Macroeconomics Discipline at the Cross-Roads

Abstract


The 2008 financial crisis of the US was a watershed for economics discipline, especially macroeconomics. Several world leaders such as the Queen of England questioned distinguished economists of Ivey league schools such as the London School of Economics on why they failed to see what was happening and had not prevented the crisis through policy advice? Most did not have an answer. Why? One of the reasons is the supply side economics, which is also called Monetarism; and the Chicago School of Economics, which advocates that free markets function efficiently and self-regulate; and at best governments should tinker with monetary policy of money supply; has become the dominant intellectual basis for policy making for the last forty years. Models of this kind failed to predict the financial crisis because they are based on strong assumptions.
The lesson from the financial crisis is that macroeconomic models have to incorporate financial markets and account for asymmetric information, transaction costs and moral hazard behaviour of economic agents. Governments have to regulate especially the financial markets. Free market fundamentalist will ask the question as to why one should expect the government agents to do a better job than private agents because they are also subject to moral hazard behaviour of using tax payers’ money. One answer to this is that if a large number of private agents act autonomously, the sum of average transaction and information costs of markets is higher than if one large agent pools these costs and realizes economies of scale. Government does this job- the tax collected from each agent could be lower than the average information and transaction costs of private agents. As far as the moral hazard behaviour of government agents is concerned, it is a political economy issue of designing and implementing institutions.

Download the entire paper

Global Economic Prospects - June 2013: Less volatile, but slower growth

The global economy is transitioning into what is likely to be a smoother and less volatile period. However, the recovery is uneven. For high-income countries, fiscal consolidation, high unemployment and still weak consumer and business confidence will continue to dampen growth this year, while growth in the developing world will be solid but weaker than during the pre-crisis boom period.

Although the challenges faced by high-income countries to restore financial-sector health, reform institutions and get fiscal policy back onto a sustainable path persist, the likelihood that these challenges will provoke a major crisis has declined markedly.

Global GDP is expected to expand about 2.2 percent this year and strengthen to 3.0 percent and 3.3 percent in 2014 and 2015. For high-income countries, growth this year will be a modest 1.2 percent, firming to 2.0 percent in 2014 and 2.3 percent by 2015.

Developing-country GDP is now projected to be around 5.1 percent in 2013, strengthening to 5.6 percent and 5.7 percent in 2014 and 2015, respectively. Growth in several middle income countries has been held back by supply bottlenecks and is unlikely to reach pre-crisis rates unless supply-side reforms are pursued vigorously. In China also, growth has slowed as authorities seek to rebalance the economy. Looking at broader region-wide trends, East Asia is expected to grow by 7.3 percent this year; developing Europe and Central Asia by 2.8 percent; Latin America by 3.3 percent; Middle East & North Africa (MENA) by 2.5 percent; South Asia by 5.2 percent and Sub-Saharan Africa by 4.9 percent.


Please click here to download the report

Low Interest Rate Policy and the Use of Reserve Requirements in Emerging Markets

This paper attempts to shed light on the link between monetary policy in large economies with international currencies (the United States and the euro area) and the use of reserve requirements in emerging markets.

Using reserve requirement data for 28 emerging markets from 1998 to 2012 this paper provides evidence that emerging markets tend to raise reserve requirements and repress financial markets to curb speculative capital inflows when interest rates in the major economies decline.

The finding suggests that the current low interest rate policies of the major economies may have collateral effects on emerging markets by triggering financially repressive policies....

Click here to download the full report

Beating market mandates: How winners are re-engineering financial markets operations.

With so much change going on 

• How can firms keep clients happy and win a bigger share of a very volatile revenue pool? 
• What role does operations play in this strategic dilemma? . 
• So how are some firms able to excel even amid today's new realities?

These questions led to this study done by IBM together with Broadridge Financial Solutions, they surveyed operations strategy decision makers to create an accurate picture of industry approaches and what today's leaders are doing to get—and keep—their competitive advantage.

The study identified three groups – Leaders, Followers and Laggards – and compared these groups to see how they’re responding to the threats facing their industry. 

To excel in today’s rapidly evolving business landscape, Leaders are building a different kind of operating model - one designed to embrace rapid, continuous change. And, as they look for better ways to do things, all options are on the table - including partnering in a variety of forms.

Click here download the full report, and gain more insight into the Leaders' thought processes and what is on the horizon, 

Intedependence of International Finanacial Markets: The Case of India& US

The study reveals that volatility in all the markets surges post the global financial crisis of 
2008-09. Spillovers in volatility across the markets are found to be present due to both 
innovations effects as well as volatility persistence.

Click here to read further