Assorted on India

India’s growth in the 2000s: Four facts

  The rupee: Frequently asked questions

Talk is cheap

Conclusion: there is precious little fundamental reason for the rupee to depreciate as it has done in 2011, and even less reason for it to depreciate at the speed of a Ferrari. If there are no fundamental reasons, what gives? Sentiment and expectations. The Centre has done everything possible to sour expectations and sentiment with regard to India. This has hurt. If this were not enough, the RBI messed up, by talking too much and stating that the rupee was a free floating currency. The market tested that ridiculous assertion. The market won. The RBI had to backtrack. Central bankers should be seen more, heard less. The rupee slide was aided and abetted by mismanagement of the interest rate and exchange rate policy. There is ample reason to believe that RBI is not independent, and that a considerable portion of mismanagement might actually be attributable to the Centre. Whatever the real cause, India is the loser.

The Price of Civilization

Like many Americans, I looked to Barack Obama as the hope for a breakthrough. Change was on the way, or so we hoped; yet there has been far more continuity than change. Obama has continued down the well-trodden path of open-ended war in Afghanistan, massive military budgets, kowtowing to lobbyists, stingy foreign aid, unaffordable tax cuts, unprecedented budget deficits, and a disquieting unwillingness to address the deeper causes of America’s problems. The administration is packed with individuals passing through the revolving door that connects Wall Street and the White House.

-Sachs, Jeffrey D. (2011-10-04). The Price of Civilization: Reawakening American Virtue and Prosperity (Kindle Locations 62-66). Random House. Kindle Edition.

Book Recommendation

10½ Things No Commencement Speaker Has Ever Said

The Harris School of Public Policy

Ph.D. students are required to pass four qualifying examinations offered by the Harris School: methods (statistics and econometrics), microeconomic theory, political economy, and a field exam in a substantive field of public policy studies chosen by the student and the student's advisor. These examinations will ordinarily be taken following two years of coursework. In exceptional cases, a student may propose an alternative to either the methods or the theory examination.

The Harris School's doctoral program (PhD)program - how's it rated among the public policy programs?

Why IMF did nothing when Russia defaulted

We hear relatively little about the struggles between “area” departments, which tend to be relatively sympathetic to the countries they oversee, and “functional” departments such as those responsible for monetary and fiscal policies, which tend to be more critical. Certain departments within the IMF are notorious for being more or less open to new ideas; one functional department during the period in question was informally referred to, less than fondly, as the thought police. Again, this is something about which one would wish to learn more.­...

The book turns next to the Mexican, Russian, and Asian crises. Although these episodes have been extensively analyzed, Boughton offers a few revelations. We are told, for example, how the IMF first learned of the peso’s impending devaluation not from the Mexican government but through an offhand remark by a high-ranking U.S. official. We learn that the reason the IMF did not do more to discourage Russia from defaulting was because of a telephonic miscommunication between Camdessus, on summer vacation in Bayonne, France, and the Fund’s man in Moscow, John Odling-Smee.­

At points the drama is compelling. One cannot help but be impressed by the number of emergency phone calls at 2:00 a.m., and by how frantically IMF officials shuttled to Moscow and Jakarta to keep the world economy from falling off a cliff.­

Boughton describes just how close the world came in 1995, in 1997, and again in 1998 to a “Lehman Brothers moment.” In retrospect it is clear that, already in the 1990s, something was dreadfully wrong with a global financial system that was so vulnerable to collapse. One wonders why the IMF did not do more at the time to rectify the problem.­

See the full review of the book by Eichengreen.

Thinking Fast and Slow

In the highly anticipated Thinking, Fast and Slow, Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. Kahneman exposes the extraordinary capabilities—and also the faults and biases—of fast thinking, and reveals the pervasive influence of intuitive impressions on our thoughts and behavior. The impact of loss aversion and overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the challenges of properly framing risks at work and at home, the profound effect of cognitive biases on everything from playing the stock market to planning the next vacation—each of these can be understood only by knowing how the two systems work together to shape our judgments and decisions.

Meet the Economist- Columbia Professor Naidu

It was in Seattle that he first decided to go into economics. "You realized, 'There're not very many economists coming out of our political movement,' and so I thought I could be one of those," he explained.

He studied at the University of Massachusetts at Amherst and then at Berkeley before arriving at Columbia, focusing on political economy, economics history and labor economics. His first research paper, which he wrote with Michael Reich and Arin Dube, showed that an increase in the minimum wage did not, as many economists assumed, necessarily lead to an rise in unemployment.

He grew up in Newfoundland, where, he says, dinner occasionally meant moose curry. His parents came from, in his words, "small villages in the middle of nowhere, India." He said his visits to those places made a lasting impression on him.

"You're a 6-year-old and you see your counterpart, who's another 6-year-old, having blond hair from malnutrition," he said. "That will stay with you."

A few days ago, Naidu reflected on his experiences in the anti-globalization movement that emerged from Seattle in 1999. "It was exciting and exhilarating -- and it felt like we were winning," he said. "I think for like two years we were winning -- and I think we did win. Now, as a professional economist, I look back on that and think, ‘Wow, that was a great thing we did -- changing the terms of the debate on free trade and exposing the politics that were underlying what was supposed to be win-win for everybody and in fact might not have been."

"Even now that I'm teaching economics," he continued, "so many of the people that I hang out with, that I associate with, are people that I hung out with in that period."

