Thursday, August 30, 2018

Why low income households have more children

On social media lately, I’ve been reading this sentiment that people who are poor shouldn’t have so many children. The apparent reasoning is that if you can’t afford to bring children up properly, you shouldn’t have them.

This attitude is not just paternalistic and condescending, it also ignores the economic incentives facing the poor.

There are, I think, two main reasons for the poor having more children:

Tuesday, July 24, 2018

Effective Exchange Rate Indexes: June 2018 Update

This post is seriously late, as I’ve just switched laptops and my editing software is being cantankerous. However, the NEER and REER page has been updated, as has the Google Docs version.


Despite the moves in the bilateral USDMYR exchange rate, there has been almost no movement in either the NEER and REER since February. This also applied to the narrow and ASEAN indexes as well. In other words, almost all the currency volatility of the past six months has been due to USD movements, with very little coming from other currencies. The nominal broad index was up 5.30% yoy, but just -0.15% on the month (REER: 4.78%, -0.15%).

Breaking down on a bilateral basis, movements were predictably mixed, with the Ringgit roughly up against half the basket and down on the other half. On a cumulative three month basis, the MYR has gained the most against the EUR (+3.15%), the GBP (+2.68%), the INR (+1.78%), the THB (+1.45%), and the AUD (+1.15%). The biggest losses were against the USD bloc countries in the basket, I.e. the USD (-2.35%), the HKD (-2.28%), and the VND (-2.18%).



  1. Indexes have been updated to June 2018
  2. CPI deflators and forecasts have been updated for May/June 2018
  3. Trade weights were updated to March 2018. This required revisions to all the indexes from Jan-18 onwards

Wednesday, June 13, 2018

Here We Go Round the Mulberry Bush

Our PM in Japan (excerpt):

Malaysia asking for yen credit to help with national debt, says Dr Mahathir

MALAYSIA is asking Japan for credit as part of efforts to resolve its debt problem, Prime Minister Dr Mahathir Mohamad said today.

Speaking at a joint press conference with Japanese Prime Minister Shinzo Abe, Dr Mahathir said he was told Japan was considering the request.

“I have explained the financial problem faced by Malaysia, and towards solving this financial problem, I have requested for yen credit from Japan and Mr Abe, the prime minister, will study this request,” Dr Mahathir said.

I don’t have much time, so I’ll keep this short. I’ll give TDM the benefit of the doubt here – he could be talking about refinancing some of the USD debt under 1MDB, which makes sense since the yield on that debt was way above market. However, using JPY loans to cover MYR debt makes no sense at all.

Tuesday, June 5, 2018

No, International Reserves are NOT Government Savings

I’m starting to read this in social media comments about Malaysia’s public debt. That the government doesn’t have reserves; no, that Malaysia has plenty of international reserves; but Singapore has more reserves than we do! etc.

This is almost wholly nonsense.

Monday, June 4, 2018

RM1 trillion debt? Don’t Panic

I realise in writing this that I’ll probably be a very lonely voice in the wilderness, but I think this needs to be said and intellectual honesty forbids doing anything else. I also promised years ago that I would defend a Pakatan government when keeping an elevated level of government debt. I’m going to keep that promise now.
As the news of the Malaysian government’s real debt position has been slowly been revealed over the past two weeks, the reactions have predictably ranged from horrified to furious. Unfortunately, the prevailing thought is mostly about how this debt is to be paid back, and the burden on taxpayers as this is being done.
Let me flip my usual practice, and begin with my conclusion, before going into the reasons why.

Monday, May 21, 2018

BR1M: Good Or Bad?

Loanstreet has an article on the pros and cons of BR1M (excerpt):

Will BR1M Destroy Malaysia from Within?

Since BR1M was implemented in 2012, it's been heavily criticised by many sections of the public. Many view it as nothing more than vote buying from the marginalised in society. Its harshest critics even claim that such careless use of public funds will run the country to ruin.

We believe that politics aside, the merits of BR1M should be assessed on its own. Is it really such terrible policy? Will it ruin the country as some claim?

Because we ourselves did not know how to feel about it, we decided to thoroughly examine the issues surrounding BR1M to find out if it is actually good policy, or one that could lead Malaysia to ruin.

The “road to ruin” narrative might be a little over the top, but the article covers most of the essential points. This came out before GE14, so a rebrand is probably apposite – my vote would be for Dividend Rakyat.

