Hurricane Sandy

Hurricane Sandy, which has already claimed over 50 lives in the Caribbean, has traveled north. It will soon bring heavy winds and floodwaters to the mid-Atlantic region, combining with other weather systems to possibly become what some are calling a historic “superstorm.” Gathered here are images from Sandy’s story so far, from the Caribbean to preparations along the East Coast of the United States.

A truck drives through water pushed over a road by Hurricane Sandy in Southampton, New York, on October 29, 2012. Hurricane Sandy, the monster storm bearing down on the East Coast, strengthened on Monday after hundreds of thousands moved to higher ground, public transport shut down and the stock market suffered its first weather-related closure in 27 years

How should macroeconomics be taught to undergraduates in the post-crisis era? A concrete proposal

Is economic teaching keeping up with the changing economy? This column presents a new way of teaching economics in light of the continuing crises. It argues that if we are to create a better-informed public debate we must begin by improvin
Economics students have started to establish new student societies, which focus not on how to get a job in the City, but on the question ‘How can economics be used to understand the world better and improve it?’ This suggests an increasing appetite to participate in policy discussions. But how well-equipped are they to engage in debates about the causes of the Eurozone crisis or the conflicting claims about austerity policies, or whether quantitative easing will lead to inflation? Do they feel more confident to discuss those questions than their peers who study physics or anthropology? Diane Coyle (2012) reports the dissatisfaction of employers of young economists about their training; they need to know more about the economic conjuncture, economic institutions, and the operation of the financial system, as well as enough economic history to provide a context for current policy debates.

Are the revised versions of popular macroeconomics textbooks an adequate response to the challenges thrown up by the crisis? Do they equip the new generation of undergraduates – for whom crisis has been the continuous background to their lives since the age of 13 – to evaluate the economics commentary in the Financial Times and The Economist or the many, often conflicting, economics blogs; and can they explain their views to their non-economist peers?

A visible gulf exists, in the cases of such textbook writers as Blanchard (2011) and Krugman and Wells (dated 2013 but available now), between what the authors say in their opinion columns, blogs and speeches and what they say in their textbooks. Both of these textbooks contain new sections dealing with the crisis. The liquidity trap is explained but there is no modelling of how the crisis arose. Both books use IS/LM as their core model and the Mundell-Fleming variant for the open economy. Inflation-targeting by central banks is discussed in chapters on monetary policy but, since it is incompatible with the IS/LM model, it is not integrated in either the core modelling or in the discussion of the crisis and its origins. The 7th edition of Mankiw’s textbook (2010) follows a similar pattern, general equilibrium modelling being done using IS/LM. Mankiw does devote one chapter to deriving a ‘dynamic AD/AS model’ but does not use it in the chapter where inflation targeting is discussed.

None of these books bring the financial sector into the core macroeconomic model and so, although they provide insightful discussions of the financial crisis, they remain essentially descriptive. There seems to be a lack of ambition in the response of popular textbooks to the challenges presented by the crisis. We are presently writing a new undergraduate macro textbook, influenced both by the need to understand the continuing macroeconomic crisis in Europe and North America and by the signs that students’ expectations and needs are changing.

In our view undergraduates need a unified integrated model through which they can understand the major business cycle events of the past century and see how economic theories and policy regimes have evolved in response to these events. We have already developed part of such a framework in two previous texts published in 1990 (emphasising the supply-side and the stagflation of the 1970s and 80s), and in 2006 (emphasising the inflation-targeting regimes that emerged in the 1990s). Now, in a third book to be published in 2013, we integrate the financial sector into the model, showing show how a financial crisis can develop in an economy even while inflation targeting is being successfully carried out.

What are the differences between our approach and that taken in typical macro textbooks and undergraduate courses?

