Friday, April 27, 2007

Time for some Cricket

Well, the blog is called mostly economics but as I mentioned at the start I am going to write on some topics that interest me. Cricket is one of them. No matter how the performance of the Indian Cricket team, I try and keep updated on the latest the sport has to offer.

I was just talking to one of my colleagues at IDBI Capital about the huge number of one-sided games in this world cup. However, being more empirically inclined was wondering to look at some statistics to prove the same.

Here is an excellent analysis by S.Rajesh of Cricinfo where he says:
  • Firstly he defines one sided rather conservatively as "a margin of at least 50 runs, or five wickets with 30 balls to spare".
  • In the 2003 and 2007 WC astounding 72% of the matches were one sided
  • Removing non test playing nations the figure for 2003 is 56% but that of 2007 is still 68% ( this statistic is clearly a better one as it excludes non-test playing nations). In 1987 the % was just 28% which looks like the most hard-fought world cup.

His analysis doesn't just end with world cup though....He has done an analysis of all the matches so far and well the concerns are there for ICC:

  • In 1980's the one sided % was 35, in 1990's 38 and in 200s it has moved to astonishing 49%. Almost 50% of the matches are simply a waste of time in 200s. This is an irony by itself. With so much involvement of professionalism ( batting coaches,bowling coaches, fielding coaches, trainers, etc) in the game we would expect more closely fought matches...
  • He has also given a break up from 2000 onwards and in most of the years the one sided % is hovering around 50. It touches a low of 39% in 2004 and a high of 53% in 2007.

I am waiting for the country wise results analysis. Which country would be involved in most one sided wins and defeats....No guesses for the former ( should by all means by Australia) and for latter there should be a tough fight between India, WI and B'Desh.

Two more prominent awards for Economics

Univ of Chicago has given 9 Nobel Prize Winners as per Nobel Prize Committee list (They basically see what Univ is one at at the time of award, so someone who gets an award when he is at MIT but has taught earlier at Univ of Chicago, The committee would cite MIT in its award). This press release from Univ of Chicago tells me till 2004, out of 55 Nobel laureates 23 were associated with Univ of Chicago either as students, associate professors etc. This is quite a number.

Thanks to Economic Principals, I just came to know about 2 more awards:

1. Bernácer Prize : awarded by Observatory of the European Central Bank given to European Economist under 40 (similar to Clark Medal). Given every year and is named in honour of Germán Bernácer (1883-1965), the first Spanish economist who made significant contributions to the development of macroeconomic research, the BERNÁCER PRIZE was established in 2001 to recognise the work of young economists from the European Union and to stimulate research on European macroeconomics and financial issues.

There have been 5 winners so far:

Again 3 out of 7 are from Univ of Chicago!! Another thing to note is that where as we have only one woman who has won the Clark Medal. here it pretty Even-Stevens.

2. The Elaine Bennett Research Prize : Awarded by American Economic Association (the one that also gives the Clark Medal) and is awarded every other year to recognize, support, and encourage outstanding contributions by young women in the economics profession. Elaine Bennett, made significant contributions in economic theory and experimental economics and encouraged the work of young women in all areas of economics.

The winners:

Out of the two lists I have only read Esther Duflo( just a bit though) and Luigi Zingales (a little more) . Duflo focuses on development research and Zingales on Financial Economics.

Zingales is a star and his research work on financial markets is quite extraordinary and always provides a lot of food for thought. He has written extensively with Raghuram Rajan and together have written some landmark papers on capital structure, impact of finance on growth, underdevelopment ( I mentioned about their work here and here). His/Their work is a must read for all looking at finance as their careers.

Assorted Links

  1. A super speech by Fed Governor Mishkin on Globalisation and Financial Development. He also talks about the role of institutions in financial development, the topics I had blogged on previously (here and here) He is one of my favourite economists. His papers are one of the simplest to read.
  2. On Hedge Funds (By Brad De Long) . On Hedge Fund salaries.
  3. A good review of Susan Athey's work (mentioned in previous post). Here is David Warsh praising her work. Here is Economist Profiling her work
  4. Lee Iacocca Interview .
  5. Diary of an Investment Banker. How little money they make?
  6. Contronyms?? Find out for yourself

Thanks to Marginal Revolution for 2 (1) & 6, Finance Professor for 2(2), 4 & 5 and New Economist for 3

Thursday, April 26, 2007

A picture is worth a thousand words

I came across these 2 wonderful images.