Two things I would add to the articles points are:

  1. Cash transfers actually do address the root causes of poverty - for the next generation. Poverty should be seen not just in terms of the current poor, but the impact that poverty has on the chances for social mobility of their children. Meritocracy only works under the unspoken assumption that initial conditions for all children are the same, which under most circumstances they are not. It's not enough to provide a good education, since this ignores the importance of for example social capital. Studies on child development also point to the importance of education in the 0-5 age range in terms of soft skills development, which even universal pre-school will not fully address.
  2. BR1M was explicitly funded by the savings from the reduction in petrol subsidies. In fact, initially, they even shared the same account code in the government's books. The way government finance works in Malaysia, BR1M would be classified as operating expenditure, so it can ONLY be funded by revenues, and not by borrowing.

Wednesday, May 16, 2018

The First 100 Days

I’ve had multiple requests to comment on this, but haven’t had the time. To be honest, I didn’t read either side’s political manifesto too closely, as most election promises are so hedged with operational realities that the likelihood of full implementation was never going to be very high, when political idealism meets unyielding economic realities. However, now that we have some clarity on the direction forward, it’s time to seriously assess Pakatan Harapan’s manifesto.

I won’t go over the whole thing, just the 10 items that were promised for the first 100 days, and even then only those that are economics related. So, no comment on investigating scandals or the stature of Sabah and Sarawak.

Thursday, May 3, 2018

GST, Exports, and the Ringgit

This is something I had to explain a few times as well over the past couple of weeks, so again, committing this to writing.

The Pakatan Harapan manifesto promises to abolish the Goods and Services Tax (GST) and bring back the old Sales and Services Tax (SST). Analysts expect this (along with the other spending plans in the manifesto) to result in a sell down of the stock market, and a drop in the Ringgit. Contrary what people may think, this has nothing to do with “investor sentiment”. There are fundamental reasons for thinking this will happen, though I’ll only touch on the SST/GST effect.

Wednesday, May 2, 2018

Fiscal Realities

A couple of things were raised last week that I want to address:

Issue 1: The Difference between Operating and Developing Expenditure

I’ve had to explain this at least twice over the last few days, so I thought I might as well spell it out. Malaysia is one of the very few countries that actually subdivides spending between operating and development expenditure – actually, I think Singapore is the only other country that does this. MOF keeps these accounts entirely separate (I’ll touch on how they intersect in a bit), whereas most other countries consolidate the two.

Wednesday, April 25, 2018

Rethinking the Macroeconomics of Resource Rich Countries

VoxEU has a new e-book out on the way forward for commodity producing economies (excerpt):

Rethinking the macroeconomics of resource-rich countries: A new eBook
Rabah Arezki, Raouf Boucekkine, Jeffrey Frankel, Mohammed Laksaci, Rick van der Ploeg 24 April 2018

After years of high commodity prices, a new era of lower ones, especially for oil, seems likely to persist. This will be challenging for resource-rich countries, which must cope with the decline in income that accompanies the lower prices and the potential widening of internal and external imbalances. This column presents a new VOXEU eBook in which leading economists from academia and the public and private sector examine the shifting landscape in commodity markets and look at the exchange rate, monetary, and fiscal options policymakers have, as well as the role of finance, including sovereign wealth funds, and diversification.

It’s a compilation of papers from a 2016 conference, and to be honest, doesn’t really present anything ground-shakingly new on the subject. However, it does provide a convenient entree for those not familiar with the conduct of macro-policy in commodity producing countries (i.e. most Malaysians).

The article itself provides a short precis of the e-book, which you can download here.

Thursday, April 12, 2018

Effective Exchange Rate Indexes: March 2018 Update

The NEER and REER page has been updated, as has the Google Docs version.


A late CPI release by Taiwan caused this update to be late, as well as an update to the trade weights, based on export-import data for 4Q17.

On contrast to the last few months, the Ringgit was largely stable for March 2018, though still tending to the upside.The nominal broad index was up 6.42% yoy, but just 0.05% on the month (REER: 6.23%, 0.06%). The picture for the sub-indexes was equally mixed, with the nominal broad index down –0.14% compared to February, but with the real index up 0.06%.

Still, gains were broad-based, with the Ringgit up against 11 currencies and down against just 4. The biggest gain was against the AUD (+1.52% mom), building further on gains since the middle of last year. The biggest decline was against the JPY (-1.58%), though this was after rising 5 out of the last 6 months.



