Regression Discontinuity - How to determine whether it is Sharp or Fuzzy RD ? Simplest Look.

        Regression discontinuity design is gaining popularity as its use is becoming more implicative in the impact analysis of certain policy or an event. 

How the New Keynesianism sprouted ? Brief Remark - Applied Macroeconomics

Brief remark on how the New Keynesianism sprouted.

When did the basic idea came up?

During the 1970's there was the revolution of the new classical economics was going on, or say, the first stage had just begun. Also the new classicists had argued that Keynesian economics was theoretically inadequate, the need of the microeconomic foundations on the Keynesian macroeconomics was required. The need of the microeconomic foundation was due to :

Say in Keynesian model a  decrease in the aggregate demand leads to the fall in the labor demand. Because there is a fixed wage rate contracted to the labor and the backward looking price expectations of the labor, the money wage does not fall sufficiently in the short run to maintain the level of initial employment level. Due all of these, the employment and output falls and hence unemployment rises. So we can see that, the wage and price rigidities seems central to the Keynesianism concept of the involuntary employment, more focus has been gone to state the rigidities could arise from the behavior of the optimizing agents. 

The supreme task of the new Keynesian proposers is to provide the basic idea for the theoretical flaws that were seen in the model. With this, the supporters of the new Keynesian concept aim to construct the coherent theory of aggregate supply where the wage and price rigidities can be rationalized. However, the market clearing mechanism and that too every time can not hold true when there is the case of the lack of effective demand. Many Economists claim that the Keynesian concept has short of the continuous market clearing approach. 

Snowdon and Vane (2005) state that Keynesianism also argue that the failure of prices to change quickly enough to clear markets imply that demand and supply shocks will lead to the real effect substantially in the economy's output and employment. It is said that the deviations of output and employment from their equilibrium values can be substantial and prolonged and are reducing the economic welfare in the long run. 

So, What did New Keynesian geeks theorize ? 😀

The New Keynesianism argued that the concept of the business cycle basing upon the market failure is more crucial to the new classical or real business cycle alternatives. The basic idea for the difference between the new and old version of the Keynesian economics , the neo classical models assumed the nominal rigidities, while the new Keynesian approach tends to provide acceptable micro foundation to explain the phenomena of wage and price stickiness.

Source : Snowdon and Vane (2005) and Froyen (2014)

To be contd...

Thank you. You may fancy your notes with these.

Keep reading.

Aditya

Bootsrap in Econometrics. Basic Intro. Without figures and equations.

Bootstrap in Econometrics.

Many of us have acquainted with the concept of the Parametric, Semiparametric, and Non-Parametric Regressions. We have applied the concept to the domain of the several pieces of research that we carry and interpreted the results thereof. The very basic thing, to obtain any analytical distributional approximations through other parametric regression seems quite easier. But, what if those analytical distributional approximations seem difficult to obtain? Or say, impossible to obtain? Do not panic. This blog is for you.

Do you remember when you read the Monte Carlo Inference techniques or say its simulation technique? I can. I read that technique when I was going through a journal article collection of the central bank during the break period while I was in my office at Nepal Rastra Bank a year ago. The interesting thing was, then I was lackadaisical about the fact that the concept like Bootsrap technique, Kernal Density Estimation, and techniques like Monotonicity, Concavity, and other restrictions based regression even existed. Now, fairly I tend to understand, that not every but mine approach was naïve though. ;-)

Who laid down this concept then? Why do we really bother?  It was Efron (1979), whose work is cited often followed by Barnard (1963) and Hartigan (1971). So the concept was introduced before Armstrong stepped onto the moon. Not so new though.

To define, Bootstrap is basically a simulation-based technique that provides estimates of variability, confidence intervals, and critical value for tests. The pivotal idea is to create replications by treating the existing data set (size n) as a population from which the samples (size n) are obtained. This is a method for estimating the distribution of an estimator or a test statistic by resampling one's data or a model estimated from the data. It counts on treating the data as if they were the purpose of evaluating the distribution of interest.  Bootstrap yields an approximation to the distribution of an estimator that is at least as accurate as often more accurate than the approximation obtained from the first-order asymptotic theory. Say, bootstrap provides a way to substitute computations for mathematical analysis if calculating the asymptotic distribution of an estimator or a statistic is difficult, and it often provides a practical way to improve upon the first-order approximations. 