1. State-wise comparison of Gasoline prices in USA (here)
2. How much the home prices have risen since 1890. (here)

Thanks to Econbrowser for 1 and Freakonomics for 2.

Profiling Daron Acemoglu's work

I came across this wonderful line in something I was reading:

To paraphrase Robert Lucas (1988), once one starts to think about economic growth, it is hard to think of anything else.

I can't agree more with this sentence. It sums up my state of mind in recent months. Initially, I used to understand this field as run of the mill types with little to offer only to realise how wrong I was. I continue to be amazed by the work done so far in the subject and the approaches taken by economists to arrive at their own set of conclusions.

As I am still new to this subject (which is a case with most of the subjects) I would like to take up the papers one by one. I have covered a paper by Rajan/Zingales which attributes low underdevelopment to the initial factor endowments in a country. Their idea is very different in the sense that even if you create reforms, development may not happen if the initial factor endowments are not distributed equally.

Recently, I have begun to read growth and development work by Daron Acemoglu. Another Clark Medal Winner (Here is Levitt congratulating Acemoglu) and has done some remarkable work on the same. There is a very good overview of his work by Robert Shimer whose name I picked from Freakonomics Blog. Levitt says he could have been one of the leading contenders for the Clark Medal. That got me to searching Shimer's work and I discovered this gem of a paper summarizing all of Acemoglu's work so far. Here is the paper. Considering the fact that Shimer has coauthored some work with Acemoglu, it again emphasises the importance of having a thinking partner.

His other work looks equally good but it his work on institutions and development, Investment and Growth and on Political Economy which has impressed me the most. I have been aware of his work on first of the three but to read the other two has been simply an eye-opener.

The question which often comes to mind is even US was a colony and so was Africa. Why and How did the two have such different levels of development? For how, there have been many factors - human capital formation, initial factor endowments, geography, education, institutions etc. Out of so many, institutions have been attributed as the most important cause for growth. And this is Acemoglu's view as well.

However, it is the answer to why that he has made a more valuable contribution to our understanding of growth theory. To cut the story short, in his landmark paper he attributes underdevelopment due to mortality rates in erstwhile colonies. Whichever colonies had higher mortality rates (due to malaria etc) the colonizers set up extractive institutions and wherever it was low, they set up good/efficient institutions. As the mortality rates were high in Africa, hence poor institutions and hence low development.

In another paper he shows that colonizers set up extractive poor institutions where the colonies were already rich & prosperous and efficient institutions where colonies were poor. Hence, India which was a rich country continues to be poor.

Well, again the basic idea is same that institutions are important. It is the approach towards understanding why certain countries grew and others didn't. There have been criticisms on the paper and there would continue to be more, but it is the basic freshness of the research which I feel is important.

But again, like other papers what is the hope for Africa and other poor countries. How do they change the institutions which have been set so many years back. How does somebody change the history? This is one aspect most economists agree is the most difficult part and continues to be a challenge for research.

I would continue to post on this fascinating subject. Keep visiting this blog.

Assorted Links

  1. First and foremost Dani Rodrik has begun blogging. Well, this is going to be a treat to read. I had heard a lot about him and discovered his work just browsing and have been hooked on since. (For the uninitiated he writes on the topic I am currently really reading about- Growth and Development; He has criticised World Bank development program popularly called Washington Consensus really well in his papers). I loved the way he mentions about Hirschman award in his blog. You deserve it Sir! Here is a superb writeup cum interview on Rodrik and his work.
  2. Milton Friedman's House :He had a great taste in interiors as well !!
  3. Joshua Angrist (His profile is here) defends Levitt style research
  4. How much should one Save? A nice one from Free Exchange Read this as well on Cottage Industry
  5. Update 1: Here is Levitt defending his research

Thanks to Marginal Revolution for 1, 2 and 3

Wednesday, April 25, 2007

Assorted Links...mostly Hedge Funds (25 Apr 2007)

Read this about Hedge Fund pay packets (From FT)

The combined earnings of the world's top 25 hedge fund managers of more than $14bn (£7.49bn) exceeded the national income of Jordan last year and 3 individuals took home more than $1bn, according to the biggest annual industry survey.