  1. Indexes have been updated to March 2018
  2. CPI deflators and forecasts have been updated for Feburary/March 2018
  3. Trade weights were updated to December 2017. This required revisions to all the indexes from Jan-17 onwards

Thursday, April 5, 2018

Historical Revisionism Redux

P. Gunasegaran demonstrates – yet again – that he doesn’t understand exchange rates (excerpt):

How successive governments impoverished M'sians

A QUESTION OF BUSINESS | At least two ways - both very wrong in the longer term - were used to support the export sector in Malaysia in believing that growth through exports was the right thing for a developing country like Malaysia.

But even though there was economic growth, which means more wealth was created, there was impoverishment too. But how could that be? Basically, those who were rich got richer and those who were poor got poorer.

How did the government achieve export competitiveness over the years? Through two measures. First, they reduced the number of things Malaysians generally could buy by going for a policy which weakened the ringgit. And two, they imported poverty by allowing the uncontrolled import of cheap labour.

Tuesday, April 3, 2018

Stuck in the Middle

The Deputy PM thinks middlemen are the culprits for high prices (excerpt):

Zahid: Higher prices of goods and services the work of 'cartels', not GST

BAGAN DATUK: The rise of market prices were not caused by the Goods and Services Tax (GST) but the actions of middlemen and “cartels” who manipulated prices for their own gain.

Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi, who is also chairman of the National Cost of Living Action Council, said these middlemen and cartels also made things worse by accusing the government of raising the prices of goods and services when it was they who were the ones responsible.

“They blame GST as the main cause, but these cartels and middlemen are the ones who, before this, avoided paying the Sales and Service Tax (SST). It is because of these people that the government decided to (do away with SST and) implement GST….

…Zahid said it was true that there had been an increase in production, import, foreign exchange costs at one time, but this was due to the fact that the ringgit had fallen against the dollar.

However, he said, the ringgit had now risen against the Greenback but the prices of goods had yet to come down.

Despite the “cartels/middlemen” explanation being a fairly widespread belief, I’d like to see some evidence for it first. While the DPM might be using this to deflect the perfectly valid point that GST is not wholly and certainly not primarily responsible for higher prices, I don’t see it reflected in any of the (patchy) census data on distributive trade. If this was true, profits (value-added, less wages) in the wholesale/retail sector should be rising. Instead, margins have been declining, largely due to higher wage bills.

That last point is mostly wrong too. Based on the interaction between prices and the exchange rate, there has been very little passthrough of exchange rate movements into domestic prices, which implies margins shrank when the Ringgit declined, and just reverted to “normal” as the Ringgit regained value. This isn’t to say that there hasn’t been isolated cases of direct passthrough into prices (I’m looking at you, Apple), but there hasn’t been a general wave in that direction. Moreover, the exchange rate should be completely irrelevant for prices of services.

What disturbs me most about this, however, is that the last two times I’ve heard this sentiment being publically aired by a top government official was in Zimbabwe and Venezuela. Both were cases of hyperinflationary environments, and governments who’d prefer to scapegoat rather than address the real causes of price increases.

Would addressing distributional inefficiencies and monopolies/oligopolies reduce prices? If they exist, quite possibly. However, any such improvement would be a temporary one-off reduction in the price level, and won’t change underlying inflation.

Monday, April 2, 2018

More on Seafood Prices

Nobody can deny inflation in food prices, and seafood is a major contributor to that. The biggest reason behind seafood price inflation is a supply-demand mismatch – the world as a whole is eating more than the seas can provide, with obvious long term consequences unless this is managed. But China is a major factor behind that mismatch (excerpt):

China's Real Offshore Disaster
There isn't much left for a million tons of light oil to kill.

Last Sunday's sinking of an Iranian oil tanker 180 miles off the coast of Shanghai certainly looks like an environmental disaster. Depending on how many of the ship's 1 million barrels of condensate were released into the ocean and not burned off, the accident could end up being one of the biggest oil spills in half a century. The irony? Even that wouldn't represent the biggest disaster to befall the area.

The fact is, thanks to massive overfishing in China's territorial waters, there isn't much marine life left to kill in the disaster zone. According to He Pemin of Shanghai Ocean University, those waters have been so denuded over the last three decades that fishermen "normally bypass the area and go further afield for a bigger catch."