Is this what Aditya means for layman? Let's cite a beautiful example laid down by Strummer (2022) [slight modifications].

Say, we introduced a macro-econometric model. For a treatment group, we took 8 cities. The model was replicated in the 8 different cities that had specific problems with their local economy. In the 5 cities, the model seemed to work quite well and helped revive the economy quite well. But 3 cities, out of 8, the model even worsened the economic situation. If the mean is calculated from the response of the model, it seems to be 0.5. 0.5 is not a good improvement, however, many of the cities experienced good it can be said that the model drafted was better than others, to the other not better at all. Maybe the model is better than not using any other model at all.

Maybe the 5 cities experienced good because they had other variables that pushed for such an event and also, maybe the 3 cities were pulled down other facts that were not so entertaining for those 3 cities. It can be also thought that the mean was obtained as 0.5 instead of 0 because there were several things that were beyond the control of the city administration. So now, how can we decide whether the model is effective or not? We can. We can replicate the experiment many times. If such experiments are repeated we can keep track of the each of mean values ending up with the histogram. The mean values near zero state that the model can not improve anything for the event that is likely to occur and mean values that are far from the zero state that the model does something that is quite rare. BUT, instead of replicating the experiment many times, we can use Bootsrap technique.

For this, from the 8 measurement cities, we can select the samples 8 cities, with replacement (same cities many times). Now we get the bootstrapped dataset and calculate the mean. We great a different mean. Then we repeat this process until we obtain a histogram of the means from the bootstrapped dataset. We can calculate other statistics as well such as median, standard deviation, etc. We bootsrap a thousand times and make a sample out of it. We create a subset to estimate the full distribution. The mean might change if we redo the bootstrapping many times. Then we calculate the standard deviation of the distribution of the histogram obtained. We can use the confidence interval as 95 percent of the bootstrapped mean. From the case, if we find that 95 percent of the confidence interval covers 0, the hypothesis the macro-econometric model is not doing good can't be rejected. We can calculate confidence intervals from other ways as well (discussed some other day).

Though bootsrap is often quite accurate, it can be inaccurate and misleading if it is used incorrectly. Examples include inference about a parameter that is on the boundary of the parameter set, inference about the maximum or minimum random variables, and inference in the presence of weak instruments. 

Oh my... long way. No equations and figures. This is just a basic idea of the very interesting topic in the Semiparametric regression. We will catch up in the next.

Thank You

Aditya

P.S. Laud with your comments.

My references are some of the genius chaps  - Strummer (2018), Horowitz (2022), and Yatchew (2003).

Brief highlights of Union Budget of India 2022/23. Any effects to Nepal?

 

Ministry of Finance, Government of India today presented Union budget 2022/23. Here are the brief (selected) highlights:

 

1.     Estimation of an economic growth on 9.2 per cent in the upcoming fiscal year.

2.     There will be total expenditure in 2022/23 estimated at Rs 39.45 lakh crore. Total receipts other than borrowings in 2022/23 is estimated at Rs 22.84 lakh crore.

3.     There would be an ‘Effective Capital Expenditure’ of Central Government estimated at Rs 10.68 lakh crore in 2022-23, which is about 4.1 per cent of GDP.

4.     Reserve Bank of India to issue "Digital Rupee" by 2022/23.

5.     GoI allocated INR 2.37 lakh crore for direct payments for the minimum support price in agriculture.

6.     Year 2022 A.D is supposed to be the year of Millet production to support the post-harvest value of the millet.

7.     Digital University to be established in India based on the hub network model.

8.     The fiscal deficit is to remain at 6.9 per cent of the GDP.

9.     Customs duty on umbrellas has been increased, likewise on cut and polished diamonds it has been decreased.

10. The virtual digital assets will be taxed on 30 percentage basis/

11. Green bonds to be issued to foster green infrastructure.

12. An amount of Rs 2.37 lakh crore direct payments to 1.63 crore farmers will be granted for procurement of wheat and paddy. It is said that chemical-free Natural farming to be promoted throughout the county, but the Initial focus would be on farmer’s lands in 5 kms wide corridors along river Ganga.

