Welcome to Applied Macroeconomic Centre

A theory is appropriate as long as it fits into the fact; when a theory doesn't fit in the fact, it's wise to walk with the fact.

Tuesday, October 18, 2016

The Trouble with Macroeconomics

Paul Romer, a renowned macroeconomist and the current Chief Economist, World Bank writes on importance of science and facts in the paper 'The Trouble with Macroeconomics'. 

Probably, the most striking words came out from this paper through the following statement: "an indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error."

So true!

Monday, June 27, 2016

Capitalism in Crisis: What went wrong and what comes next

Mark Blyth writes on the crisis of capitalism, in the current form, in his article, Capitalism in Crisis: What went wrong and what comes next, in Foreign Affairs. 

Good reading! 

Wednesday, October 21, 2015

BB’s goal: Growth Support vs. Price Stability


Why ‘currently’ Bangladesh Bank (BB) should prioritize ‘growth’ more than ‘inflation’?

First, in the first sentence of the ‘Highlights’ of the current monetary policy statement (MPS) for the period of July-December 2015 is just as follows:

This is a cautious but explicitly pro-growth monetary policy stance supporting the 7 percent growth target and the 6.2 percent inflation target for the fiscal year 2016.”


Through this statement, BB made it clear that it weighs ‘growth’ more than other issues of its concern including ‘inflation’, during the current MPS period.

Second, the country targets to reach to 7.0% in FY2016. And with only 0.8% export growth in the first quarter of the fiscal year, what are the means through a reasonable analyst will give the country that targeted growth. It would be curious to know.

Third, Bangladesh wants to be a middle income country by 2021, and for that the government targets to have 8.0% GDP growth by 2020. Historically, export has been the main driver of growth, and will remain so until so many years to come. Then why not the central bank, like other government institutions, focuses more on ‘growth’ than other issues within its jurisdiction?   

Why ‘currently’ the issue of inflation should not be a concern of BB?

Domestic inflation has been on a declining trend, at least in the last two years, mainly because of reduced global food prices and lowered money supply (M2) growth. [Please see the graph of inflation.]


(i)            There is a long-term declining trend of inflation, and then who should care about inflation fear;
(ii)           Inflation trend is stable too!
(iii)          Domestic average inflation is 6.3% in August 2015, which is almost closed to the target inflation rate of 6.2%;
(iv)         Global commodity prices remain stable, and M2 growth of 12.6% in July 2015 remain far below the target M2 growth of 15.6% for December 2015. Unless someone forces, there is no scope of M2 overshooting until December 2015, and then of further rise in inflation. Please remember, BB sets 6.2% inflation target while keeping 15.6% M2 growth. The why one should make BB to be fear about further inflation? Only skepticism rules over the fact, and misguides BB.

How poor!

Why ‘currently’ depressed export growth should be the prime concern of BB?

As BB announced a pro-growth monetary policy, and export is the main drivers of growth, BB should open its door of instruments (e.g., exchange rate) for supporting exports so that it may ultimately bring good news for the 7.0% growth target. Export growth over the last two years has remained quite unstable around the lowest point and negative territory. In general, export growth has been declining since ind-2014. With these kind of export growth, a country just can’t grow, can’t achieve its short-term and long-term goals of reaching higher trajectory of growth (7% to 8% growth).     

Why it’s not possible to improve import growth position without the required momentum in export growth?

First, historically, in the medium-term, trend in import growth has been closely linked with the trend export growth. (Please see the 3-month moving average graph of export and import growth)


Second, import growth of commodities is controlled by those commodities which are used as basic inputs for major export industries, meaning without the increase in import of those commodities, the export growth will remain as it is now.

Third, one just can’t import according to her wish. Import commodities must have a demand in the country. The demand will either come for consumption purposes, or industry uses. Consumption demand is largely dependent on economic condition. Hence, even to increase consumption demand/import, the country should encourage exports, the main driver of economic growth.  

Why exchange rate depreciation shouldn’t be a concern for inflation overshooting?  