"And that is what I think will happen with the Occupieds," he said. "Even if the movement goes away, the social networks that have formed will hang around. People will be friends, even if they're no longer camping together in the camps, and when strangers meet in whatever venues, they'll be like, ‘You were there,’ and there will be an immediate rapport. In the long run that will have a big political impact."

Chile's Economic and Social Challenges

Panelists included:
- Guillermo Calvo, Professor of Economics, SIPA,
- John Dinges, Professor of Journalism, CJS
- Nelson Fraiman, Director, Program on Entrepreneurship & Competitiveness in Latin America
- Nara Milanich, Professor of History, Barnard College
- Miguel Urquiola, Associate Professor of Economics, SIPA

Book Recommendation on Health Care Reform

A Sneak Peek At ‘Health Reform: The Comic Book;

I think Mitt Romney is the hero of this story. But I want to make clear that the way he’s portrayed in this book has nothing to do with his presidential campaign. Mitt Romney is the single person most responsible for health care reform in this country: Without his leadership we don’t get reform in Massachusetts, and without Massachusetts reform we don’t get national reform.

Cool Summarizer Tool

wikisummarizer

Debt Dynamics

Winner of the Coolest Statistical Agency on web

The revamped ONS website is just great- congratulations. Checkout their You-Tube Channel and the interactive charts

Latest Employment Data from ONS

Movies about the Financial Crisis

 

There are three ways to make a living in this business. Be first, be smarter, or cheat.

India - Pakistan Relations Assorted

Pakistani Foreign Minister Hina Rabbani on Indo-Pak relations

Pakistan, India, MFN: What are the implications? ;

In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India's connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.

For Discussion: Would the gravity model work when India is just too big for its neighbors unlike ASEAN?

Related:

The Gravity Model

Trade Frictions and Welfare in the Gravity Model

Gravity models are mathematical models based on an analogy with Newton s gravitational law and used to account for aggregate human behaviors related to spatial interaction such as migration and traffic flows. In regards to trade, the gravity model states that the volume of trade can be estimated as an increasing function of the national incomes of trading partners, and a decreasing function of the distance between them. Although the model’s ability to predict trade flows has been popular for several decades, it is often criticized for its lack of theoretical foundations. On August 6, 2002, Edward Balistreri presented his collaborative work with fellow International Trade Commission (ITC) economist, Russell Hillberry on an evaluation of the gravity model and its ability to replace traditional methods of welfare and policy analysis

Book Recommendation

'In Capitalist Revolutionary, Backhouse and Bateman cut through the misinformation, the caricature, and maybe even the web memes, to give us an actually useful understanding of Keynes as a philosopher offering a moral critique of our capitalist system.

According to Backhouse and Bateman, Keynes was essentially a man who wanted to create a revolution in how we thought about economic problems'

Peter Boettke highly recommends the book- 'the most informative and best read on Keynes that I have read recently'

The Economics of Good and Evil

Economics of Good and Evil-The Quest for Economic Meaning from Gilgamesh to Wall StreetTomas Sedlacek

There’s a song that says that rules and laws are created by lawyers and poets. Poets (in the wider meaning of the term) give rules meaning and spirit; lawyers give them form and letter. Similarly, we may say that a great economist can be either an outstanding mathematician or an excellent philosopher. It appears to me that we have given lawyers and mathematicians too large a role at the expense of poets and philosophers. We have exchanged too much wisdom for exactness, too much humanity for mathematization.

-Sedlacek, Tomas; Havel, Vaclav; Havel, Václav (2011-06-03). Economics of Good and Evil : The Quest for Economic Meaning from Gilgamesh to Wall Street (Kindle Locations 5420-5422). Oxford University Press, USA. Kindle Edition.

Think the quality of writing needs much improvement. 

Bangladesh Economy Blogs

Bangladesh Economic News
Centre for Policy Dialogue
Bangladesh Budget Watch

Photo Source: The Economist

Elizabeth Warren talk

The previous fall, Geithner huddled with top aides to develop what one called an “Elizabeth Warren strategy,” a plan to engage with the firebrand reformer that would render her politically inert. He never worked out a viable strategy—a way to meet with Warren without drawing undesirable comparisons—and so, like the president, he didn’t.

-Suskind, Ron (2011-09-20). Confidence Men: Wall Street, Washington, and the Education of a President (pp. 4-5). Harper. Kindle Edition. Related: Consumer Finance Protection Bureau

Tourism Spending

Real spending on travel and tourism increased at an annual rate of 2.6 percent in the second quarter of 2011 after increasing 2.8 percent (revised) in the first quarter. Growth in travel and tourism outpaced growth in real gross domestic product (GDP), which increased 1.0 percent in the second quarter after increasing 0.4 percent in the first quarter. The growth in real spending on tourism primarily reflected increases in total transportation and in recreation and entertainment.

Overall growth in prices for travel and tourism goods and services remained high, increasing 7.3 percent in the second quarter of 2011 following an 8.5 percent (revised) increase in the first quarter. The growth in prices for travel and tourism goods and services reflected increases in prices for traveler accommodations and for gasoline.

Definitions: 
Tourism spending. Tourism spending comprises all goods and services purchased by tourists (defined as people who travel for any reason). In the following tables, tourism spending is referred to as direct tourism output.

Indirect tourism-related spending. Indirect tourism-related spending comprises all output used as inputs in the process of producing direct tourism output (e.g., toiletries for hotel guests and the plastic used to produce souvenir key chains).

Total tourism-related spending. Total tourism-related spending is the sum of direct tourism spending and indirect tourism-related spending.

Direct tourism employment. Direct tourism employment comprises all jobs where the workers are engaged in the production of direct tourism output (such as hotel staff, airline pilots, and souvenir sellers).