It's a dark twist to an accident that has the potential to send oil drifting to the California coast. And it should encourage the Chinese government to rethink how it manages its marine environment. The need is urgent: China's hunger for seafood is fast outstripping its domestic resources. Consequences already loom, including food inflation, a depleted environment for the hundreds of millions of Chinese who live along the coast, and rising international tensions.

Chinese fishermen traditionally concentrated on inland and coastal waters. But as the economy opened up in the late 1970s and private fishing fleets grew in size, those areas were quickly fished out.

Seeing the industry as a jobs creator, local officials were loath to restrain it. The national government didn't do much better. Instead of crafting policies to sustain inshore fishing (by controlling catches and combating massive coastal pollution, for starters), authorities offered subsidies and technical support to help fishermen venture further offshore into the East China Sea. (The money also supported other "blue economy" industries such as shipbuilding and offshore drilling.) In 1985, just 10 percent of China's catch was netted in those far-flung fishing grounds; by 2000, it was 35 percent.

The shift was driven by a massive jump in China's seafood consumption as its population has become more affluent. Growth has averaged 7.9 percent annually since the late 1970s. Chinese seafood consumption increased 50 percent in just the last decade, to 62 million tons annually. That accounts for nearly two-thirds of global growth.

Lesson 1: Unless we do something to manage fisheries on a sustainable basis, the situation will only get worse.

Lesson 2: Politicians can say what they like, but no amount of fiddling with taxes or the local economy will make a difference. This is a global problem and needs a global solution.

Thursday, March 15, 2018

Effective Exchange Rate Indexes: February 2018 Update

The NEER and REER page has been updated, as has the Google Docs version.


This update is a little late for a few reasons. First, I was travelling the whole of last week, and simply hadn’t the time. Second, there were major updates to a few of the CPI series (changes of base years), including the one for Malaysia, that required rejigging the spliced deflator series.

On the whole though, the picture hasn’t changed much since December 2017. The Ringgit was still climbing against most currencies, which resulted in a continued increase in all of the indexes. On the year, the nominal broad index was up 5.3% in January and 6.4% in February, while the real broad index was up 3.9% and 6.3%. The picture was broadly the same across all the sub-indexes.

On a bilateral basis, the Ringgit was up against 14 currencies in January and 11 in February (relative to the 15 that make up the broad index). The biggest gains were against regional currencies, with the only net declines over Jan-18-Feb-18 recorded against the EUR, JPY and CNY.



  1. Indexes have been updated to February 2018
  2. CPI deflators and forecasts have been updated for January/Feburary 2018
  3. CPI deflator data revisions were required for Malaysia, Thailand, and the Phillippines. This required revisions to the indexes from Jan-17 onwards

Thursday, February 15, 2018

4Q17 GDP: Momentum Slowing

A quick note on yesterday’s GDP report. The date brought the growth numbers for 2017 to a gratifyingly satisfying conclusion (log annual change and annualised seasonally adjusted quarterly change; 2010 constant prices):


GDP expanded at a 5.8% clip (in log terms; 5.9% in percentage terms), just a little lower than the 6.1% log change seen in 3Q17. That brings full year growth to 5.7% (log) and 5.9% (percentage), the best performance since 2014.

Wednesday, February 14, 2018

Food Stamps Don’t Work, Redux

My original take here. From a Tweetstorm I read this morning:

Worth reading the whole thread.

Thursday, January 25, 2018

BNM Watch: On The Move

The OPR was hiked 25bps today to 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively.

The global economy has strengthened further, with growth becoming more entrenched and synchronised across regions…Global growth is projected to experience a faster expansion in 2018. In this environment, risks to the global growth outlook are more balanced, pointing towards continuity in the current phase of global economic expansion.

For the Malaysian economy, latest indicators reaffirm the strength in exports and domestic activity. Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy….

…However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, remains moderate….

…With the economy firmly on a steady growth path, the MPC decided to normalise the degree of monetary accommodation. At the same time, the MPC recognises the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time. At the current level of the OPR, the stance of monetary policy remains accommodative….

After the strong signal given at the last MPC meeting in November, BNM fulfilled market expectations with this move. Up to last week, I think the bond markets were still in two minds whether this would happen, having only half priced it in. Regardless, foreign investors were in no doubt, judging by the moves the Ringgit has made over the past couple of months.

