Notes on "More than good intentions: how a new economics is helping to solve global poverty" (Dean Karlan and Jacob Appel)

More than good intentions: how a new economics is helping to solve global poverty

Dean Karlan and Jaccob Appel

Publisher: Dutton, Penguin group (U.S.A.) Inc., London, England (2011)

We need more than good intentions in order to solve problem.

Jeffrey Sachs: give more

Bill Easterly: focus on small, agile, homegrown programs

Behavior economics is important:

Not everything that matters is dollars and cents have different priorities.

Marketing is useful to make programs more effective. (based on behavior economics)

è “sell” development solution

è Advertise

Important to test the programs:

Randomized control trial

The two-pronged attack: 

• understanding the problems we face
• Rigorous evaluation

Test specific theories of human behaviour

The poor people are unaware of the resources already available.

Microcredit/saving/education/health

=>need to be carefully managed/don’t be optimistic/things could go well and badly/tess are important to find out fields needed to be unproved.

(Details could also be seen in the book “poor economics”)

There is no one-size-fits-all solution

Possible solutions:

• Microsavings:
• Saving is important
• Reminders to save:
• Cheap and effective ways to mobilise savings among the poor.
• Prepaid fertiliser sales:
• Boost in productivity and agricultural output
• deworming:
• simple
• dort-cheap and tremendously powerful.
• Remedial education in small groups:
• Proven to be effective.
• Chlorine dispenses for dean water:
• Efficient and self-sustaining
• Commitment devices:
• Make significant improvements to houreholds
• Help women (the SEED commitment savings ccount)
• Let people make their vices more expensive and their virtue cheaper
• Help people make more virtuous choices

Notes on Jan Mossin's "Theory of Financial Markets"

Theory of Financial Markets

Jan Mossin

Published by Prentice-Hall, Inc., England Cliffs, New Jersey (1973)

The theory of financial has two principal objectives:

• Explain and interpret phenomena in financial markets.
• Assist management in formulating a company’s financial policy by providing useful analytical tools within a realistic theoretical framework

Maximization of the market value of the company’s equity

• simultaneous interplay of sup ly and demand
• relationships among individual investors’ portfolio decisions

equilibrium

The derivation of a market valuation formula:

   An explicit expression for the value of the firm in terms of characteristics of the probability distribution for its earning and other market parameters.

Walras model of equilibrium in commodity market, use of the central results is that a competitive equilibrium leads to an efficient, or Pareto-optimal.

the theory of decision making under uncertainty:

   To explain people’s choice among alternative choices of action in situations where an action does not uniquely determine the outcome.

Notes on "Method of Policy Accommodation at the interest-rate lower Bound" by Michael Woodford

Method of Policy Accommodation at the interest-rate lower Bound

Michael Woodford, Columbia University

September 16,2012

• other option for policy accommodation exist, apart from additional cuts in the current level of overnight interest rates:
• forward guidance 
• balance-sheet policies:  CB (central bank) varies either the size or the composition of its balance sheet
• people's expectations about future policy are critical aspect of the way in which monetary policy decisions affect the economy

• zero lower bound 
• whether market expectation of the forward path of the US federal funds rate seem to change over a narrow time window around the release of a post- meeting statement by the Federal Open Market Committee.

• real life example result the Bank of Canada's statement in 2009:
• implies either that expectations of policy rates for months in early 2010 fall even more than do nearer-term expectations, or that uncertainty  about the path of the policy rate over the coming year has been substantially reduced.
• forward guidance outside the context of routine predictions about the future path of interest rates is more often interpreted as revealing central-bank policy intentions.

 

• accompany any discussion of the forward path of interest rates with an explanation of the considerations behind it.

 

• Expanding the Supply of Bank Reserves
• the use of changes in the central bank's balance sheet- its overall size, the composition of its assets, and the share of its liabilities that are " monetary" in character - as additional dimensions of policy, apart from the central bank's influence over oversight money- market rates.  =>QE.
• the increase in broad money necessarily increase aggregate nominal expenditure, in proportion to the increase in money if the " velocity of money " remains stable.

• the model of Auerbach and Obstfeld assumes a cash-in-advance constraint, as a result of which the demand for base money is equal to aggregate nominal expenditure each period, except when the nominal interest rate falls to zero. Hence the commitment of a deterministic path for the monetary base is equivalent to a commitment to a deterministic target path for aggregate nominal expenditure together with a commitment to use monetary policy to keep nominal expenditure equal to the target at all times, unless expenditure undershoots the target even when the money supply is already large enough to drive the nominal interest rate at zero. 