Indirect tourism-related employment. Indirect tourism-related employment comprises all jobs where the workers are engaged in the production of indirect tourism-related output (e.g., employees of companies that produce toiletries for hotel guests and the plastic used to produce souvenir key chains).

Total tourism-related employment. Total tourism-related employment is the sum of direct tourism employment and indirect tourism-related employment.

Data Watch

Since the recession ended, businesses had increased their real spending on equipment and software by a strong 26%, while they have added almost nothing to their payrolls....

You can’t fault companies for investing in new machinery rather than hiring new workers. As two news reports detail, labor costs are rising, a function of both private and public pressures.

First, employers face a jump in health insurance costs. The Kaiser Family Foundation reported a 9% average increase in the premiums paid by employers this year. The average yearly cost to cover a family hit a record $15,073, up sharply from $13,770 in 2010.

Related:
Annual Capital Expenditures Survey 

Krugman's History of Macro

So, here’s the history of macro in brief.

1. In the beginning was Keynesian economics, which was ad hoc in the sense that on some important issues it relied on observed stylized facts rather than trying to deduce everything from first principles. Notably, it just assumed that nominal wages are sticky, because they evidently are.

2. In the 1960s a number of economists started trying to provide “microfoundations”, deriving wage and price stickiness from some kind of maximizing behavior. This early work had a big payoff: the Friedman/Phelps prediction that sustained inflation would get “built in”, and that the historical tradeoff between inflation and unemployment would vanish.

.....

7. The Lesser Depression arrives. It’s clearly not a technological shock; clearly, also, nobody is confused about whether we’re in a slump, as the old Lucas model required.

In fact, it looks a lot like what Keynes described, and old-Keynesian models work very well, thank you, both at explaining it and in making predictions about such things as interest rates and the effects of fiscal austerity. But the descendants of the Lucas project know that Keynes was wrong — it’s what their teachers and their teachers’ teachers have been saying all these years. They cannot accept anything resembling a Keynesian explanation without devaluing everything they’ve done with their intellectual lives.

Related: Stephen Williamson debates Krugman.

Discuss- are escalators decreasing?

Arnold Kling always gives us good brain food on economics;

There are multiple escalators in the economy. At any one point in time, some people are on up escalators, and some people are on down escalators. From 1970 to 2000, I think that cohort data would tell you that many more families rode escalators up than rode them down. From 2000 to today, my guess is that the proportion riding up escalators has not been as high.

Confidence Men

Brad de Long reviews Confidence Men;

Since the spring of 2009 I have became more and more alarmed by the economic policy choices made by the Obama administration. A new administration needs to (1) forecast what is most likely to happen, and (2) design and implement policies that will deal with what is likely to happen, The Obama administration did that. I think that some of its initial policies were wrong, but given the press of events I would give the administration moderately high marks for the policies it designed and implemented up through, say, April 2009.

Thereafter, however, things to me seemed to gradually fall apart. An administration has a third task it needs to carry out: (3) think hard about the risks--what if the administration has misjudged the situation? what if more things go wrong?--figure out what it needs to do to buy insurance against those risks, and do those things as well.
It needs to ask itself:

• What if we are wrong in our estimation of the situation--what might the world then look like three years from now? 

• What if more things go wrong in the next year or two--what might the world then look like three years from now?
• In those possible scenarios, what will we wish then that we had done today to prepare the way for dealing with the situation?
  
  ....

Why Obama chose the policies he did, why Geithner and Orszag and company were so optimistic in 2009, why the Reconciliation process was not teed up for emergency expansionary fiscal policy action if it turned out to be necessary, why Fannie and Freddie were not teed up for emergency mortgage action if it turned out to be necessary, why the administration turned so decisively away from unemployment and toward long-term deficit reduction in early 2010, why Summers and Romer did not wipe the floor with Geithner and Orszag in the long twilight bureaucratic struggle when NEC collegiality broke down, and why Bernanke forgot about the employment and output part of the Federal Reserve's dual mandate - these are all questions that I would dearly love to know the answers to.

Two and a half years ago I would have given long odds that Ron Suskind's book would provide me with a lot of the answers to these questions.

It does not.

Christine Lagarde's 4 Rs

A recent speech of IMF's Lagarde;

But before talking about solutions, we need to be clear about the problems. I would isolate three distinct, albeit related, issues—balance sheet pressures sapping growth, instability in the core of the global economic system, and social tensions.... I want to propose today four key policy dimensions needed to secure recovery and economic stability—repair, rebalance, reform, rebuild, the “4 R’s”.

First, repair. Before anything else, we must relieve some of the balance sheet pressures that risk smothering the recovery—on sovereigns, on households, on banks.

On sovereigns, advanced countries need credible medium-term plans to stabilize and lower public debt ratios. This must come first. But consolidating too quickly can hurt the recovery and worsen job prospects. So the challenge is to navigate between the twin perils of losing credibility and undermining growth. There is a way to do this. Credible measures that deliver and anchor savings in the medium term will help create space for accommodating growth today—by allowing a slower pace of consolidation.

Of course, the precise path is different for each country. Some have no choice but to cut deficits today, especially if they are under market pressure. Others should stick to their adjustment plans, but be ready to change course if growth falters further. Others still are probably pushing too hard today, and could slow down a bit.