13. The budget has provisioned the taxpayers to file updated income tax return within 2 years for correcting errors. It also provides tax relief to persons with disability.

Any effects to Nepal?

The Union budget of India 2021/22 on the previous year provisioned several surcharge or cess on several items, nonetheless, in this budget it has not specified on the specific taxes on the agricultural products that we import. However, chemicals like Sodium Cyanide would be heavily taxed. It could be assessed that the ambitious economic growth of 9.2 per cent would may lead to the hike in the consumer prices as many researches mention so with the effect Nepal could also bear a sort of rise in the inflation that we roughly import from India. The importance of other clauses is still left to be assessed. Let us see what happens in the time that is coming.

 

Thank you

Aditya Pokhrel

P.S Laud with comments.

What is going wrong with Sri Lanka, Pakistan and Turkey's Economy ? (International Economics)

 

WHY SRI-LANKA IS EXPERIENCING ECONOMIC CRISIS?

Sri Lankan economy has been facing with the shortages of the foreign exchange currently and the major reasons of the economic slowdown in Sri Lanka are:

1.     Tourism Industry has been affected badly by COVID and the Foreign Reserves depleted causing imports to rise

                                               

Ø  Tourism industry accounted for 10 percent share of GDP in Sri-Lanka prior COVID 19, but due to the pandemic tourism industry halted and the shocks are seen this time.

Ø  The earning from the foreign reserves dropped drastically from 7.5 Billion USD in Fiscal Year 2019 to 2.8 Billion USD in the end of July, 2020.

Ø  With shortage of Forex reserve to import goods (even for basic food supplies) the foreign currency had to be purchased and with this the domestic currency of Sri Lanka, Rupee depreciated by 8 percent.

 

2.      Mr. Rajapakshe's decision to ban chemical fertilizers on agricultural production and to make Sri Lanka 100 percent organic state in agro based production

 

Ø  According to the Food and Agriculture Organization – 2021, tea, rubber, coconut, and spices are the major agricultural exports of Sri Lanka and rice is the largest agricultural production in there. So the anti-chemical fertilizers law, Sri Lankan experts stated that the tea production was reduced in half and causing others crops also to reduce their respective production.

Ø  The traders in Sri Lanka are hoarding the essential food supplies and selling those food products at high prices. The army is authorized to seize food supplies from the traders and supplying it to consumers at fair prices.

Ø  Also the foreign exchange reserves are used for the purchase of the essential goods. Sri Lanka's central bank has been prohibiting the traders for exchanging more than Rs. 200 for an USD and stopped traders from entering into the forward currency contracts.

Ø  The government of Sri Lanka has refused to end its aggressive push for complete organic farming claiming that the short term pain of going into the organic system would be compensated by its long term benefits. It has also promised to supply farmers with the organic fertilizers as an alternative.

IS THE ACTION TAKEN BY SRI LANKAN GOVERNMENT IN RESPONSE OF THE CRISIS IS A GOOD STEP?

Ø  If we analyze the situation, the step taken by Sri Lankan's government to continue with the organic law is seen to increase the food prices even further because there would be the drastic drop in the production of the food products and also the shortages of food products (demand of the food products would be more than supply) would be there.

Ø  Also, in addition to this the decision by Sri Lanka's central bank to halt the forward contracts at the spot trading above 200 rupees to an USD also can affect in the essential supplies (for example: a food trader who wants to pay more than Rs. 200 for an USD to import the food product may be no longer to carry out the trade. And also without forward contracts which helps the traders mitigate the currency volatility onto professional speculators, many traders may be unwilling to import the essential food supplies.

 

 

 

WHY PAKISTAN IS FACING ECONOMIC CRISIS?

Presently the economic health of Pakistan is not up to the mark. The inflation is surging high over there. The current account deficit, deteriorating foreign exchange reserves and the currency depreciation have been the major cause of the crises.

The major causes have been the domestic and global factors of pandemic that is affecting the economy.

·         The foreign exchange reserve in Pakistan

According to the report published by State Bank of Pakistan on November 19. 2021 the Foreign exchange reserves stood USD 22.77 billion. Out of this, USD 16.25 billion has held by the central bank and the rest was with the commercial banks.

