Friday, 29 August 2014

South Africa Market Capitalization is off scale


I am just noticing that South Africa market capitalization is double the size, relative to GDP, than any other country. This need to be explained.

Friday, 17 May 2013

Debt and Money - it is easier than you think

From now on I'll use this blog to signpost papers and articles that I need to remember and use. This paper is particularly interesting and ask the right question Debt, Money and Mephistopheles: how do we get out of this mess.

Monday, 04 June 2012

Crisis and Institutional Reforms

Paul Krugman is right (see here): Elites are using the crisis to justify a significant change in the role of the state and a definitive redistribution of power in their favor.  In a different time this would have been called a "class project". The increase in wealth inequality of the last 30 or so years is affecting the political system, the moral framing and the economic outcomes (on this, interesting interpretation of Rawls).  This is the reverse of what had happened in 1929  where the suffering of the people was the center of the collective imagination (think Steinbeck The Grapes of Wrath). There is an interesting political economy issue -  rhetoric and framing matter because they determine the  range of "acceptable" strategies of the participants to the democratic game. Today we cannot say anymore as Steinbeck did that  "The bank is something more than men, I tell you. It's the monster. Men made it, but they can't control it" but is this less true? The crisis is  first and foremost a crisis of financial capitalism. Finance didn't control risk, it created it because risk is the basis for profitability of financial investment - (See Haldane here). Thus a reduction of the profitability of the financial industry is a necessary condition for financial stability (and it would also re-allocate human capital towards more productive activities, and thus good for growth). But the solution we face is the reduction of the dimension of the State.  

Creditors' Morality and The Sack of Athens

A historical tale (thanks to Simon Wren Lewis for point this out here). 

Wednesday, 30 May 2012

The Macroeconomics of Poverty

A new conference has been announced on how to solve poverty and inequality in South Africa: It is noticeable that in the "new paradigm" proposed for the conference two things are never mentioned: economic growth and political economy. Consider instead this article by Moletse Mbeki: I think Mbeki is correct: if you want to discuss seriously poverty reduction and inequality, the functions of elites and the institutional set-up they are providing is essential. There is a real difficulty in South Africa to frame the problem in this way. Partly is the normal issue that elites do not commit suicide: the discussion about poverty and inequality sometimes sounds like a discussion about policies that would minimize the impact of inequality on the life of the elite (we could model this). Partly is an intellectual difficulty to accept the idea that a real strong growth process is revolutionary, it destroys the old society and create a new one that is unpredictable and cannot be controlled - it is not soviet planning at work: it is creative destruction.

p.s. I know that these are only notes for myself and that nobody is reading, but just for future reference the definition of elite South Africa needs to be modelled. As Mbeki points out and as we have mentioned in this paper with Lawrence Hamilton, in South Africa we have an extreme separation between political elite and economic elite along racial lines which is unique and make the political economy analysis very interesting. A paper that could be adapted to these circumstances is Esteban, Joan, and Debraj Ray. 2008. "On the Salience of Ethnic Conflict."American Economic Review, 98(5): 2185–2202.

Tuesday, 11 May 2010

The Interdependence between Public and Private Debt

In this paper (which was part of my PhD thesis 11 years ago - but at that time it was not "realistic") we had highlighted the importance in considering the interdependence of government budget constraints when considering European fiscal institutions. In the simplified version of economic integration described in the model, private sector would hold the only assets available, i.e. public debt, and this will be the channel of interdependence between countries.

The model is useful in thinking about the present European crisis. One thing that the European fiscal crises put in evidence is the interdependence between private and public budget constraints and between the debt position of all the member countries. The picture gives an idea of the web of relationships across the union. It might therefore be important to develop a model where this interdependence is taken explicitly into account.

Sunday, 09 May 2010

African Economic Outlook

I have been asked to comment on the IMF Regional Economic Outlook

From a long term point of view the most significant observation in the report is the countercyclical nature of fiscal policy in Africa during the crisis. This observation is important because it might  signal a long term "normalization" of fiscal institutions in many African countries. On the other hand it could be just an accident of history - it just happened that the crisis coincided with a period of relatively fiscal health, after years of fiscal adjustment and debt forgiveness. The fiscal dynamic going forward will reveal which one of the two scenarios is the most likely - for the moment let's enjoy a relatively quite economic climate.

Monday, 26 April 2010

Tuesday, 09 March 2010

A bankruptcy law for sovereign state in EU

Greece fiscal crisis illustrate a fundamental weakness of the monetary union institutional design. Although the designers of the Maastricht treaty recongnised the importance of fiscal discipline to sustain the whole project, fiscal rules have a very limited effect if they are not at the same time robust to shocks and incentive compatible. The Maastricht rules are neither. In this article Daniel Gros and Thomas Mayer propose the institution of an European Monetary Fund to manage the insolvency of euro area countries. The proposal has two main components: the first component is to increase the price of using the fiscal instrument, thus internalizing at least some of the negative externalities of increasing fiscal risk, by providing transfer to the EMF in proportion of the distance of fiscal debt and deficit from the Maastricht criteria; the second component  is to intervene minimizing the systemic effect of a fiscal crises of one of union members, through operations of refinancing and debt swapping with conditionality. That's certainly better than what we have now, i.e. nothing. 