One more point—it’s not just the what of the adjustment, it’s the how. In the short run, policymakers must focus on measures with the biggest bang-for-the-buck, that create jobs and kick-start growth, and that take distributional considerations into account. The how of adjustment is also important in the medium term, where fiscal plans should seek to support growth. I’m thinking of issues like tax reform, including by broadening bases. Equally, entitlement reforms will be essential in establishing long-term debt sustainability in virtually all advanced economies.

Policymakers must also deal with household and bank balance sheets.

In light of the jobs crisis in the United States, I welcome President Obama’s recent proposals to address growth and employment. At the same time, it remains critical for policymakers to clarify in parallel their medium term plans to put public debt on a sustainable path. In tandem with this crucial employment agenda, it is important to relieve overburdened households through actions like more aggressive principal reduction programs, or helping homeowners take advantage of low interest rates.

In Europe, the sovereigns must address firmly their financing problems through credible fiscal consolidation. In addition, to support growth, via private sector lending, all banks must have sufficient capital buffers.

The second “R” is reform. If repair was about getting the economy moving today, reform is about laying the foundations for a more stable economic future tomorrow.

A priority here is financial sector reform. On the plus side, we have broad agreement on higher quality capital and liquidity standards with appropriate phase-in arrangements. But substantial gaps remain in areas like supervision, cross-border resolution, too-important-to-fail, and shadow banking systems. We need international cooperation across all dimensions to avoid regulatory arbitrage. The fact that so many of these issues are still unresolved three years after Lehman should be of concern to us all.

We also need to develop and fine-tune macro-prudential tools to guard against financial risks. I’m thinking here of policies like having banks hold more capital when times are good or implementing maximum loan-to-value ratios to guard against housing price bubbles.

Under the reform banner, I would also include the social dimension. Employment must be central. It not only sustains demand, but supports human dignity. In the words of Dostoevsky, “deprived of meaningful work, men and women lose their reason for existence”. This is especially important among the young, who risk losing the race even before the starting gun has sounded. We should also seek growth that is inclusive, benefiting the whole of society.

The third “R” is rebalance. This has two meanings. First, it means shifting back demand from the public to the private sector, when the private sector is strong enough to carry the load. This hasn’t happened yet.

The second rebalancing involves a global demand switch from external deficit to external surplus counties. The idea here is straightforward—with lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery. But any rebalancing so far is largely due to lower growth. In some countries, rebalancing is being held back by policies that keep domestic demand growth too slow and currency appreciation too modest. Some other emerging markets are dealing with dangers from capital inflows that are too rapid.

This lack of sufficient rebalancing hurts everyone. In our inter-connected world, any thought of decoupling is a mirage. If the advanced economies succumb to recession, the emerging markets will not escape. Nobody will. Rebalancing is in the global interest, but it is also in the national interest.

Woodrow Wilson would have appreciated that, I'm sure.

My fourth—and final—“R” is rebuild. Here I am thinking mainly of the low-income countries that need to rebuild their economic policy buffers—including fiscal positions—that served them so well during the crisis, to protect themselves against future storms. This will also help provide the space for growth-enhancing public investment and social safety nets—for example, allowing countries to deploy well-targeted subsidies to protect the poor from commodity price swings with minimal damage to fiscal sustainability.

Ireland and World Economy

Ireland and the World Economy Guest Lecture from Stephen Kinsella on Vimeo.

Robert Reich at Google

Robert Reich on his new book After Shock

It hurts some times

IMF on fiscal contractions;

Second, external adjustment is not driven solely by the fall in domestic demand from fiscal consolidation. The contractionary effect of fiscal consolidation is now well established, with consequent effects on import demand, and this is something policymakers cannot ignore—fiscal consolidation hurts. But the current account also improves because exports get a boost from the real exchange rate depreciation that tends to accompany fiscal consolidation.

Chapter 4 of WEO- The Twin Budget and Trade Balances

How do changes in taxes and government spending affect an economy’s external balance? Based on a historical analysis of documented fiscal policy changes and on model simulations, this chapter finds that the current account responds substantially to fiscal policy—a fiscal consolidation of 1 percent of GDP typically improves an economy’s current account balance by over a half percent of GDP. This comes about not only through lower imports due to a decline in domestic demand but also from a rise in exports due to a weakening currency. When the nominal exchange rate is fixed or the scope for monetary stimulus is limited, the current account adjusts by as much, but the adjustment is more painful: economic activity contracts more and the real exchange rate depreciates through domestic wage and price compression. When economies tighten fiscal policies simultaneously, what matters for the current account is how much an economy consolidates relative to others. Looking ahead, the differing magnitudes of fiscal adjustment plans across the world will help lower imbalances within the euro area and reduce emerging Asia’s external surpluses. The relative lack of permanent consolidation measures in the United States suggests that fiscal policy will contribute little to lessening the U.S. external deficit.

We find that fiscal policy has a substantial and long-lasting effect on the current account. A fiscal consolidation of 1 percent of GDP improves the current account by over a half percent of GDP within two years, with the improvement persisting into the medium term. The improvement in the current account comes not only through lower imports due to falling domestic demand, but also from an increase in exports arising from a weaker domestic currency.

See chapter 4

Something to think about?

'We call the negative outliers "rogue traders". What do we call the positive outliers?

From Junkcharts

Target what you can hit- follow up

In case you don't have time to read the entire chapter 3 , please read the two boxes
- Box 3.1. Inflation in Sub-Saharan Africa during the 2008 Commodity Price Surge 
- Box 3.2. Food Price Swings and Monetary Policy in Open Economies

What accounts for the relative stability of nonfood inflation? As Table 3.1.4 indicates, the macroeconomic environment was broadly neutral during this period. There was a small increase in government spending. On the monetary front, there was a small increase in the growth rate of monetary aggregates; money targets were missed in eight countries for which there are data; and nominal interest rates stayed constant—all of which is broadly consistent with an accommodation of first-round effects.