The survey by Alpha Magazine put Jim Simons of Renaissance Technologies on earnings of $1.7bn, Ken Griffin of Citadel Investment Group on $1.4bn and Eddie Lampert of ESL Investments on $1.3bn. The previous year, two managers, Mr Simons and the septuagenarian T Boone Pickens of BP Capital Management, topped the $1bn mark.

  1. An excellent series of articles on Hedge Funds
  2. Read this good blog entry on Why is the top one percent earning more?
  3. Hedge Fund - a billion dollar club
  4. Return of the idiot ( a nice article on Latin America)

Thanks to Marginal Revolution for (3) and to Ajay Shah for (4)

Steven Levitt..time to defend your research

This morning I read two blogs (here and here) which mentioned about Steven Levitt (his wikipedia profile is here) and his impact on economic research. Both the blogs quote newspaper article which criticise Levitt's research ( R'ber he is somebody who has been awarded the Clark medal ; For the uninitiated Levitt's research is on crime, population etc; he has coauthored the popular book Freakonomics)

He has often been criticised for giving rise to something which has been called "cuteo- nomics" i.e. asking questions which may not be economics but could simply be a good reading ( most I am sure don't agree). As he is hugely admired (because of Clark Medal) , the traditional economists have criticised him for making this field popular and making people look at all kinds of questions and calling them economists. The article does talk about few students who trained under Levitt and have written papers which could be interesting to read but you really cannot call it economics.

My view on this is that Levitt kind of research is interesting in the sense it helps us look at answers to those questions which have not been attempted before and gives a new dimension to the research. We often come across problems related to research where we have no data, do not know how to interpret results in different ways, this is where Freakonomics kind of analysis helps. However, everything has to balanced. The problem is not with the research perse but the proliferation of the same and in times when we are still struggling to answer basic questions in economics (what drives growth, how to reduce poverty etc). This is an area of concern and as the article shows Levitt has not been doing enough to defend his style of research. He is in fact promoting his style to answer more cute questions than traditional economic questions.

Tuesday, April 24, 2007

Some points from RBI Annual Policy

RBI has announced its Annual Policy Statement for the year 2007-08. The summary is here and details here .

Summing up the policy, there have been no changes in interest rates. However, the concerns over inflation have been mentioned in the statement.

The Statement is divided into 2 parts:
  1. Annual Statement on Monetary Policy- which is further subdivided into 3 parts:
    i) Summary of the Macroeconomic and Monetary developments I mentioned in previous blog entry . ( So people who cannot read the huge report, can read the summary here ..Summary 30 pages Vs Report 99 pages)

    ii) Stance of Monetary Policy for 2007-08: It is the most important part of the Statement as from this one gauges the stance (whether hawkish or dovish) , RBI is taking.

    iii) Monetary Measures: Finally the measures taken, the part which matters the most for markets.
  2. Statement on Developmental and Regulatory Policies for the year 2007-08: This statement lays down policies for strengthening the Indian Financial System.

On 1(i) and 1 (ii) I would write later, let me quickly go through the developments in 2 (my comments wherever reqd are in italics and in blue).

State Development Loans (State Govt. Bonds)

  • Introduction of an indicative calendar for State Development Loans ins being worked out
  • Non-competitive bidding in SDL auctions to be issued
  • SDLs to also be reissued ( rather than issuing new SDLs evertytime)

G-Secs (Central Govt Bonds)

  • Floating Rate Bonds have so far failed in India. (See an example of how floating rate bonds are valued here). There is a proposal to use average cut-off yield on 182 day T-Bills instead of 364 day T-Bills. (The bond failed as the coupon was reset once in an year and in a rising interest rate scenario it was not worth buying the bond, the statement does not mention that reset would also be changed to twice a year. Let us wait for further press release)