Personally, I think this is the right move – the data certainly supports a tightening of monetary conditions, even if the appreciation of the Ringgit makes it appear unnecessary. The problem with playing the expectations game is that if you don’t follow through, the markets might reverse course and make it necessary again. For practical purposes, monetary conditions started tightening right after the release of the last statement, and not raising the OPR today would have undone that. Borrowers will have to start paying more on their loans from next month, but that would be the only difference. Granted, that’s maybe RM2 billion or more off the table in private consumption and investment, but that’s in the context of a faster growing economy.

Speculation will now shift to if and when there will be another hike. Nothing in the statement suggests one is on the cards for the moment, but the “pre-emptive” line at the end indicates BNM will be keeping an eye out for an acceleration of loan demand. I think the data would support a further move in the second half of the year, though that might be skewed by spending around the general election, which I think will probably come in March. Provisionally, I’m not expecting any consideration of further tightening until September at the earliest.

Negative Income Tax: Someone’s Finally Trying It

I came across this on Twitter last night – Mauritius is taking on the challenge of implementing a negative income tax (excerpt):

Negative Income Tax scheme: Beneficiaries receive first payment

GIS - 27 November, 2017: The first payment of Negative Income Tax (NIT) allowance to beneficiaries was effected on Friday 24 November 2017 at the seat of the Mauritius Revenue Authority (MRA) in Port Louis in the presence of the Prime Minister, Minister of Home Affairs, External Communications and National Development Unit, Minister of Finance and Economic Development, Mr Pravind Kumar Jugnauth.

Cheques were handed over symbolically to some thirteen beneficiaries under the NIT scheme which came into effect as from 1st July 2017. Out of the 21 800 applications received, 12 100 persons have already benefitted from an allocation. The NIT consists of a financial support from the Government to be effected by the MRA on a quarterly basis to employees whose basic salary is less than or equal to Rs 9 900 monthly.

Before anybody sneers at this, Mauritius has a GDP per capita roughly on par with Malaysia, and the scheme will benefit something like 25% of the workforce. The support isn't much – roughly USD30 per month for the lowest income category – but it's the principle that counts.

One obvious drawback is that only those in paid employment are eligible (full criteria here), which leaves out the informal sector and those out of work for other reasons (such as disability). I don't know Mauritius so well that I can say whether that's good or bad. Nevertheless, here's hoping someone's tracking the outcomes of this policy. That would be one piece of research worth waiting for.

Tuesday, January 23, 2018

Property Taxes: There’s a Right Way, and There’s a Wrong Way

Caught this yesterday (excerpt):

Selangor, Penang tax hike woes

ONE part of Pakatan Harapan's manifesto covers cost of living and taxes, and points fingers at federal government policy.

If they are serious about reducing the cost of living and taxes, they should first look at Selangor and Penang.

On Dec 26, the Selangor Mentri Besar's Office scrambled to respond to my assertion that property-related taxes are the main cause of increase in cost of living in Selangor.

Datuk Seri Azmin Ali refused to accept my assertion and blamed Putrajaya and the goods and services tax (GST) for the increase….

…There was a significant increase in cost of living between 2008 and 2011, years before the implementation of GST.

Moreover, the initiatives rolled out in 2016 by the state government were focused on rural residents. The MB's Office said several hundred thousand owners of kampung houses were given exemption on assessments.

But what about urban residents in the cities and towns where over 80% of Selangoreans reside?

The residents in apartments and urban dwellings have had to pay higher quit rent and assessment taxes since 2008?

This is where most of the increase in cost of living happens.

Most Selangor residents live in cities and towns and have been significantly affected by the rapid rise in property prices and rental because of the state government's policy.

I’m not going to play politics here. Property related taxes have increased across most states, and in my opinion probably a bigger factor in the increased cost of living than anything else. We can all argue over who is at fault, but ultimately, nothing much will change unless fundamental reforms are carried out.

Public Transport Pass

I support this (excerpt):

Time to introduce a RM100 public transportation pass in the Klang Valley

In October 2017, I had written about the lack of an increase in the ridership of the LRT, MRT and KTM Komuter despite the billions of Ringgit of investment poured into new projects.[1] The recently released Quarter 3 2017 rail statistics[2] by the Ministry of Transportation confirmed my fears that the LRT and MRT ridership spike in July and August 2017 due to the half-price fares were only temporary....

...The drop in the daily ridership on the LRT and MRT clearly shows that passengers are price sensitive. This is why it is necessary to introduce an affordable monthly public transportation pass to allow passengers to have unlimited rides on the LRT, MRT, Monorail and Rapid KL buses as a way to increase public transportation usage. Rapid used to have an RM150 monthly travel pass for the LRT but this was eliminated as part of the LRT fare hike in Dec 2015.