Target what you can hit

The analytical chapters of the WEO is out. The 3rd chapter address the following questions;

-What are the effects of international commodity price swings on inflation across a variety of economies? What economic factors influence these effects?

-What is the appropriate monetary policy response to commodity price shocks? In particular, how does the approach of targeting underlying inflation rather than headline inflation perform in terms of delivering macroeconomic stability in different types of economies? Should central banks respond to persistent commodity price shocks any differently than to one-time shocks?

-Finally, what are the implications for monetary policy in today’s environment, with excess demand pressures in some emerging and developing economies and economic slack in advanced economies?

These are the main findings of the chapter:

-Food price shocks tend to have larger effects on headline inflation in emerging and developing economies than in advanced economies. On a related note, because medium-term inflation expectations are weakly anchored in many emerging and developing economies, food price shocks have larger effects on inflation expectations in these economies.

-The measure of inflation used to define a central bank’s target matters because of its effect on the central bank’s credibility. In economies with low initial monetary policy credibility and high food shares in the consumption basket, focusing on underlying inflation—that is, a measure that reflects the changes in inflation that are likely to be sustained over the medium term—rather than on headline inflation, makes it easier to build credibility. The reason is that it is harder to hit headline inflation targets when commodity prices are volatile. Higher credibility, in turn, leads to better-anchored inflation expectations and lower volatility of both output and headline inflation.

-The desirability of setting and communicating monetary policy based on a measure of underlying inflation depends on the relative importance of headline inflation and output to a country’s welfare. A headline framework can lower the volatility of headline inflation, but at the cost of significantly higher volatility in output (and hence in household income).

-Finally, in economies where central bank credibility is still limited and the share of food in consumption is high (as in a number of emerging and developing economies), a food price shock is likely to have even larger second-round effects and require a more aggressive policy response when excess demand pressures are high and inflation is running above target. This assumes that the economic costs rise as the gap increases between actual inflation and the target. In contrast, in economies where the central bank’s credibility is strong, where food accounts for a low share in consumption baskets, and where there is substantial economic slack (as in major advanced economies today), the monetary policy tightening required to stabilize inflation is more gradual.

Nepal can expand external debt?

The debt reduction has created fiscal space, but in the short run maintaining the peg calls for containing domestic borrowing close to current levels. With external debt within thresholds, the debt sustainability analysis indicates that Nepal is at moderate risk of debt distress (see Annex 1). This fiscal room could be used for building infrastructure and human capital, and for the peace process, provided spending quality is ensured. But, in the short term the worsening external position requires that domestically financed deficits remain close to current levels, while the overall deficit could be expanded provided it is funded with external grants or concessional debt. The main considerations in determining the appropriate fiscal stance are;

Debt level target. Nepal’s external debt, with an NPV of debt-to-GDP ratio of 21¾ percent, and an NPV of debt-to-exports-and remittances ratio of 63 percent, is well within DSA thresholds. Nepal’s public debt is well below the average of comparators. However, contingent liabilities of some 2–3 percent of GDP arising from the required recapitalization of state-owned banks, and potential additional liabilities stemming from the weak financial sector suggest that adequate cushions be maintained. In sum, a public debt target of around 40 percent would be appropriate to anchor fiscal policy. To stabilize the public debt-to-GDP ratio in the long run at this level, the overall deficit could rise to 3½ percent of GDP, and the domestically financed deficit would be in the range of 2¼–2½ percent of GDP, higher than in previous years.

Support for the peg and demand management. The expected slowdown in output growth would suggest a more expansionary fiscal stance in the short term. However, inflationary pressures remain high, and the peg to the Indian rupee requires that domestically financed deficits remain contained.

Crowding out and borrowing costs. A high money-to-GDP ratio suggests that, in the longer run, a somewhat higher domestic debt burden can be accommodated. However, in the short run, the expected slowdown in money growth due to the deteriorating external position, public sector borrowing may need to be contained to leave sufficient room for private credit and control interest costs

Source: Nepal: 2010 Article IV Consultation and Request for Disbursement Under the Rapid Credit Facility - Staff Report

Random Data- Nepal's Government Revenues

Random Data- What's Bhutan's Government Revenues

The answer is it depends. See also the latest Economic Update on Bhutan from the World Bank

Government Debt in Europe

Egypt, Israel and Spain

Having a bit too much fun with Google Data Explorer

Google Data Explorer is cool

Government Revenues and Expenditures

 Note to Self: IMF DataMapper users the following definitions for public revenues and expenditures.

General government revenue (National currency)
Revenue consists of taxes, social contributions, grants receivable, and other revenue. Revenue increases government’s net worth, which is the difference between its assets and liabilities (GFSM 2001, paragraph 4.20). Note: Transactions that merely change the composition of the balance sheet do not change the net worth position, for example, proceeds from sales of nonfinancial and financial assets or incurrence of liabilities.

General government total expenditure (National currency)
Total expenditure consists of total expense and the net acquisition of nonfinancial assets. Note: Apart from being on an accrual basis, total expenditure differs from the GFSM 1986 definition of total expenditure in the sense that it also takes the disposals of nonfinancial assets into account.

What's the quickest way to find public finance data on the web?

So whats the quickest way to find International Public Finance data on the web? Is it
A- Wolfram Alpha
B- World Development Indicators
C- IMF Data Mapper

Homework: Try finding the latest estimates of Bhutan's government revenues estimates?