Corp Bonds

  • After many years of dilly dallying, RBI says it will consider inclusion of corporate bonds in the repo market. (I don't understand why does it take so much time to consider? The guidelines for this would be interesting as corporate bonds are now under SEBI's domain and G-Sec under RBI, corp bonds are traded/reported on BSE and NSE and G-Sec on NDS-OM system. How would the whole thing be managed would be interesting to see)


  • Plans to start a trading platform for Interest rate swaps (a nice move to bring transparency in this market, as it is largely traded OTC (Over the Counter) over telephone , I was wondering how should an exchange be designed for these products? Something like OTCEI I would believe....)
Towards fuller Capital a/c convertibility

  • Overseas investment limit for corporates increased from 200% of their net worth to 300%
  • Listed Indian companies are allowed to do portfolio investment in companies abroad. This limit has been increased from 25% of net worth to 35%.
  • Mutual Funds on an aggregate basis are allowed to invest overseas and the ceiling is $3 bn. This has increased to $4 bn
  • Individuals can now invest Us $ 100,000 in overseas markets from the $50,000 limit earlier
  • Category-1 Dealers can offer Hedging solutions to domestic producers/users of following metals: aluminium, copper, zinc and nickel in international exchanges. Users of ATF are also allowed (It is welcome but why just 4 metals)
  • Earlier corporates that used forward contracts to hedge currency risks could use them provided they are completed by delivery or rolled over on due date. From now, they can cancel the contract and rebook it. SMEs and individuals can also use forward contracts now.(Another good development; corporates can take a relook at the risk and hedge afresh)

I am a bit tired now. Would post more developments tomorrow.

Globalization and Inflation

The other day I was discussing with a friend wondering whether Globalization has any effect on inflation.

I just did some reading on that topic and the summary so far is that globalization should lead to lower inflation but so far empirical evidence shows negligible impact.

There are a number of ways in which globalization could effect prices in an economy and Janet Yellen provides a very good summary of the same. She also points to two studies both showing very little impact of globalization on inflation:

  • IMF analysis estimates for a panel of eight industrial countries, including the U.S. The study finds that the slower rise in relative import prices in recent years has had only a fairly small impact on overall inflation. For the U.S., the study estimates that a 1 percent decline in relative import prices lowers CPI inflation by only 15 basis points after one year and 6 basis points after three years. Based on such estimates, the IMF calculates that non-oil import price reductions lowered U.S. inflation by an average of ½ percentage point a year over 1997 to 2005.
  • Federal Reserve Board study estimates that lower (core) import prices have reduced core U.S. inflation by an annual average of ½ to 1 percentage.

Krozner and Bernanke have also given very insightful speeches on the above.

Ken Rogoff has taken a step further. He says Chinese exports lower relative prices and as long as Central Bank targets the overall price level, the prices of the other goods must actually be rising. Hence, China could actually be exporting inflation and not deflation as is the common perception.Theoretically it appears quite good, but has to be still tested empirically. ( Atleast I am not aware of papers on this)

There have been further papers by Laurence Ball and John Taylor (the person who gave the famous Taylor formula that gives interest rates given the inflation conditions). These papers also suggest that Globalization has not changed inflation. Read this abstract from Ball paper:

" Many observers suggest that the "globalization" of the U.S. economy has changed the behavior of inflation. This essay examines this idea, focusing on several questions: (1) Has globalization reduced the long-run level of inflation? (2) Has it affected the structure of inflation dynamics, as captured by the Phillips curve? (3) Has it contributed substantial negative shocks to the inflation process? The answers to these questions are no, no, and no."

There is a caveat though. Most of the work so far I have cited is from US. Still looking at papers that give a more global outlook. Anyways, happy reading on inflation and globalisation.

Useful set of reports from RBI

Today is the RBI Annual Policy Review for the year 2007-08. For the uninitiated in this review RBI officials take a view on the economy and decide the interest rates you and me are going to pay in coming months. What RBI changes is its benchmark rates (the rate at which RBI lends to Banks) and the Banks alter their rates structure accordingly. If RBI raises rates other follow and vice-versa.