In our approach, there is a single general equilibrium model (the three-equation model plus financial sector) to explain how the economy works in both good and bad times; we do not need a different model to deal with the ‘pathologies’ of high unemployment or stagflation or depression or asset price bubbles.
In constructing a model that matches key features of real-world economies, we adopt an original modelling strategy. Instead of avoiding explicit micro-foundations altogether, or starting with unrealistic competitive assumptions, we take as our starting point an economy with imperfect competition in product markets in which a variety of institutional forms of wage setting, including efficiency wages, results in equilibrium unemployment. We assume that there is a mixture of credit-constrained and unconstrained households and firms, and that fiscal policy is non-Ricardian, so that the financing of government expenditure matters.
This single model explains how output, unemployment, and inflation are determined. Using it as a framework students can analyse developments in the real world: rapid changes in demand (such as a housing boom) and in supply (such as technology shocks, changing forms of wage bargaining, labour market deregulation, shifts in product market competition, and commodity price shocks). Such a model depicts an economy which is not self-stabilising. If the economy is to be kept close to a constant-inflation equilibrium purposeful policymaking is indispensable.
The objectives of policymakers are specified explicitly. This means we can model how the central bank or the government analyses the consequences of the shocks that affect the economy. The analysis allows for uncertainty in the economic environment and for lags in the effect of policy on the economy. Forecasting and the way expectations affect the constraints on the policymaker are part of the core model. Most of this was contained in the three-equation model (IS-PC-MR) in our previous book (Carlin and Soskice 2005).
Now, in our new book, the same model is extended to deal with the open economy. We show how the foreign exchange market interacts with the central bank in forecasting the effects of shocks and in determining the mix of exchange rate and interest rate adjustment to them (for an initial presentation of this, see Carlin and Soskice 2010). The case of a common currency area is handled within the core model enabling students to see how the Eurozone economy worked in its first decade and how an attitude of benign neglect by national policymakers towards stabilisation policy contributed to the origins of the sovereign debt problem.
The new book includes three chapters addressing the most glaring absence in macroeconomic models and courses, that of the financial sector. We integrate a model of the banking system with the macro-model, showing how the margin of the lending rate over the policy rate is set in the commercial banking sector, how money is created in a modern banking system and how the central bank takes account of the working of the banking system (and of government funding needs) in order to achieve its desired policy outcome. This produces the three-equation model plus financial sector.
Having included the commercial banking system in the core macro-model, we extend the model further to include highly-leveraged financial institutions and the transformation of risky loans from the balance sheets of commercial banks into marketable securities (in the spirit of Shin 2009 and Geanakoplos 2009). This step provides the tools to analyse how a leverage cycle can take hold in the economy. The modelling of a financial crisis and the consequences for policymakers of a subsequent balance sheet recession is also done within the same framework (reflecting the approach of Eggertsson and Krugman 2012).
Is teaching the three-equation model plus financial sector to undergraduates practical? The large number of students in the UK and Europe doing specialist degrees in economics can certainly be taught the formal (diagram-based) modelling, especially if the repetition that currently characterises the principles and intermediate levels of macroeconomics teaching in many universities could be reduced. It is also quite feasible for students on degrees with a smaller economics component to be taught the logic of the core model (without deriving it explicitly) and shown how to use it to interpret the behaviour of policymakers and macroeconomic performance data.

In addition to the initiative of the UK Government Economic Service and the Bank of England (reported in Coyle 2012), a major push to renew the economics curriculum is being supported by the Institute for New Economic Thinking, INET. A new INET project will generate new teaching material (to be delivered in the class-room and via the internet) and will explore innovative approaches to both the teaching and wider communication of economic concepts and models. This is a matter of broad public interest because citizens – most immediately in Eurozone countries – are being asked to make choices between different macroeconomic scenarios. They are usually obliged to make these choices with only a minimal understanding of the issues involved. If we are to create a better-informed public debate we must begin by improving the economics curriculum and our students’ ability and willingness to communicate about economic issues.g the economics curriculum and our students’ ability and their willingness to communicate about economic ideas and issues.

Bangladesh opposition leader arrives in New Delhi

Leader of the opposition in Bangladesh and two-times Prime Minister, Begum Khaleda Zia arrived in New Delhi on a seven-day visit at the invitation of the Indian government. Earlier on the day, she started from Hazrat Shahjalal International Airport in a flight of Jet Airways. Begum Zia will be meeting the Indian President Pranab Mukherjee today in the afternoon. She will also call on the Indian Prime Minister Dr. Manmohan Singh on October 29 as well as Indian National Congress leader Sonia Gandhi and leader of the opposition Susma Swaraj. Begum Khaleda Zia will also visit the holy shrine of Khwaja Mouniddin Chishti in Ajmer.