Something for Nothing

Something for Nothing-A Novel
Michael W. Klein

David Fox (Ph.D. Economics, Columbia, Visiting Assistant Professor at Kester College, Knittersville, New York) is having a stressful year. He has a temporary position at a small college in a small town miles from everything except Albany. His students have never read Freakonomics. He thinks he is getting the hang of teaching, but a smart and beautiful young woman in his Economics of Social Issues class is distractingly flirtatious. His research is stagnant, to put it kindly. His search for a tenure-track job looms dauntingly. (The previous visiting assistant professor of economics is now working in a bookstore.) So when a right-wing think tank called the Center to Research Opportunities for a Spiritual Society (CROSS)--affiliated with the Salvation Academy for Value Economics (SAVE)--wants to publish (and publicize) a paper he wrote as a graduate student showing the benefits of high school abstinence programs, fetchingly retitled "Something for Nothing," he ignores his misgivings and accepts happily. After all, publication is “the coin of the realm,” as a senior colleague puts it.

But David faces a personal dilemma when his prized results are cast into doubt. The school year is filled with other challenges as well, including faculty politics, a romance with a Knittersville native, running the annual interview gauntlet, and delivering the culminating "job talk" lecture under trying circumstances. David’s adventures offer an instructive fictional guide for the young economist and an entertaining and comic tale for everyone interested in questions of balancing career and life, success and integrity, and loyalty and desire.

When Fiscal Adjustment is not enough

The mission and the authorities agreed that fiscal adjustment alone will not
ensure debt sustainability (MEFP, paragraph 10). It was recognized that attempts to achieve higher primary fiscal targets over the medium term would not be sustainable unless accompanied by a meaningful reduction in the public debt service burden, which will require burden sharing by all stakeholders. In this context, the authorities have retained debt and legal advisors, publicly announced to seek a comprehensive and substantive restructuring of the public debt, initiated discussions with creditors, and obtained financing assurances from the Paris Club. The authorities’ strategy (Box 4), developed with the assistance of their debt advisors, emphasizes dialogue with all creditors and information transparency (including publishing relevant information on the debt restructuring on their website).

- St. Kitts and Nevis: 2011 Article IV Consultation and Request for Stand-By Arrangement - Staff Report

Ideas for PhD

PhD in Political Economy & Government;

The PhD in Political Economy and Government is designed for students interested in the impact of politics on economic processes and outcomes, and the reciprocal influence of economic conditions on political life. It is appropriate for students whose academic interests are not served by doctoral studies in Economics or Political Science alone...

Things to consider before applying

Required quantitative preparation for the PhD in Political Economy and Government includes:

Minimum two semesters of Calculus.
Mathematics preparation up to and including Multivariable Calculus.

I want to work for IMF/WB?

A certain Praveen Kishore comments on the Dani Rodrik's blog sometime back- which worries me a bit about the type of people who get attracted to jobs at multi-lateral institutions.

For past three months, I have been collecting information regarding Ph.D. in Eco. and MPA/ID and similar other programs. I have gone through other blogs as well. However,I am still not decided about Ph.D. or MPA/ID. I like economics. I have basic undergraduate degree in Eco.and Mathematics. Thereafter, I got MBA(Finance) from Calcutta University (India) and Masters in Public-policy and Management from IIMB (Indian Institute of Management, Bangalrore, India). I am part of permanent Indian civil service (IRS - Indian Revenue Service, to be precise) with around 10 years of experience in Central (Federal) direct tax department, Ministry of Finance, Govt. of India - at operational as well as policy level. I am aged 35 years.

I want to work for IMF/WB or consulting organization. I also like academics/research.

In such a situation -What should I do? MPA/ID or Ph.D.in Eco?

Justin Lin on Esther Duflo

Justin Lin summarizes the Jackson Hole conference;

Esther Duflo, meanwhile, posited that a long term strategy to balance growth with equity should entail policies that maximize the chance for the poor to fully participate in markets. Her paper describes market failures in finance, insurance, land, and education in developing countries, and discusses what is known, and not known, about how best to tackle them.

My view is that fixing all those market failures that are biased against poorer people might not be sufficient. Poor people’s income comes mostly from their labor earnings, while the rich people derive a large portion of their income from capital. If a developing country can follow its comparative advantage and starts its structural transformation by developing labor-intensive industries, the poor will have better employment opportunities, the economy will be competitive and dynamic, labor will turn from relatively abundant to relatively scarce, and the increase in wage rates will be much faster than the return to capital. In this way, the country may achieve growth with equity as Japan, Korea, Taiwan-China, and Singapore achieved during their catching up process.

September is going to be David Henderson month

Plan to finish reading two books by David Henderson next month- so will be blogging extensively about the books in the coming month.

Justin Wolfers says good bye to DC

Life in D.C. is not just about public policy debates, it is also a wonderful city to live in. My usual running route takes me home past the White House, the Washington Monument, perhaps the Lincoln Memorial and Reflecting Pool, and for hill work, I head to the Capitol. There’s something special about running past monuments. There’s terrific trail running, too. Great restaurants are on every corner, although perhaps too many expense-account steakhouses. The cupcake scene is incredible. I would say something about the happy hour culture, but, well, I’m now a parent. So instead, I can say that a typical weekend might involve taking my daughter to visit the dinosaurs at the Natural History Museum, burn off steam in the atrium at the National Portrait Gallery, picnic in the Sculpture Garden, or take a twirl on the Carousel on the National Mall.