First of all, exchange rate depreciation has little impact on the Bangladesh inflation dynamics. This is evident; any economist may check this fact with extensive econometric research.

Second, some experts have been arguing that current exchange rate is not the equilibrium exchange rate, but the equilibrium exchange rate would be far below the current official exchange rate, as the central bank has been intervening in the foreign exchange market to keep it stable. Then, logically, the official exchange rate which is higher than the equilibrium exchange rate, would have been harming the inflation development over the last few years. But in reality, we observe that inflation rate has been on a declining trend, meaning the market exchange rate is not basically harming inflation trends.

Third, some experts also have views that sterilization process to keep exchange rate below the equilibrium rate has been increasing money supply, which is another channel through which exchange rate may harm inflation. But again, if one looks carefully, M2 growth has been always below the target M2 growth, at least in the recent past, despite the fact that the central bank has been doing sterilization for long. This is because net foreign assets under M2 is so insignificant portion (the share of net foreign assets in M2 was only 24.0% of total in June 2015) that may rarely be able to disturb the overall M2 growth. Thus, the concern is unnecessary.         

Probably, the core team of the central bank authorities knows this fact, and that’s why the current MPS is rightly convinced for the necessity of the exchange rate depreciation with keeping the current depressed exports growth in mind, and it’s the right time for the central bank to keep its words by acting accordingly.

Please read the first paragraph of Page 8 of the current MPS:

“While the central bank's purchases of foreign currencies from the market is defusing appreciating pressures on taka and thus on the exchange rate, lackluster performances of exports convince us to lower the value of taka against the dollar and thus depreciate the exchange rate.”

This is really wonderful!

Why other export factors are less important to BB?

Some analysts try to say: other issues such as infrastructure and business climate are more important than exchange rate depreciation for export growth. In this long-run, this is true. But analysts forgot the basic facts: (i) depressed export growth needs quick/short-run action, and dealing infrastructure constraints and appropriate business climate are long-run measures; (ii) while talking about BB’s playground, infrastructure and business climate are not BB’s cup of tea, meaning BB is not in a position to address infrastructure constraints and challenges to business climate. So, it’s better to keep the discussion within the boundary of BB.

BB can use its exchange rate instrument to support export.   

Why analysts keep their eyes shut on real effective exchange rate (REER)?

Can analysts do recall their basic macro knowledge? When REER appreciates, it reflects the erosion of export competitiveness. The following graph shows the trend of REER over the period:  




An analysis of the graph:
(i)    This is the probably longest period of REER appreciation in the history of Bangladesh. The last depreciation of REER took place in November 2012, and after than it has been always the music of REER appreciation. It means, Bangladesh has been losing its export competitiveness since December 2012, or for 32 months.
(ii)           REER appreciation has been rising since August 2014, meaning rising trend in erosion of export competitiveness. This is due to no counter-balance action taken by BB during this period.


Tuesday, October 20, 2015

Bangladesh Development Update: World Bank

World Bank, Bangladesh provides its Bangladesh Development Update. Major issues include:

1. GDP is expected to growth at 6.5% in FY2016;

2. Bangladesh is facing a declining trend in international competitiveness with external and domestic risks.

Link for the update.

Saturday, October 17, 2015

Tuesday, July 7, 2015

Profiles of Helene Rey

IMF's Finance and Development profiles Helene Rey, Professor of Economics at the London Business School, and well-known for her work for international financial economics, macroeconomics and international financial system. A good read!

Link of the profile.

Sunday, May 31, 2015

Monday, March 16, 2015

Profiles of Raghuram Rajan

IMF's Finance and Development profiles Raghuram Rajan, its former Chief Economist and also the current Governor of India's Central Bank. As one of the finest economists in recent time, Raghuram Rajan not only got success in teaching at the University of Chicago, but as a practitioner as the Chief Economist of IMF, Economic Advisor to the Prime Minister Manmohan Singh, Chief Economic Advisor to the Finance Ministry, India and Finally the Governor of Reserve Bank of India, the rare quality one can imagine.