Political analysts in Bangladesh are seeing the India visit of the Bangladesh opposition leader as “very significant”, as it is taking place few months before the next general election, which is expected to be held in March 2014. The current government led by Bangladesh Awami League will finish its tenure on December 8, 2013. The Indian government has termed the visit as part of its engagement with the democratic and multi-party polity of Bangladesh. The last India visit of Begum Khaleda Zia took place in 2006, when she was the Prime Minister of Bangladesh. During this visit, the Bangladeshi leader of the opposition and chairperson of Bangladesh Nationalist Party would discuss various bilateral issues with India, including the sharing of water, killing by Indian border security forces along the Bangladesh-India border, expansion of trade etc.

Indian political analysts also are seeing the visit of Khaleda Zia as “significant” when the Indian intelligence agencies have clearly indicated huge defeat of the ruling Bangladesh Awami League led Islamist-leftist coalitions in the next general election.

While the BNP has always been known for its anti-India stance, New Delhi knows that it is imperative to at least make an attempt to mend fences with her in the run up to the general elections slated to be held next year. The BNP, known for its links with Pakistan, has of late been looking to make new friends in the region. On the other hand, India is also interested in mending fences with Bangladesh Nationalist Party, keeping the 2014 general election into consideration, as none of the ruling parties were re-elected in any of the past elections in Bangladesh.

A nine-member BNP delegation is accompanying Khaleda during the visit. The delegation includes Standing Committee Member Tariqul Islam, her Advisors Riaz Rahman, Sabih Uddin Ahmed, Vice Chairman Shamser Mobin Chowdhury, former MPs Khaleda Rabbani, Mosaddek Ali Falu, her Press Secretary Maruf Kamal Khan, Private Secretary Saleh Ahmed and photographer Nuru Uddin Ahmed.

Bangladesh keen to join four-nation gas pipeline

As four nations to the TAPI gas pipeline look to sew a consortium that will build the line, Bangladesh has evinced interest in joining the multi-billion dollar project.
“There was a request from Bangladesh to join the project. We require official note for this which will be considered by all the four governments of TAPI project,” Turkmenistan’s acting Minister of Oil and Gas Industry and Mineral Resources Kakageldy Abdullaev said at Petrotech 2012 Conference in New Delhi recently.
The Turkmenistan-Afghanistan-Pakistan-India (TAPI) project countries have invited firms which can become consortium leaders for executing the 1,680km cross-country project. The pipeline length would be increased if the project is extended to
Abdullaev said roadshows to attract firms that would build the project were recently held in New York, London and Singapore and there was “substantial interest” from institutional investors.
The Asian Development Bank (ADB) is the lead partner for the project and is helping the four nations put a credible consortium that would build and operate the line passing through volatile Afghanistan and Pakistan territories.
The TAPI pipeline would originate from Turkmenistan and pass through Afghanistan and Pakistan before entering India. It will have a capacity to carry 90mn standard cubic metres a day (mmscmd) gas for a 30-year period and will be operational in 2018. India and Pakistan would get 38 mmscmd each, while the remaining 14 mmscmd will be supplied to Afghanistan.
The minister said gas sale and purchase agreements (GSPA) have already been signed with Pakistan and India and the entire process of selection of the consortium leader and finding the investors is expected to take one year. The construction of the pipeline is expected to start in 2015.
Bids will now be invited to select the consortium leader who will be responsible for the design, funding, building, control and subsequent operations of the pipeline.
The US is backing the TAPI pipeline as an alternative to the Iran-Pakistan-India line in its efforts to choke Tehran financially over its suspected nuclear weapon programme.
While New Delhi had reached agreements on price and transit clauses for the IPI pipeline, TAPI is the first transnational line for which it has signed a GSPA in May this year. Agencies