I like to think at this issue as the design of a bankruptcy law for sovereign states. Bankruptcy laws are designed to achieve few contemporary objectives:

  • Minimize the negative spillover of failure of a firm (through orderly liquidiation)
  • punish irresponsible behaviour or get rid of inefficient firms 
  • protect the social interest of preserving the economic value still present in the firm
When a firm goes bankrupt, the owner and management  loose control of the firm and a third party, nominated by a public authority, take control of the books and start the process of liquidation or restructuring. Creditors have to wait. For the law to work both creditors and debtors have to recognize the authority of the court in taking control of the situation. In the debate about sovereign bankruptcy law the stumbling block is always the definition of the centre of sovereignty. The case of Argentina is instructive: after an external shock the policy followed by the government was not sustainable and any attempt to maintain the policy through restructuring, debt freeze and refinancing via IMF were not credible. Translate this scenario to Europe: the EMF intervenes but  the cost of restructuring debt is too high to be feasible. No devaluation is possible and real devaluation is too costly and might actually increase the debt burden. If the country was a firm, the judge would intervene, the management would be replaced, creditors would be made to wait, restructuring happens, normal relationships are resumed. Who is the judge in Europe? 



Friday, 13 November 2009

Music Box

Let me use this blog also to archive whatever I find on the web that I might want to see again in the future. Let's start with this classic.

Monday, 28 September 2009

Models and Policy

Few days ago, I was discussing about the opportunity for the South African Reserve Bank to publish the expected path of the policy instrument. This is a practice that is gaining support in several central banks around the world and, according to the prevalent thinking, a perfect sensible thing to do. The basic idea is very simple: because monetary policy is, in large part, about controlling private sector expectations, the Bank should make public all the informations that are necessary to make the private sector form expectations in line with the Bank predictions. Thus the Bank should say not only what she does but also what she intend to do in the near future. Simple? Not so fast. I think this is a classical case of a result that is very much dependent on the modelling framework used to generate it. Let's take, for example, Woodford prototype Neo-Keynesian model. This is a model in deviation from the steady state, where private sector expectations, in the long run, are anchored by definition to the long run properties of the model. The uncertainty is only in the dynamic path that the economy will follow after a shock. We can add some uncertainty in the parameters, but not too much. More importantly we cannot insert uncertainty affecting the steady state values of the variables (what the inflation target is, for example). In a model like this, commitment to a path of the policy instrument in response to a shock is the best way to control private sector expectations: actually, using a timeless perspective, if the system is forward looking the policy path should have a lot of inertia, i.e. should be very sticky, because the hard work is done by expectations. The policy should not interfere too much with them.
Now consider a situation like South Africa, where the private sector (and anybody else) has a lot of uncertainty about the structure of the economy, the objectives and the credibility of the Bank, let alone what the steady state of the model is. Plus the country is a small open economy and the effect of external shocks, commodity prices, financial flows reversion etc. is dramatic to say the least. In this situation the expected path of the policy instrument changes significantly at any new round of policy decision. Does communicating this path help the Bank in controlling expectations? I doubt it. On the contrary it will probably increase the confusion around objectives and efficiency of monetary policy.
In this context, credibility is about gaining reputation for competence. It is building a track record that makes the details of the policy irrelevant. It is about common definition of objectives and trust in institutions to be able to achieve them. In modern macroeconomics the complexity of the models hides a simplistic view of the constraints faced by the policy makers. Somehow, the old credibility literature (from Barro Gordon onward) was more useful in the policy context because it was more malleable; you could easily use the models to analyse a wide range of issues and train your mind accordingly. New DSGE style models instead constraint the space of analysis to a very limited set of often uninteresting issues, giving a set of very strong results with very little robustness.

Sunday, 20 September 2009

Fiscal Policy

The debate on macroeconomics and the crisis is really interesting. Here John Cochrane on fiscal policy.

Sunday, 06 September 2009

Debate on the State of Macroeconomics - a view from afar

The present debate about the state of Macroeconomics (here the last Krugman's contribution) is very interesting but a bit puzzling if viewed from here. It is maybe the advantage of seeing things from far away - if you work here it is quite obvious that representative agent models, real business cycle models, new keynesian models - any model for that matters - are only a very imprecise description of a complex system in which coordination failures, irrational behaviour, limited information, uncertainty, political economy, desomogeneity of agents, distribution of income and wealth, stocks and history matter a lot in the conduct of daily economic policy. I like models, and I find them useful ways to discipline the thinking, but if models becomes religions they are useless. What we are trying to do here is to introduce some of these characteristics of the economies where we live in the models we use. I think the state of uncertainty in modern macroeconomics gives us a great opportunity: let's go to work

Thursday, 03 September 2009

What can we learn from Africa?

The basic idea behind my research is that it is possible to learn something about economics looking at the way African economies operate. Consider for example this paper with Maria Demertzis on Inflation Targeting : in the paper you will not find a single reference to Africa or South Africa. Nevertheless observing the implementation of inflation targeting in South Africa has been an important source of inspiration for the paper. The main issue is that being transparent and inform the public are two different things: being transparent does not mean that you will be understood, or that information you convey is what the public will understand. Policy maker cannot control interpretation. Economic press is important, credibility and trust between the policymaker and the public is as important, spin doctors are important. In a situation where this relationship is imperfect, semplicity and verifiability of communication is more important than completeness. That's partly why inflation targeting is so popular in emerging countries. It provides a simple e immediatly verifiable information. It is also why it is not very popular the other modern fancy, the pubblication of the interest rate path: although in principle more complete information, in practice it might create more uncertainty in interpretation (expecially when it is constantly changed, as it should) and reduce, not increase, transparency of policy. That's a way in which being an accidental african economist, or an accidental italian economist in Africa, helps, or just make work interesting. This blog want to be all about this particular point of view that living here gives.