Before the policy, RBI comes out with a document called Macroeconomic & Monetary Developments. It is a superb analysis of the events so far. Basically these are quarterly reports on the Indian economy and covers the developments in the economy in previous quarter. This is better than most of the research reports on Indian Economy which one comes across. It is a must read for all the people interested in Indian economy.

The report is nicely divided into chapters like Real Economy, Financial Markets, External economy with simple text and rich graphs illustrating all about Indian economy. Apart from the lucid analysis, it offers very useful data which can be used by researchers for their analysis.

Read the summary here and the detailed chapters are here

I would post my comments on the same later.

Monday, April 23, 2007

Assorted Links (Monday 23/04/07)

  1. A good list of favourites
  2. Beachonomics
  3. A good number of papers presented at Eastern Finance Association Program

Thanks to Greg Mankiw for 1 & 2 and Financial Rounds for 3.

More on growth and development

Just to carry on with the Friday discussion on growth and development, this weekend I read a bit more on development. The more I read on this topic the more I am amazed by the available literature. As I mentioned all kinds of factors have been discussed and widely researched and written (of which I have become aware recently, phew!!).

I read this paper by Rajan and Zingales where the central idea is that underdevelopment is due to initial factor endowments in the country. Their work is different from the earlier works that have looked at institutions, geography, religion, culture etc as factors for growth. Paper by R & Z offers more hope in the sense that where others look at factors which cannot be altered ( for instance what can a country do if it has adverse climatic conditions or has a difficult geographical landscape... ) or are difficult to alter (changing institutions its own time etc), R &Z explain factors that are more endogenous and hence can be altered.... the path to development is still a difficult one but there is more hope than offered by other papers.

By factor endowments they mean is that interests of certain groups (they call it constituencies) may not be aligned with each other and hence may oppose the reforms. The paper has some very interesting insights and has developed a very useful model which helps us understand if reforms are the key why don't they is understood that in dictatorship reforms may not be allowed why is it that democracies fail to implement reforms (India is a classic case). So to get out of the trap, we need proper sequencing of reforms. The traditional advice "fix the institutions" may not work as what is needed is to make the endowments more equitable for reforms to take place.

The paper however is disappointing in one aspect... it doesn't dwell in details how can endowments be changed? They attribute it to economic and non-economic factors which to me again look like fate more than anything else. They talk of non-economic factors like religion, nationalist movements etc. which have altered the initial factor endowments in countries. There are rich examples but still the problem persists.

But an interesting paper by all means. Another great stuff by this deadly combo!!

Some facts about Clark Medal and Nobel Prize

Just carrying on with the Clark Medal, I thought I would share some trivia and facts. As Clark Medal is supposed to be for economists under 40, one of the things to see is how many get Nobel finally. Here is a factfile:

  • There are 58 nobel winners so far
  • There are 29 clark medal winners
  • Out of 29 clark medal winners only 11 have got a nobel so far...(38% conversion rate... pretty impressive)
  • Clark started in 1947 and Nobel in a gap of 22 years... the fact is that till 1969 Clarkies had already produced 7 future nobel winners!!!
  • Infact in that gap of 22 years, there were 10 clarkies (none was awarded in 1953) and seven went on to win a nobel !!! 70% success ratio
  • Post 1967, the number of clarkies winnining a nobel has been just 4 out of a total of 19 winners a ratio of just 21%
  • Out of 58 winners so far, 42 were associated with US Univs at the time Nobel was awarded....72.4%!!So to say Nobel is panglobal is not really working.. well what can nobel committee do... all top guys and thinkers seem to be in US...
  • It shows nothing but their productive Univs 9 from Uchicago, 4 from UCB, 4 Harvard, 4 columbia, 3 Cambridge (last in 1995)
  • Average & mode age -67, median age-66
  • It takes roughly 22 years of waiting between clark and nobel
    Arrow took the least time between clark and nobel (15) and Tobin and Solow 26...
    Arrow is the youngest (but obvious) to have won a nobel (just 51) .. he still holds the recors... and nobel committee is widely cricticised for giving him a nobel alongwith Hicks... he deserved it all alone...!!!!
  • Merton 2nd youngest at 53, His mentor Samuelson at 55, Scholes at 55...One can imagine the impact Black Scholes Merton model had on fin markets....
  • 3 guys in 80's gto the Nobel- Schelling (game theory) , Wickfrey (famous for his work on auctions), and Coase (never calls himself an economist.. but what impact...)
  • all fin eco guys were either 66 or below (Both Modgillani and Miller were 67...the oldest of the lot.. funny the guys who contributed the most recognised at last)
  • And plotting the ages gives a somewhat normal disitribution.....!!!!