Link of the profile.

Thursday, February 19, 2015

Background Studies of 7th Five Year Plan

It's already known that Planning Commission (PC), Bangladesh is in the process of preparing the 7th Five Year Plan (FY2016-FY2020). Recently, PC uploaded, in its website, 25 background studies which are conducted sectoral experts of the country for person/group who has the interest to know how the planning process is done.

Link to access the background studies.   

Wednesday, February 4, 2015

Maintaining Growth in India: R. Rajan

Raghuram Rajan, Governor of the Reserve Bank of India, writes on basic factors that may shape up the Indian growth process in future. He broadly focused on three issues: deepening regional and domestic demand, strengthening India's macroeconomic institutions including his central bank, and finally, joining in the fight for an open global system. More specifically, he talked about:

  • Infrastructure development (for having links to domestic and international markets)
  • Human capital development (developing skills that are valued in the labor market and  the creation of jobs in firms that have an incentive to invest in training) 
  • Fiscal prudence (controlling budget deficits and monitoring the quality of budgets)
  • Low inflation (while ensuring optimal conditions for growth) 
  • Financial stability (no to asset price boom)
  • Attracting more FDI while keeping India's interest intact 
  • Searching more natural resources from abroad, and if necessary, using multilateral institutions for that 
  • Playing strong role in the international monetary system   


Most of these excellent points that he pointed out may be relevant for the Bangladesh case also. A worth reading for Bangladeshi policymakers.

Link for the article.

Tuesday, February 3, 2015

Bangladesh Inclusive Growth Diagnostic Study

USAID and DFID have jointly produced a study 'The Inclusive Growth Diagnostic Study' which identifies the binding constraints that deter households and firms in Bangladesh from making investments and taking risks that would significantly increase their incomes. The analysis provides a framework that will focus attention on the most pressing obstacles (electricity, low skills and governance) to development. Based on it, policymakers may identify appropriate reforms and projects that will ease those binding constraints, stimulating economic growth.

Sunday, February 1, 2015

Wasted Investment: China's $6.8-trillion hole?

The Economist published this worth reading article (Wasted investment: China's $6.8-trillion hole?) based on a research done by two Chinese government researchers. The topic is simple: based on the Chinese investment, the researchers calculated the efficiency of investment through incremental capital investment ratio (ICOR), and interestingly they found that China has made worthless investment of $6.8 trillion over 2009-2013 for building bridges and other infrastructure investments. With this ICOR analysis, they tried to show how Chinese investment has been becoming less efficient in the recent past.

While the Economist analysed the research findings of Chinese government researchers, and also it provided alternative analysis. Based on a coherent and using more realistic approaches to research, the Economist tried to show how Chinese researchers miscalculated the whole thing and what were the missing areas in their research that should be considered.

Researchers, who often get involved in debate, must read this article, at least, to know how an economic debate should take place.     

Sunday, January 25, 2015

Alvin Roth: The Fixer

IMF's F&D profiles Nobel Laureate Alvin E. Roth, who uses game theory to make people's lives better.

Link for the profile.

Wednesday, December 24, 2014

Why are rich countries democratic?

Ricardo Hausman, a Professor at Harvard University, writes on the necessity of proper democracy (beyond voting cast) through decentralizing the power and empowering the legislation to monitor government activities. The main theme of the article comes in the following way:

"... successful political systems have had to create an alternative invisible hand – a system that decentralizes the power to identify problems, propose solutions, and monitor performance, such that decisions are made with much more information."

Link for the article.

Tuesday, December 9, 2014

Look East Policy for Bangladesh

Ifty Islam writes on the much needed policy prescription 'Look East Policy'. As Ifty rightly mentioned, there is twin benefit of the said policy: (i) countries in the East Asia have the potential to bring a large amount of FDI in Bangladesh, if they receive the required support, and (ii) these countries are likely to be the biggest importer of Bangladeshi products after USA and Europe. Both of these benefit will trigger GDP growth in Bangladesh from its current position. A worth reading article!

Link for the article.