• The demonstration by Auerbach and Obstfeld that welfare can be increased by permanently increasing the supply of base money could alternatively be used to show that welfare could be inseased by committing to keep the nominal interest rate at zero until it is possible to hit a certain deterministic target path for nominal GDP, and then use monetary policy to keep nominal GDP growing at a steady rate thereafter. The inferior initial equilibrium is instead one in which nominal GDP is allowed to follow a permanently lower path,  albeit with the same long-run growth rate.

Notes on "Is Piketty’s ‘Second Law of Capitalism” Fundamental?" by Per Krusell and Anthony A. Smith

Is Piketty’s ‘Second Law of Capitalism” Fundamental?

Per Krusell and Anthony A. Smith

Oct.21 2014

In "Capital in the Twenty-first Century", Thomas Piketty uses what he calls “the second fundamental law of capitalism” to predict that wealth-to-income ratios are poised to increase dramatically as economics’ growth rates fall during the twenty-first century. This law states that in the long run the wealth-to-income ratios equals s/g, where s is the economy’s saving rate and g is its growth rate.

Argument against:

It holds the net saving rate constant as growth falls, diving the gross savings rate to one as growth goes to zero.

It is inconsistent with both the textbook growth model and the theory of optimal saving: in both of these theories the net saving rate goes to zero as growth goes to zero.

Both of theories privido a reasonable fit to observed data on gross and net saving rates on the US, whereas Piketty’s does not.

Contrary to Piketty’s second law, both of these theories predict that wealth-to-income ratios increase only modestly as growth falls.

Piketty’s first law:

Capital’s share of national income, y, is r* k/y,

r:  return to capital

k: aggregate stock of capital

Inequality in capital holdings > Inequality of all of income.

In the LR k/y=s/g?

The capital-to-income ratio is s/(g+d)

d: depreciation of capital

Notes on "A Macroeconomic Model with a Financial Sector" by Markus K. Brunnermeier and Yuliy Sannikov

A Macroeconomic Model with a Financial Sector

Markus K. Brunnermeier and Yuliy Sannikov

American Economic Review, 2014, 104(2): 379-421

http://da.doi.org/10.1257/aer.104.2.379

• the financial friction for the business cycles
• Financial stability
• How resilient is the financial system to various shocks?
• At what point does the system enter a civic regime, the same that market volatility, credit speed, and financing activity change drastically?
• To what extent is risk exogenous, and to what extent is it generated by the interactions within the system? How does one quantity systemic risk?
• Does financial innovation really destabilize the financial system?
• How does the system report to various policies, and how policies affect spillovers and welfare?

Temporary shocks can have persistent effects on economic activity as they affect the net worth of levered agents. Net worth takes time to rebuild.

Financial frictions lead to the amplification of shocks, directly through leverage and indirectly through prices. Thus, small shocks can have potentially large effects on the economy. The amplification through prices works through adverse feedback loops, as declining net worth of levered agents’ net worth.

Allow the length of the slump to be uncertain.

Solve for full dynamics of the model using continuous-time methodology and find a sharp distinction between normal times and civic episodes

.

Two types of agents: productive experts and less productive households

The system’s reaction to shocks is highly nonlinear

Getting closes to the steady state, shocks have smaller effect.

The system’s reaction to shocks is asymmetric.

 Positive shocks of the steady state lead to larger payouts and little amplification, while large negative shocks are amplified into civic episodes resulting in significant inefficiencies, disinvestment, and slow recovery

Endogenous risk dominates the volatility dynamics and affects the experts’ precautionary motive.

The extent and length of slumps is stochastic

After moving through a high-volatility region, the system can get tapped for some time in a recession with low growth and misallocation of resources. The stationary distribution is U-shaped.

Financial innovation that allows experts to hedge their idiosyncratic risk can be self-defeating, as it leads high systemic risk.

Purpose of the paper: financial regulation  

“Our model argues in favor of countercyclical regulation that encourages financial constitutions to retain earnings and build up capital buffers in good times and that releases constraints in down turns”

“Our model makes a strong care in favor of macro-prudential regulation. For example, regulation that restricts payouts (such as dividends and bonus payments) should depend primarily on aggregate net worth of all intermediaries. That is, even if same of the intermediaries are well capitalized, allowing them to payout dividends can destabilize the system of others are undercapitalized.”