Pakatan Harapan has proposed in our alternative budget to introduce a RM100 unlimited travel monthly public transportation pass. I am confident that with the introduction of this pass, public transportation usage especially on the LRT, MRT and Rapid buses will increase significantly, perhaps even beyond the daily ridership figures set in August 2017 when the LRT and MRT fares were reduced by 50%.

Public transport almost never makes money, but there are large positive externalies to increasing utilisation. From reduced congestion to lower environmental costs, not to mention spreading the large upfront cost of building transport networks across more users, there are good arguments for maximising the use of available capacity. There's also the incentive trade-off between using cars as opposed to public transport - because of the lower convenience, public transport has to be priced lower to compete effectively. Lower or flat prices might also increase revenue, depending on the shape of the demand curve. So this makes sense, and is at least worth some study.

Monday, January 22, 2018

Check Your Credit Report

BNM has opened up access to CCRIS (excerpt):

Bank Negara Malaysia Introduces eCCRIS

Bank Negara Malaysia wishes to announce the introduction of its new initiative – eCCRIS, a secure online platform for the public to access their own Central Credit Reference Information System (CCRIS) report, anywhere at their convenience. This service is provided for free and is available nationwide starting today.

The CCRIS report shows the financing and repayment history of a borrower with participating financial institutions over the past 12 months. It does not provide an assessment of a borrower’s credit standing. It is therefore a factual report and is not a blacklist....

CCRIS was previously only available in person. You still have to register physically at any BNM or AKPK office, but you’ll have online access thereafter. The website is here.

Wednesday, January 17, 2018

Development Thinking Summarised

Stefan Dercon takes the top 10 thinkers (I actually counted 11…hmm, Nigel Tufnel anyone?) in development economics, and condenses each of their beliefs into one or two sentences (excerpt):

10 top thinkers on Development, summarized in 700 words by Stefan Dercon

One of the treats of my role at LSE is luring in some great development thinkers to lecture on Friday afternoons, andStefan Dercon then sitting in to enjoy the show. Stefan Dercon came in just before the Christmas break and was typically brilliant, witty and waspish. Particularly enjoyable from an outgoing DFID chief economist (as well as Prof at the Blavatnik School of Government and Director of the Centre for the Study of African Economies).

Stefan gave us a tour of the ‘Big Ideals, Big Egos and Big Thinkers in development’. Here they are, points for recognizing them. For the answers, go to the bottom of this post and see their books – extra point if you have read them all. He celebrated the quality of the books, the way they have brought development ideas to a mass audience, the impact they have had on the ‘public conversation’ around the way the world works. And then came a wonderful ‘digested read’ summary:

It's a very concise summary, and probably doesn't capture all the nuances of each perspective, but as a shorthand beginners introduction to the topic, this is hard to beat.

Tuesday, January 16, 2018

Market Monetarism Goes Mainstream

David Beckworth summarises who’s bought the idea of NGDP targeting (excerpt):

Do Changes in Potential Output and Data Revisions Make NGDP Targeting Impractical?

Over the past few months there has been increasing chatter about the need for a new framework for U.S. monetary policy. The Peterson Institute for International Economics (PIIE), for example, recently had its Rethinking Macroeconomic Policy conference where, among other things, Ben Bernanke called for the Fed to adopt a temporary price-level target. PIIE also launched Angel Ubide's new book on reforming monetary policy. Similarly, at the AEA meetings there was a session titled Monetary Policy in 2018 and Beyond where Christina Romer again made the case for a NGDP level target. Likewise, the Brookings Institute held a recent conference on whether the Fed should abandon its 2 percent inflation target. There, Jeff Frankel shared the arguments for a NGDP level target and Larry Summers endorsed it. Others at the conference, like San Francisco Fed President John Williams called for a price level target.

I am glad this conversation is happening. It is not new--some of us have been having it since 2009--but I get the sense that it is gaining traction. The turnover at the Fed and the opportunity it creates for new thinking makes this conversation about new monetary policy frameworks incredibly important now.

As this conversation continues to grow, so will the interest in the options available including nominal GDP level targeting (NGDPLT). Obviously, I have much to say here, but for now I want to respond to two critiques often applied to NGDPLT: (1) changes in potential output and (2) data revisions make NGDPLT an impractical rule to implement. I think these concerns are misplaced as explained below.

