The Unassuming Economist

From The Grumpy Economist:

“I wrote this essay on Bob Hall and Consumption (link goes to pdf on my webpage) for the conference in honor of Bob Hall at Hoover, November 22. It turned into a more extended history of some trends in macroeconomics, which any student of macroeconomics might find useful. Why we do what we do is often obscure. If this post exceeds your email limit, finish on the website at grumpy-economist.com

Bob Hall and Consumption1

I’m going to cover just two of Bob Hall’s many pathbreaking papers, “Stochastic Implications of the Life Cycle–Permanent Income Hypothesis,” Hall (1978), and “Intertemporal Substitution in Consumption,” Hall (1988), both in the Journal of Political Economy. Along the way, this turns in to a brief history of the emergence of modern macroeconomics, and one of its central unsolved problems, intertemporal substitution.

I titled my remarks at the conference, “Consuming Hall at Chicago.” I think you know Hall has many fans at Stanford, but you might not know just how popular Bob was at Chicago. Pretty much everything I write today I learned from Bob Lucas and Lars Hansen at Chicago in the 1980s.

1 A Simple Idea

As usual for Bob, it all starts with a simple clever idea. In asset pricing, price is present value of dividends, so price follows a random walk. In the permanent income model, consumption is proportional to the present value of income. So consumption should follow a random walk too. Why not test that hypothesis just as asset pricers were doing in the 1970s, by running regressions,”

Continue reading here.

From a paper by Marek Szturo, Bogdan Włodarczyk, George H. Ionescu, Daniela Firoiu, and  Vitor Braga:

“The commodity market is a key element of the global economy. It is influenced by the political and economic situation of the major participants on the supply and demand side, as exemplified by the geopolitical and economic situation related to the conflict in Ukraine. Another aspect of this influence is the close relationship between commodity markets and financial markets. Both factors contribute to the possibility of the commodity market becoming subject to contagion, resulting in the transfer of supply and demand shocks and volatility. The aim of this article is to identify the commodities that are the source of contagion (volatility) during the transmission of shocks and the increase of systematic risk in selected periods. Combining traditional network theory with vector autoregression (VAR) model, we aim to estimate systemic linkages as a measure of systemic risk and the contagion process underlying it. We used time series of commodity returns from the Refinitiv Eikon database to observe the relationships between commodities during crisis periods, starting from 2006. The results suggest that the commodities with the largest increase in volatility transmission compared to the pre-crisis period acted as a transmission gate for market shocks.”

From a paper by Luccas Assis Attílio, and André Varella Mollick:

“We investigate the effects of oil price shocks on industrial and emerging market economies. We use a global vector autoregressive (GVAR) model with 19 economies from 1999M1 to 2022M3. Our sample evaluates output responses of each country to the same global shock, defined in several ways. While we find that domestic prices and interest rates in industrial economies respond to the WTI real oil price shock, the generalized impulse response functions (GIRF) tend to be not statistically significant in emerging economies. Stock markets increase in the first months for the oil producers but have negative values in the long-run. The oil price shock causes a generalized fall in industrial production and loses importance over time. We reinforce our results by identifying the oil shock using the structural GIRF (SGIRF) following a causal ordering from oil to real output. When we decompose WTI into either supply or demand shocks, industrial production declines in the short-run due to supply shocks but increases in response to oil demand shocks. Our results are very robust, especially in industrial economies when allowing for time-varying bilateral trade. Underscoring the importance of identifying oil price shocks, the oil price shock pushes inflation up, prompting the central bank’s response in policy rates.”

From UNDP:

“This is an opportune time for Bangladesh to recalibrate structural transformation towards an inclusive and greener economy. The policies that enabled the country to increase its footprint in manufacturing—albeit mainly in the ready-made garment sector (RMG)—may not work in the future. Policymakers must choose whether to continue a selective export-driven focus while protecting the rest of the economy, or opt for a more outward alignment of the economy for growth and jobs.

There is empirical evidence that export-driven growth was one of the major drivers of economic development in East and Southeast Asia. Several countries in the region started their industrial journey with RMG, but over time diversified and moved vertically along the value chain. Although export-led growth was pursued as a policy objective, the degree of economic openness varied. With a relatively smaller consumer base, Singapore followed largely laissez-faire economic regulations while limiting foreign capital to strategic sectors. Larger economies such as Indonesia pursued a dualistic approach by opening parts of the economy for exports and investments while protecting some sectors from competition through state-owned enterprises or investment restrictions. 

In Bangladesh, there is a strong correlation between exports, more specifically RMG exports, and economic growth. The share of RMG exports in the national output increased from less than six percent in 1990 to over 13 percent in 2023, after peaking at 20 percent in 2012, according to the World Bank. Although weakening, the positive relationship between RMG exports and jobs is also visible.

It is fair to say that Bangladesh’s export-led growth story has essentially been an RMG story. There have been limited spillover effects for other sub-sectors. RMG products still represent around 85 percent of Bangladesh’s exports. There are also worrying signs that the RMG-led growth has already peaked. In the last decade, the share of private sector investment has remained stagnant at around 22 percent of GDP.

Given its population size and potential, Bangladesh has not been able to attract enough foreign direct investment (FDI). Between 2010 and 2022, annual FDI inflow averaged $2.2 billion, significantly lower than Vietnam and Indonesia, where it averaged $12 billion and $18 billion, respectively, according to UNCTAD. An overly regulated economy, red tape, and weak enforcement of business regulations have often been cited as barriers to domestic and foreign investments in Bangladesh.

From 133 in 2003, Bangladesh’s ranking on the Ease of Doing Business Index improved to 119 but fell as low as 168 out of 190 countries in 2020, the last year before the report was discontinued. On the Global Competitiveness Index, Bangladesh’s ranking was 102 in 2023, which is quite low and has barely improved in the last five years. Bangladesh performs poorly on trade, investment, and financial indicators, broadly indexed as economic freedom. Between 2013 and 2023, the economic freedom score of Bangladesh increased from just 52 to 54.

A narrowly defined export-led growth model can limit the diffusion of technology and learning into other sectors of the economy. Protecting selected industries and businesses to build domestic capabilities is justified if measures are time-bound and not too distortionary for the economy, which can result in skewed distribution of income and wealth.

 Relying on a few export goods without gradually opening and reforming the rest of the economy is bound to run its course. Many analysts have pointed out the anti-export bias that a long period of protection has created for the non-RMG sectors in Bangladesh. There is a need for change, but the sequencing of reforms and timing is also critical.

The first task should be to address regulatory bottlenecks, making it easier for businesses to invest and operate in the country. These can be followed by a gradual rationalisation of import tariffs that should be underpinned by a rigorous cost-benefit analysis. These reforms can go alongside trade facilitation support, incentivising already established local companies to start looking outwards.”

From a paper by Jonatan Svanlund:

“In this chapter, we will study how the shift from a fixed exchange rate regime to a floating exchange rate regime and an independent Riksbank working toward an explicit inflation target took place in Sweden in the early and mid-1990s. Until the beginning of the 1990s, the overriding view among economists and politicians but also in the business community and partly in the trade unions was that a fixed exchange rate was the norm around which economic policy should be based. But in November 1992 it was impossible to maintain the exchange rate and the fixed exchange rate was abandoned, and the shift from the deeply rooted idea of a fixed exchange rate to the new system took place during a very short period. A central theme of the chapter will be the importance of ideas and their role in changing economic regulations and institutional conditions. The central role the Riksbank itself played in reformulating its policy will, therefore, be under scrutiny. The chapter concludes by discussing how the current regime can be seen in relation to general economic developments from 1993 to 2023.”