The economy is prone to instability regardless of the level of aggregate risk because leverage and risk taking are endogenous. As aggregate risk goes down, equilibrium leverage goes up, and amplification loops in civic regimes become more severe: a volatility paradox. Owing to the volatility paradox, the Kocherlakota critique does not apply in our model: in fact amplification in crisis can be unbounded in low-volatility environments. In an environment with idiosyncratic and aggregate risks, equilibrium leverage also increases with diversification and with financial instruments that facilitate the hedging of idiosyncratic risk. Thus paradoxically, tools designed to better manage risks may increase systemic risk. 

Notes on "Cycle Gaps, and the Social value of Information" by George-Marios Angeletos, Luigi Laino and Jennifer La’o

Cycle, Gaps, and the Social value of Information

George-Marios Angeletos, Luigi Laino and Jennifer La’o

July 9, 2014

What are the welfare effects of the information contained in macroeconomic statistics, central-back communication, or news in the media? We address this question in a business-cycle framework that nests the neoclassical core of modern DSGE models. Earlier lessons that were based on “beauty contests” (Moris and Shin,2002) are found to be inapplicable. Instead, the social value of information is shown to hinge on essentially the same conditions as the optimality of output stabilization policies. More precise information is unambiguously welfare-improving as long as the business cycle is driven primarily by technology and preference shocks-but can be detrimental when shocks to markups and wedges cause sufficient volatility in “output gaps”. A numerical exploration suggests that the first scenario is more plausible.

Market participants pay close attention to public signals regarding the state of the economy, like those embodied in central-back communications, macroeconomic statistics, surveys of consumer confidence, or news in the media. Given how noisy these signals can be, the market’s heightened response to them

Often feels “excessive”. In an influential AER article, Moris and Shin (2002) have argued that this is due to the sunspot-like role that public news play in environments with dispersed information: by helping agents coordinates their choices, noisy public signals can have a destabilizing effect on the economy, contributing to higher volatility and lower welfare.

The welfare effect of information within the context of business cycle.

Withholding the release of the macroeconomic statistics, practicing “constructive ambiguity”, or otherwise constructing the information that is available to the public makes sense when, and only when, a sufficiently high fraction of the business cycle is driven primarily by shocks that move the “output gap”. For a plausible parameterization of our framework, this was not the case: more information was found to be welfare-incoming.

Based on the flexible-price allocations of an elementary DSGE model.

The economy is hit only by technology shocks, but, contrary to what would have been optical, monetary policy fails to replicate flexible-price allocations. In this case, the suboptimal response of monetary policy to the underlying shocks introduces random variation in realized markups and output gaps. This opens the possibility that more precise information about the underlying productivity shocks may now be detrimental. In short, a suboptimal monetary policy might induce an otherwise innocuous productivity shock to have the same welfare implication as a distortionary markup shock.

By focusing on flexible-price allocations, we have deliberately abstracted from such confounding effects. By contrast the suboptimality of monetary policy is playing a central role in the otherwise complementary work of Helling(2005) and Roca(2010). These papers assume sticky prices and study the welfare effects of information regarding exogenous shocks to the quantity of money. Clearly, monetary shocks that are unknown at the time firms set their prices cause equilibrium output to fluctuate away from the first best. To the extent that monetary policy fails to instate the economy from such shocks, were precise public information can simply help the market do what monetary policy should have done in the first place: once these shocks become known at the time firm set their prices, prices adjust one-to-one to these shocks, guaranteeing that the shocks have no effect on real allocations and welfare. These observation help explain the results of the aforementioned two papers and the difference between their contribution and ours.

Preference and technology shocks can trigger inefficient fluctuations to the extent that market frictions impact the response of flexible-price allocations to the aforementioned shocks.

The welfare effects of information to hinge on how strongly the wedges covary with the technology shocks and thereby on the severity of the market frictions.

Another interesting issue emerges if the available information interferes with the ability of a policy makes to stabilize the economy. James and Lawler (2011) make a related point within the content of the Morris-Shim “beauty contest”. Translating this insight in the content of business cycle hinges, once again, on the nature of the underlying shocks and the resulting “output gaps”.