I’ve liked the idea of market monetarism from the start – it’s intellectually appealing, simple in implementation, and really, just common sense. I do have some reservations, though not the ones David brings up.

My main concern is the choice of growth path, especially when viewed through the lense of a developing economy versus a developed economy, as well as how such a path might evolve for an economy across time. That might not seem like much, given that a central bank no longer has to target a lagged reported variable (inflation) and an unobservable one (the output gap). Inflation and real growth can vary under the limits of the central bank’s growth target. So far so good.

But what governs the choice of the NGDP growth path? NGDP growth of 4%-5% would more or less be compatible with developed economy growth like the US, but what about Indonesia or Vietnam, where nominal growth is typically in the region of 8%-9%?

Second, should that target change as economies converge to the global production possibility frontier, and potential growth rates drop? It’s one thing to have inflation averaging 2% over time, but quite another to have it average 6% or more.

Third, what about the impact of demographic change? As populations age, the dependency ratio rises, and both nominal and real income and consumption growth will naturally slow. How should a NGDP growth rule respond to this? I think for this last point, any such monetary rule should target NGDP per capita or NGDP per worker, rather than NGDP. But I don’t have much of  feel for the solutions to problems 1 and 2.

Nevertheless, we’re seeing real progress here.

Friday, January 12, 2018

Raising the Minimum Wage

I was going to keep this for Monday, but this is too timely (excerpt):

Be Careful When Raising Minimum Wages
By Noah Smith

Minimum wages are one of the most contentious topics in economic policy. Many states and cities are experimenting with big minimum wage increases, so that there is now a lot of variation across the country...

...To many in the news media and in the world of think tanks and activists, being pro- or anti-minimum wage is akin to a religious belief. But even in the world of economics research, there’s plenty of disagreement.

A slew of recent minimum-wage studies illustrate the point...

It’s important to remember that these studies are all very limited. Some of them, like the Leamer et al. and the Allegretto et al. studies, are preliminary and subject to change once the final analysis is concluded. The studies that use synthetic controls -- Jardim et al. and Allegretto et al. -- could be wrong if they’ve chosen the wrong controls, which is easy to do. The method used by Cengiz et al. requires its own set of assumptions, which could be wrong.

At this point, anyone following the research debate will be tempted to throw up their hands. What can we learn from a bunch of contradictory studies, each with its own potential weaknesses and flaws? Some extreme cynics even see the contradictory minimum wage results as reason to doubt the usefulness of empirical economics itself.

But this is the wrong response. The right reaction to the contradictory studies is caution. Policy makers and advisers should read the whole literature, including studies that yield conclusions they don’t like. They should try to get a picture of which research methods are considered the most reliable, and why. And then they should move forward cautiously with policy, taking steps to try to help the poor, but not making the steps so big and bold that they can’t be reversed if things go wrong.

In the case of minimum wages, a majority of the evidence seems to indicate that raising the wage floor by modest amounts isn't very dangerous. That means that experiments like the ones now underway in places like Seattle should continue. But the studies showing larger harm from minimum wages boosts should be a reason not to make the increases too large or abrupt, and not to implement big hikes at the federal level. To borrow a phrase from Chinese leader Deng Xiaoping, the right approach is to “cross the river by feeling the stones.”

I'm generally supportive of the notion that the minimum wage is a necessary tool for addressing labour market imperfections and wage inequality. But there's also such a thing as pushing something too far, too fast.

One key problem with the Malaysian labour market is that, unlike in developed countries, a significant portion of the labour force is in the informal sector, where the minimum wage won’t apply and can’t be enforced. In other words, it’s not a silver bullet for the problem of low incomes. A second issue is that, in my own delvings into the impact of the minimum wage in Malaysia, the disemployment impact was statistically significant i.e. it cost jobs, even if the overall welfare benefits outweighed those job losses. So there is a very real trade-off involved. Third, the most recent minimum wage revision showed no impact at all on wages in proximity to the minimum wage level, i.e. zero welfare gains.

So the fact that Malaysia has a minimum wage at all is a positive, but let’s not get too carried away that it’s any kind of total solution. It isn’t.

An Obsession With Surpluses

No, I’m not addressing the government deficit. Rather this is about Malaysia’s (slowly) diminishing current account surplus. I wrote about it at length last year (link), but here’s another flavour of the same argument (abstract):

Current Account Deficits:The Australian Debate
Rochelle Belkar, Lynne Cockerell and Christopher Kent

This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place.