Justin Wolfers is one of our favorite economists!

Do check-out Wolfers' parenting habits;

OK, so one randomized trial that we actually did read had a huge impact on us, which was teaching babies sign language. And it turns out that this is a great way of even increasing their vocab before their speaking skills kick in. And Matilda speaks terrific sign language and his been able to sort of communicate her needs whether she wants milk or Cheerios, you know, for about a year now. No not a year, I misspoke, six, seven months now. But you know, preverbal. We made that a priority.

What Steven Landsburg been reading

It's all fiction

;

The Brothers Karamazov (Fyodor Dostoevsky) (for the fourth time!). Arguably the greatest novel ever. The issue with the Brothers K is always the choice of a translation. The last time around (maybe ten years ago or so), I went with Pevear and Volokhonsky, and pronounced it by far the best. This time I went back to the classic Constance Garnett translation that I last read at age 16 — and reminded myself that this one is also great.

Alan Krueger to replace Austan Goolsbee

Mr. Krueger has been on Princeton's faculty since 1987, the year he earned his Ph.D. in economics from Harvard University. He did a stint as chief economist at the Labor Department during the Clinton administration.

The work he has done in academia ranges from attempts to explain why job growth wasn't stronger during the 2000s, to findings that increases in the minimum wage don't depress employment, to a work showing that terrorists often come from middle-class—and often college-educated—backgrounds.

While at Treasury, Mr. Krueger worked on analyses of a variety of programs, including tax incentives to encourage employers to hire the employed, the "cash for clunkers" initiative to jump-start auto purchases and Build America taxable municipal bonds.

Treasury Secretary Timothy Geithner, through a spokeswoman, said that "given his expertise in labor economics, he is precisely the right choice to lead the CEA at this moment in history."

Martin Feldstein, who was CEA chairman in the Reagan White House, praised the choice. "His experience at the Treasury will give him a running start in his new job," he said. "Alan is an expert in labor-market problems, taxation and the economics of terrorism. I hope the president listens to him."

-Labor Economist to Fill Key Post

Leon Levy Lecture - The Lot of the Unemployed

A closer look at Alan Krueger’s academic work;

The minimum wage: Krueger might be most famous for the paper he did with David Card back in 1992 showing that an increase in the minimum wage doesn’t always increase unemployment, as most economists had long believed. Krueger and Card compared fast-food restaurants in New Jersey and western Pennsylvania and found that New Jersey, which had hiked its minimum wage from $4.25 to $5.05, didn’t lose jobs as expected. In fact, in some conditions, an increase in the minimum wage can actually boost employment. As Robert Waldmann explains, “Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly.” That said, Waldmann adds, this research doesn’t appear to be relevant to current labor-market conditions.

Unemployment: In 2011, Krueger and Andreas Muller conducted a survey of 6,025 unemployed workers and found a couple of interesting things. One, “the amount of time devoted to job search declines sharply over the spell of unemployment.” Second, out-of-work job-seekers tend to be picky: The minimum wage a worker will accept tends to be pretty close to the wage of his previous job, and it doesn’t drop very much over time, even if he stays unemployed.

Krueger to CEA

Reading for the Weekend- paper by Kashik Basu on Indian Inflation

Understanding Inflation and controlling it

Vijay Kelkar- A Practitioner in Indian Economic Policy

Vijay Kelkar's is a fascinating story in Indian public policy. He started out as an economics Ph.D. and turned himself into a consummate policymaker. While he did many interesting things in the field of oil and gas, and as executive director of the IMF, I worked with him in his fiscal phase...

...I used to get astonished at the way Kelkar, who is 20 years older than me, consistently found the energy and morale to go back into the fray again and again, chipping away at solving long-standing problems. This also taught me that while weary cynicism is a more fashionable pose, progress is only achieved through the dint of boundless optimism.

Practical people are often dismissive of the world of ideas, but that is not the Kelkar that I have known. For one thing, he made a point of reading the current global research in economics on an astonishing scale. I have been frequently humbled in finding that his knowledge of the current literature was better than mine. I suspect his years at the IMF were very useful in tooling him up in modern open economy macroeconomics, which is often a gap in the knowledge of those who experienced a closed India in their formative years. Kelkar has always encouraged me, saying that in an open society, ideas matter, so it was important to build good ideas, and to push important messages out in the public domain, even when this makes many people uncomfortable.

via Ajay Shah

Doing Economic Theory in Practice

A book that Olivier Blanchard wishes he had written should be a must read for economic policy students;

To give a sense of what they do, I shall take one example, the creation or reform of fiscal frameworks like the European Stability and Growth Pact (SGP). To come to an intelligent set of recommendations, think of all the elements you need to put together:

•You need to understand what sustainability means in theory and in practice, what the costs of not abiding by it are, and how to assess it. When does a debt-to-GDP ratio become truly excessive? What happens then? How fast can you reach that threshold? How fast can you move away from it?
•You need to understand the long-term effects of deficits and debt on output and its composition. How do deficits and debt affect output in the medium and the long run? How do they affect the interest rate, the net foreign debt position, the capital stock? What is the cost in terms of lost consumption in the future? Which generations gain, which generations lose?
•You need to understand the short-term effects of deficits, and how counter-cyclical fiscal policy can help in the short run. Do deficits affect activity in the same way, whether they come from tax cuts or spending increases? How important are expectation effects? Can the anticipation of large deficits in the future lead to a decrease in consumption and investment, and a decrease in output today? When is this more likely to happen?
•You need to understand the macroeconomic costs of decreased policy flexibility. Are constraints on deficits and debt consistent with an appropriate response of fiscal policy to shocks? What explains sustained divergences within the euro area during the first ten years? Were such divergences avoidable? Then you should determine whether and to what extent fiscal policy is the right tool to deal with country-specific shocks and to what extent it can (should) substitute for the lack of an independent monetary policy. Finally, you need to figure out how much policy space is left to governments after they have fought the great recession and rescued their banks.
•You need to think about how to define the rules in practice. How should debt be defined? How should implicit liabilities, coming from social security and other promises to future generations, be treated? If rules are defined in terms of deficits and debt, what are the most appropriate definitions of the two concepts for the question at hand? How should rules deal with privatization revenues? Should rules apply to gross debt or to net debt? Should the budget be separated between a current account and a capital account? Should the deficit rules apply only to the government current account? Can rules be enforced by politicians or do we need to set up independent committees?
•You need to think about political economy issues. Why are rules needed in the first place? To protect people from their governments, or to protect the governments from themselves? How can a particular set of rules be manipulated or distorted by a national government? How will sanctions against a misbehaving government be imposed? Will these sanctions be credible ex ante? Is international coordination, such as in the G-20 framework, an asset or a diversion from every government’s duties?

To answer these questions, you need many conceptual tools. Among them: a dynamic general equilibrium model with overlapping generations; a model of short-run fluctuations with careful treatment of expectations; political economy models to think about the case for rules; agency models to help you think about the design of specific rules. In each case, with the guidance of theory, you need to look at the evidence, so as to get a sense of which theoretical arguments are more relevant. This is not easy to do. Courses will typically give you the theoretical tools, without much motivation, and let you use them on your own, without much practical training. This is not what this book does. It motivates the use of the tools, gives you the tools, and shows you how they can be used.

FRL in Mongolia - some of the Ceilings

Mongolia's FRL appears interesting;

1. The floor of structural balance is the deficit of 2 percent of GDP. The structural balance is calculated by using the moving average price of major minerals—currently copper and coal—over 16 years (past 12 years, current year, and future three years). This provision takes effect in 2013.
2. The ceiling of expenditure growth is the non-mineral GDP growth rate, determined as the greater between its 12-year moving average value and the budget year’s GDP growth rate. This provision takes effect in 2013.
3. Net present value of public debt cannot exceed 40 percent of GDP. This excludes any borrowing in which the government has agreed to contribute into the paid-in capital of a foreign invested mining entity and which is repayable from the future profits of the entity. The provision takes effect from 2014, with a transition period specified for the preceding years.

IMF's view on Mongolia's fiscal framework;

Medium-term fiscal framework. A sound fiscal policy is necessary for ensuring that Mongolia’s mineral wealth leads to lasting prosperity for all Mongolians. In practical terms, this means managing public spending growth in a way that (i) helps smooth economic growth (through a counter-cyclical fiscal policy); (ii) leaves room for the private sector to thrive; and (iii) provides buffers to insulate the budget—and the economy—against a downturn in global commodity prices. The adoption of the Fiscal Responsibility Law last year was a landmark achievement in this regard. However, the 2011 budget is a big step backwards. The Fiscal Responsibility Law will succeed only if it is strictly adhered to in letter and spirit; failure to do so will undermine its credibility and limits its effectiveness in preventing a recurrence of the policy driven, boom-bust cycles that Mongolia has experienced in the past. Compliance will entail expenditure restraint in the coming years, for example, by keeping spending
roughly frozen in real terms in order to reach the 2013 structural deficit target. Moreover, it is equally important not to circumvent the law by using off-budget vehicles or government guarantees that would, in effect, undo the economic benefits of adhering to the law and come
with the additional costs of an increase in fiscal risks and a loss of transparency. The Development Bank, public-private partnerships, and public guarantees are sources of such quasi-fiscal risk and, if such operations are to proceed, need to be managed prudently and in line with international good practices.

Related;
Strengthening the MTEF Process in Mongolia

Mongolians can learn from the Dutch

The story of the Netherlands is of relevance to Mongolia. How does a democracy with good institutions deal with the sudden discovery of mineral wealth? Initially, the Dutch followed a path which would later become known as the Dutch Disease: a strongly appreciating currency made the non-mineral sector uncompetitive, further aggravated by highly inflationary and unproductive government spending on wages and social transfers. Undoing the negative effects of the wage spiral and the overly generous social welfare system was painful and took more than a decade. The cure for the Dutch Disease was based on a voluntary, negotiated agreement between the same stakeholders which had been responsible for the Dutch Disease—government, labor and business. It was centered on conservative fiscal policies, including low public debt, and wage restraint. The essence of this agreement formed the basis of the subsequently highly successful Polder Model—a framework which also held up very well during the 2008 global financial crisis.

Mongolia has laid a strong legal foundation for a similar macroeconomic and fiscal framework in the three rules which form the basis of the Fiscal Stability Law passed with overwhelming majority in parliament in June 2010. The three rules put strict limits and ceilings on the fiscal deficit, expenditure increases and public debt. However, the essence of the FSL only kicks in 2013, when a structural fiscal deficit of no more than 2 percent of GDP needs to be adhered to. In the transition period, Mongolia would do well to heed the lessons from Holland: curing the Dutch Disease can be long and painful. Preventing the Dutch Disease to afflict the economy in the first place would be the wiser path to take, and, if the story of the Polder Model holds true, will also reward the politicians associated with this path.

See the Annex to Mongolia Quarterly Economic Update - August 2011