Notes on "Why nation fails: the origins of power, prosperity, and poverty" by Daron Acernaglu and James A. Robinson

Why nation fails: the origins of power, prosperity, and poverty

Daron Acernaglu and James A. Robinson

Publisher: profile books, London, the UK(2012)

• Based historical and current affairs
• Good institutions build good environment
• centralised politics is bad:
• “ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people” =>lack of competitions
• “as institutions influence behaviour and incentives in real life, they forge the success of failure of nations”
• An institutional framework transform individual talent into a positive form.
• The political institutions ensured stability and continuity
• Geography hypothesis/culture hypothesis /ignorance hypothesis do not explain why poverty takes place.
• inclusive political institutions vs  extractive institutions

                                   good                           bad

          (the distribution of political power in society)

• Powerful groups often stand against economic progress and against the engines of prosperity.
• Inclusive economic institutions also pave the way for the other engines of prosperity: technology and education.
• Inclusive political institutions create sustainable growth.
• Some luck is key,because history always unfolds in a contingent way.
• Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments on new technologies and skills are more conclusive to economic growth then extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity.
• Extractive political institutions: concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.
• Major institutional change, the requisite for major economic change, takes place as a result of the interaction between existing institutions and vertical junctures.
• Existing institutional differences among societies themselves are a result of past institutional changes.
• History is key, since it is historical processes that, via institutional drift, create the differences that may become consequential during critical junctures.
• 15^th century was a key turning point
• The Europeans turned outwards
• The Chinese turned inwards
• It is hard to predict: 
• Vicious and virtuous circles generate a lot of persistence and sluggishness.
• The vicious circles implies that changing institution is much harder than it first appears.
• Chinese growth example:
• A popular alternative to the “Washington consensus” for kick-starting economic growth in many less developed parts of the world.
• Inclusive: creative destruction
• Extractive: 
• growth: 
• adoption of existing technologies and rapid investment
• not sustainable
• Property rights are not entirely secure
• Chinese development is due to a radical shift away from extractive economic institutions. Such growth will reach the limit and force the institutions, especially political ones, to transform on a inclusive direction
• Cannot engineer prosperity:
• The failure of foreign aid: neither conditional nor unconditional aids work
• Since the development of inclusive economic and political institutions is key, using the existing flows of foreign aid at least in part to fertilitate such development would be useful.
• A free media and new communication technologies can help only at the margins, by providing information and coordinating the demands and actions of these lying for worse inclusive institution. Their help will translate into meaningful change only when a broad segment of society mobilise and organise in order to effect political change. And also as not far sectarian reasons or to take control of extractive institutions, but to transform extractive institutions into more inclusive ones.

Notes on "Understanding the Greenspan" by Standard Alan S, Blinder & Ricardo Reis

Understanding the Greenspan Standard

Alan S, Blinder & Ricardo Reis

Princeton University Sept 12. 2005

For years now, U.S. monetary policy has been said to be on “the Greenspan Standard”

The monetary policy of the Greenspan era are described by a Taylor rule. But any Taylor rule needs to be interpreted as an econometric allegory of “historically anerage responses” to inflation and unemployment

the Greenspan Standard is highly situational, even opportunistic.

FOMC decisions are made one meeting at a time, without pre-commitment to any future course of action and often with much indication as to what those future actions might be.

Monetary policy under Greenspan has been remarkably flexible and adaptable to changing circumstances.

Greenspan had never accepted the idea that any model without unchanging coefficients, or even with an unchanging structure, can describe the US economy adequately.

Greenspan has suggested a different methodological paradigim for monetary policy- that of aik manage.

The many sources of risk and uncertainty that policymakers face, quantify those risks when possible, and assessing the costs associated with each of the risks. The central summary tool in such a risk-management system is often a risk matrix that, according to criteria set forth in the Fed’s manual for bank supervisors should be used to identify significant actinvities, the type and level of inherent risks in these activities, and the adequacy of risk management over these activities, as well as to determine composite-risk assessment.

Criticism:

Failure in financial regulation, including the Federal Reserve’s failure “to stern the tide of toxic mortgages “.

Breakdown in corporate governance that led to “reckless” actions and excessive risk taking by financial institutions.

Households taking on too much debt.

A lack of understanding of the financial system on the part of policymakers.

Fundamental breaches in accountability and ethics “at all levels”.

Greenspan claims that his model is reasonable and better than most models but he fails to see the behavior of the bankers.