Here is the full list of Clark Medal Winners who got the nobel as well. The year ahead of name is Year when Clark is given. If the nobel is given, the year is followed after the name..

1947 Paul A. Samuelson 1970
1949 Kenneth E. Boulding
1951 Milton Friedman 1976
1955 James Tobin 1981
1957 Kenneth J. Arrow 1972
1959 Lawrence R. Klein 1980
1961 Robert M. Solow 1987
1963 Hendrik S. Houthakker
1965 Zvi Griliches
1967 Gary S. Becker 1992
1969 Marc Leon Nerlove
1971 Dale W. Jorgenson
1973 Franklin M. Fisher
1975 Daniel McFadden 2000
1977 Martin S. Feldstein
1979 Joseph E. Stiglitz 2001
1981 A. Michael Spence 2001
1983 James J. Heckman 2000
1985 Jerry A. Hausman
1987 Sanford J. Grossman
1989 David M. Kreps
1991 Paul R. Krugman
1993 Lawrence H. Summers
1995 David Card
1997 Kevin M. Murphy
1999 Andrei Shleifer
2001 Matthew Rabin
2003 Steven Levitt
2005 Daron Acemoglu
2007 Susan Athey

Clark Medal for 2007 goes to Susan Athey

The John Bates Clark Medal ( given to most promising American Economist under 40; read more about the medal here; read about John Bates Clark here) for 2007 (is given every alternate year) goes to Susan Athey.

Susan Athey is a very popular economist and teaches at Harvard. Her webpage is here and summary of her work is here. She is the first woman to have won the award.

To be honest I do not recall reading any work by her and her name adds one more to the ever growing reading list.

Friday, April 20, 2007

Must read Blogs for Economics and Finance

Here is a list of blogs I try and read everyday to keep myself updated.


Europe Focus


India centric issues

Finance irrelevant for growth??

I really do not know where to begin. Should I focus on authors or on topics or on interesting academic papers or ???

Let me begin on my thoughts first. I have been reading a bit on what leads to development and growth in a country. It has traditionally been studied by people studying development economics (or dev eco as it is popularly called in campuses). It seeks answer to one question:

  • What are the causes of growth? sustainabale growth?
This topic has always been at the centre of economic research. There are numerous ways economists have analysed growth and its factors. I would discuss the different factors in my next blogs.

What has been appalling to me most is that most of the works (read academic papers) in this field do not recognise the role of finance in development. The growth literature is quite old but none mention role of finance. Nobel Prize winner Merton Miller remarked "that financial markets contribute to economic growth is a proposition almost too obvious for serious discussion." Alternatively Nobel Laureate Robert Lucas (1988) holds that the role of finance in economic growthhas been "over-stressed" by the growth literature.

How can a country grow without having a good financial system? If it is growing (like China is), then the problems would simply blow up. The objective of the financial system is to allocate finance to the most productive activities in the economy. The better a financial system is at that purpose, the better are the growth prospects in any economy.

It is only recent works by Ross Levine, Raguram Rajan , Luis Zingales, etc. we have some papers, some thoughts on how finance leads to development. Most of the credit however goes to Levine for bringing tons of empirical work on the subject.

There is a lot of work since then and to keep updated of the papers so far, there is an excellent lietrature survey on the above by Levine. Also read the comments by Zingales on the survey. Excellent stuff!!

Trying to blog

I have started many a times but have not been able to keep the spirit going. After taking some inspiration from Apurv, I would like to give it another try.

This blog would mostly be on economics (hence the name) but would cover some topics that interest me as well particularly cricket, tennis, football (basically sports).