Monday, September 14, 2015

Global Value Chains and Exchange Rates

From (excerpt):

The age of global value chains

João Amador, Filippo di Mauro 09 September 2015

There is an urgent need for policymakers to fully acknowledge the extent to which conventional indicators related to gross trade are severely flawed as policy benchmarks because they fail to take into account the existence of global value chains and their increasing role in shaping the global economy. This column, which introduces a new Vox eBook, urges academics to start proposing workable indicators that are systematically produced and readily available.

Thursday, September 3, 2015

Exchange Rates Are Relative Prices

I used this analogy  in a conversation last week, and its too apt not to publish it.

Imagine you’re in the stock market and trying to evaluate two different stocks. Now, fundamental based analysis would look at earnings, book value, gearing, corporate strategy and so on, and come up with a target price for the stocks which reflects what the price of a stock should be.

Tuesday, August 25, 2015

Market Psychology

The thing that struck me the most about yesterday’s global market selloff, is the sense of déjà vu. The more things change, the more they stay the same:


Thursday, August 13, 2015

What To Do About The Ringgit

My advice to BNM and the government, not that they need it, would essentially be the following:

Wednesday, August 12, 2015

Monetary Policy and the Yuan

In a shock move yesterday, the PBOC announced a sharp downward revision in the Yuan’s reference rate, with another one coming today. This de facto devaluation has had repercussions across the world, with some speculating that it would even put the Fed off from raising interest rates in September. It’s certainly the catalyst for the Ringgit moving past RM4.00 to the USD this morning.

There’s all kinds of speculation as to why (the devaluation I mean). Off hand, I would say the notion of currency war and regaining trade competitiveness is grossly mistaken. With regionally distributed production chains, the impact of FX changes on competitiveness have gradually been disappearing.

Friedman On Pegging

I’ve got the book*, but I’m too lazy to type it all out, so I’m quoting Friedman’s thoughts on this from my friend Lar’s post (excerpt):

Milton Friedman on exchange rates #4

...Despite Milton Friedman typically – and rightly – being labelled as the standard bearer for floating exchange rates, he often stresses that the choice is not easy, and he has repeatedly emphasised that countries have achieved both good and bad results with fixed and floating exchange rates. He points out for example that in 1985 Israel successfully implemented a fixed exchange rate policy against the dollar that helped cut inflation without causing any negative long-term economic repercussions.

Ringgit Fallacies: Imported Inflation and International Reserves

Another week, another multi-year low for the Ringgit. Since BNM appears to have stopped intervening, the Ringgit has continued to weaken against the USD, to what appears to be everyone’s consternation. There is this feeling that BNM should do something, anything, to halt the slide – cue: rumours over another Ringgit peg and capital controls.

To me, this is all a bit silly. Why should BNM lift a finger? Both economic theory and the empirical evidence is very clear – in the wake of a terms of trade shock, the real exchange rate should depreciate, even if it overshoots. NOT doing so would create a situation where the currency would be fundamentally overvalued, and we would therefore be risking another 1997-98 style crisis. Note the direction of causality here – it isn’t the weakening of the exchange rate that gave rise to the crisis, but rather the avoidance of the adjustment.

Pegging the currency under these circumstances would be spectacularly stupid. I’ll have more to say about this in my next post.

Monday, August 10, 2015

Poverty, Corruption and Economic Growth

One of the puzzling things I’ve found in the empirical data is that corruption doesn’t seem to have any impact on economic growth (I found instead that corruption primarily impacts the variance of growth, but not growth itself or the level of development). It appears to matter what type of corruption is involved, and the institutional framework that a country has.

Here’s Ricardo Hausmann on the same subject (exceprt):

Fighting Corruption Won’t End Poverty

CAMBRIDGE – Countries are poor because governments are corrupt. And, unless they ensure that public resources are not stolen, and that public power is not used for private gain, they will remain poor, right?

It certainly is tempting to believe so. Here, after all, is a narrative that neatly aligns the promise of prosperity with the struggle against injustice. As Pope Francis said on his recent trip to Latin America: “corruption is the moth, the gangrene of a people.” The corrupt deserve to be “tied to a rock and cast into the sea.”

Perhaps they do. But that won’t necessarily make their countries more prosperous.

Friday, August 7, 2015

Inequality: The Important Role of Family and Inheritance

From the NBER (abstract):

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth
Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi

Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

Translation: It's nurture, not nature. If that's the case, meritocracy (in an aggregate sense) without some government intervention would be a sub-optimal growth and development strategy, even in a relatively equal society.

Technical Notes

Black, Sandra E., and Paul J. Devereux, Petter Lundborg, & Kaveh Majlesi, "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth", NBER Working Paper No. 21409, July 2015

Wednesday, July 22, 2015

China, Gold and Reserve Currencies

In case you missed it, gold looks to be declining again (USD per troy ounce):


But let’s keep some perspective:


Tuesday, July 21, 2015

Assessing July

I’m back from my usual Ramadhan blogging break, and my, aren’t there lots of things to comment on. This will be a kind of omnibus blog post, covering some of the developments over the past month.

2Q2015 GDP Growth

A funny thing happened with the change in national accounts base year to 2010 – the economy all of a sudden got a lot harder to forecast. The usual indicators no longer seem to matter as much – for example, MIER’s confidence indices appear to have totally decoupled from GDP – which makes forecasting growth more than a little bit more difficult. IPI and trade remain good predictors, but their standard deviations have doubled and the forecasts are suggesting two completely different pictures of the economy.

Tuesday, June 16, 2015

Income Inequality In Perspective

A new IMF staff discussion note takes on global inequality (excerpt):

Causes and Consequences of Income Inequality: A Global Perspective

Widening income inequality is the defining challenge of our time…Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.

First, we show why policymakers need to focus on the poor and the middle class…Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth….

Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class…Our analysis suggests that

  • Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs….
  • Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.
  • There is no one-size-fits-all approach to tackling inequality…More generally, complementarities between growth and income equality objectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.

Pretty self-explanatory I think, though the details are interesting, especially the role of financial market development in skewing the income distribution in developing economies. Something for weekend reading.