It's an old paper, but still relevant. I'll note in passing here two things:

  1. The underlying argument is similar to my own – whether the current account is in surplus or deficit (and the extent of that imbalance) is primarily driven by factors in the domestic economy, not the external sector or the exchange rate;
  2. Australia now has almost no FX reserves to speak of, despite being heavily exposed to trade and commodity prices, and a foreign presence in their bond market that exceeds ours. IIRC, they barely have one month cover of retained imports.

The implication is that all adjustments take place in prices instead of levels i.e. the AUD exchange rate adjusts, not their level of reserves. Despite this difference, the MYRAUD cross rate is one of the most stable I’ve ever seen outside of a pegged exchange rate. Or to put it more bluntly – despite not having accumulated “insurance” (FX reserves) against capital outflows, and thus deliberately exposing the exchange rate to greater volatility, the AUD does not appear to be any more volatile than the MYR is. There was an exception to this, running roughly from October 2008-May 2009, coinciding with the collapse of Lehman Brothers and running to the beginnings of the global recovery. But this was more the exception that proved the rule.


Rochelle Belkar, Lynne Cockerell and Christopher Kent, "Current Account Deficits:The Australian Debate", Reserve Bank of Australia Discussion Paper 2007-02, March 2007

Thursday, January 11, 2018

Rent Control Doesn’t Work Either

I’ve been falling behind in my blogging – work commitments, travelling, time with the family etc have really eaten into my writing. One of my new year resolutions is to become more active again. Nevertheless, blogging is still likely to take a little bit of a back seat, though I’ll try to keep up to at least once a week, if not more. Just don’t expect long rants.

First up, a paper on the effectiveness of rent controls on housing (abstract):

The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco
Rebecca Diamond, Tim McQuade, & Franklin Qian

In this paper, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants, landlords, and the rental market as a whole. Leveraging new micro data which tracks an individual’s migration over time, we find that rent control increased the probability a renter stayed at their address by close to 20 percent. At the same time, we find that landlords whose properties were exogenously covered by rent control reduced their supply of available rental housing by 15%, by either converting to condos/TICs, selling to owner occupied, or redeveloping buildings. This led to a city-wide rent increase of 7% and caused $5 billion of welfare losses to all renters. We develop a dynamic, structural model of neighborhood choice to evaluate the welfare impacts of our reduced form effects. We find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging between $2300 and $6600 per person each year, with aggregate benefits totaling over $390 million annually. The substantial welfare losses due to decreased housing supply could be mitigated if insurance against large rent increases was provided as a form of government social insurance, instead of a regulated mandate on landlords.

Frisco (I lived there for a few years, so feel entitled to use the short form) is an interesting case. Silicon Valley is next door, and the agglomeration of high tech companies in the area have both increased demand for housing (from internal and external immigrants) as well as boosted house prices substantially. Couple that with Californian zoning regulations, and Frisco has a housing market that is one of the most unaffordable in the world. Rent control is one solution, but the paper estimates that the costs far outweigh the benefits.

This isn’t to say that rent controls don’t work at all, but the specific circumstances in Malaysia are similar – inadequate supply, internal migration to economic centres of activity, increased compliance costs. So I’m comfortable extrapolating the results to our domestic housing problem. The solution is still to reduce barriers to contruction and increase supply in the right market segments.


Rebecca Diamond, Tim McQuade, & Franklin Qian , "The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco", paper presented at the NBER Conference on Public Economics, October 26-27 2017

Wednesday, January 10, 2018

Effective Exchange Rate Indexes: December 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.


December saw the Ringgit gaining for a fourth straight month across all the indexes. The NEER hit 4.1% yoy, while the REER rose 2.1%. On the month, gains accelerated, with the Ringgit gaining 1.7% in nominal terms, and 1.5% in real terms. Gains were across the board, with appreciation recorded against all 15 currencies in the indexes, the first time that has happened since April 2016.

The largest (m-o-m) gains were against the JPY (2.33%), IDR (2.30%), HKD (2.25%) and USD (2.16%). The smallest gains were against the KRW (0.71%) and GBP (0.86%).



  1. Indexes have been updated to December 2017
  2. CPI deflators and forecasts have been updated for November/December 2017
  3. Trade weights have been updated to 3Q2017. This caused revisions to the indexes from January 2017 onwards