “hot potato” with risk going around from hand to hand. In this respect, rating agencies are among those to blame. Furthermore, this new development of risk management was not followed by a wave of new strict legislation, unlike insurance companies.
But let’s come to the core issue: why did people want to buy houses for so long? We need to go back to 2001, when the dot bubble went bust and the war on terror began. Financing the war required a huge fiscal stimulus, but this was mainly flowing from the US to abroad (ie, contracts to reconstruct Iraq, keep the army going, etc) with few spillovers for the US domestic economy. Nevertheless, the domestic economy needed to recover, and the FED poured a huge amount of liquidity into the economy. Ex post, this was shortsighted. Also, this echoes the South American debt crises of the ‘70’s. There, expansionary policies to boost consumption relied on heavy indebtment but all ended in implosion. “Borrow borrow borrow…boom”.
When he speaks about the rescue plans, Mr Stiglitz is gloomy. He compares them to “curing a hemorrhage with blood transfusions only”. The Paulson plan does not address the mortgage-side problems, it only provides for the buyout of bank bonds. But what will happen when house prices will fall under the threshold level and people will be forced out of their homes by mortgage contract? On the other hand, even if the plan succeeds, recession will be inevitable.
In the meanwhile, the US exported their downturn to Europe, not necessarily through financial linkages but also simply because the dollar was weak for a long time, thus depressing European exports. Mr Stiglitz calls for European governments to stand united, as decision-making fragmentation is a major problem in times of panic. Europe should grant for deposit insurance and suspend the Stability Pact in order to stimulate the economy.
In conclusion, Mr Stiglitz leaves the audience with a glimmer of hope. At the question “do we have the knowledge to avoid a Great Depression”, the answer was yes.
To make a parallel with Economics - and will all due respect - it is as if the Nobel was given to Krugman (½ of the prize for his seminal contribution in new trade theory) and to Falvey and Greenaway (the other ½ of the prize) for this article. Excluding this guy.
Personally, I feel sorry for Mr. Cabibbo - who invented the bloody complicated stuff. And I hope nothing like this will happen in Economics next Monday. And it won't: the prize will go to Sargent/Hansen/Sims, as our friend Ugo Panizza foresees, and everybody will approve.
Oct 7, 2008
"I, for one, am not convinced. Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden. And the US financial sector, in greasing the wheels of the real economy, has been soaking up an astounding 30% of corporate profits and 10% of wages. Thus, unlike in the 1930’s, the US faces a hypertrophied financial system. Isn’t it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulatory structure, might actually enhance efficiency and growth?"
I never thought about the issue this way, but I tend to buy this argument. Sophisticated financial instruments spread the risk, and this creates more credit opportunities. True. But are we sure that everybody working in the profession was fully aware of what they were buying?And can we say that consumers are fully ready to understand all the investment plans that financial planners are willing to propose? As long as the industry is dominated by lack of information on both sides, need to make sure also that the bad banks disappear, otherwise only savers will end up bearing the costs.
Oct 3, 2008
Could this line of thinking be applied to the sick political (and economic) man of Europe, Italy? As you may know, the Italian political system is highly polarized between those who worship Mr. Berlusconi and those who detest him, without necessarily liking his political "opponents" (guess where I stand). What happened in the last elections is that Mr. Berlusconi won easily, the newly created "Democratic Party" of Mr. Veltroni lost miserably, and the left-wing parties (ex-communists, ex-socialists who had not sided with Mr. Berlusconi and the Green Party, all reunited under the colorful coalition called "Sinistra Arcobaleno") were totally wiped out like Napoleon's army at Waterloo. Historically, Italy was governed by essentially right-wing "Democrazia Cristiana" (basically, the Vatican's political arm) and by Craxi's Socialist Party (the masters of corruption) for fifty years, then by Mr. Berlusconi one-man-party for six years or so. Mr. Prodi and friends (center-left unstable coalitions) governed for seven years or so.
In the light of this evidence, it is quite safe to assume that the Italian median voter is mildly right-wing (ID: catholic, low-to-medium educational attainment, over 50). If this is true, then the distribution of political preferences may be represented by a bimodal distribution which is skewed to the right:
Now, even if the distribution is like this, the MVT still holds. Each party will try to tailor the program to best suit the catholic, 50-or more year old and with low-to-medium educational attainment median voter. Say, for illustrative purposes that the median is at 1 in the figure. If the left-wing party proposes a platform equal to 1, however, all the people around -5 will be really pissed off, because the distance between their preferences and the proposed platform is huge. There may even be a threshold distance that makes the voter indifferent between voting for the left-wing candidate and dropping from the electorate. If this is the case, it is easy to see that the left-wing candidate finds himself (there are no significant "she's" in Italian politics) in an impossible situation. If he stays at 1 he loses all voters below the threshold, he moves away from 1 he leaves more that 50% of the electorate to the right-wing candidate. Really, his best chance is to send mixed messages, ambiguous enough not to alienate too many voters on either side, and to hope that the distaste for the other candidate, coupled with the ambiguity of the platform he proposes, will be enough to get the votes of everybody on the left of the median. Very tough job indeed.
This simple conjecture explains quite a few facts of Italian politics. To start with, it is consistent with the real distribution of political preferences. Second, it rationalizes the high levels of ambiguity contained in Mr. Veltroni's platform (Italian satirical commentators made successful jokes about this). Third, it is consistent with the high levels of cohesion among the right-wing parties around the charismatic figure of the boss - Mr. Berlusconi. Finally, it explains the debacle of the left-wing parties, which lost Parliamentary representation.
Another sad but realistic implication is that - given the progressive ageing of Italian society, the total lack of empowerment of the young and the weaknesses of the educational system - the skewed distribution of political preferences is not likely to change any time soon, making it easy for Mr. Berlusconi and friends to dominate the political arena. Very sad message indeed.