The reserves of the central bank declined by USD 691 million during the last week o9f November, 2021 due to the external debt repayments.

·         Economic Growth in Pakistan

The annual economic growth in Pakistan was 5.8 percent in the year 2018, but it decreased to 0.99 percent in the 2019, and further it decreased to 0.53 % in 2020. This led eventually to deplete in the current account. As it is evident that a persistent high deficit can cause to the excess supply of a country's currency in the foreign exchange market, which further leads to deplete the nation's currency.

·         BOP crisis and IMF bailout

Due to the BOP crisis because Pakistan was unable to finance its import bills or to service its external debt. Pakistan has been importing most of the items on the domestic consumption and this has increased the debt service obligations, which have made the situation even more worse. The current account of Pakistan deficits in September and October have been way larger than anticipated, reflecting both rising oil and commodity prices and improving the domestic demand. The burden of adjusting to these external pressures, as the central bank of Pakistan's monetary policy statement in November is noted that it has highly fallen into the rupee.

In the year 2019, Pakistan sought rescue from the IMF and it is reported in the last four decades Pakistan has 13 times bailed out by the IMF.

For the current period, it is reported that 750 million in IMF special drawing rights (around USD 1 billion) will be available to Pakistan, taking total disbursements to about USD 3 billion.

Also Pakistan is going to withdraw tax exemptions and subsidies, increase in levy on petroleum products, raise the power tariffs, and to audit USD 4.1 billion "extra funds" that is to be lent to Pakistan in April, 2020 due to the pandemic.

·         The Deal with Saudi Arabia

Pakistan undertook USD 3 billion loan from Saudi Arabia in November 27, 2021. The loan amount was agreed to keep in the Pakistan's central bank. In 2018 Pakistan had undertaken from S. Arabia USD 3 billion loan and out of which about USD 1 billion was disbursed.

It is also reported that Pakistan is about to get USD 7 billion from 3 other sources within the next 60 days, including the USD 3 billion in deposits from S. Arabia, a USD 1.2 billion Saudi Oil facility with deferred payments, a USD 800 million Islamic Development Bank oil facility. However, the ministry of Pakistan is stating that all of these would be enough to lessen the pressure on the import bills.

But, the loan from Saudi Arabia comes with a rigid interest rate of nearly around 4 percent can lead the situation to dilemma.

·         Inflation is Skyrocketing in Pakistan

In November, 2021 the inflation of Pakistan mounted to 11.5 percent from 9.2 in October. The prices of the food items such as fresh fruits, milk, and chicken increased to their highest levels. The regressive domestic policy in Pakistan focusing on " to systemically penalize the production of high value products by focusing support on wheat and sugarcane". As a result, Pakistan remains an importer of the horticultural products, dairy products despite having massive number of animals producing below potentials, and cotton to feed the domestic textile industry.

 

 

WHY IS TURKEY FACING ECONOMIC CRISIS?

 

Current Economic situation in Turkey

In Turkey, these days the price of medicine, milk, even toilet paper are soaring. The Petrol pumps have been almost closed due to the high prices of the petroleum products. The cost of living in Turkey has skyrocketed and the 25 percent of the youth have been unemployed. Turkey also has a huge debt and due to the losses in the value of the Turkish Lira, the situation has been even more worsened.

Cause of the Economic turmoil in Turkey

The causes of the situation are –

·         The president of Turkey Erdogan is quite rigid to lower down the interest rate and due to this the inflation in Turkey has reached to 21 percent currently. The president has threatened the central bank of Turkey to keep inflation in check and set the interest rate again.

 

·         The Turkish Lira on November 2020 was 7 to one Dollar ($) and currently in the month of November 2021 it has surged to 14.3 to one Dollar ($). The price of the imported goods keep on rising.

 

·         President Erdogan’s strategy to undertake expensive infrastructure projects enticed foreign investors and encouraged businesses and consumers to load up to a debt back in 2003 A.D. During the first decade of his reign Turkey was experiencing an economic miracle, however, Erdogan’s dream to ever expand led him to go towards the disaster and towards unsustainability. Rather than pulling back the borrowing for the ambitious projects still continued.

 

·         President Erdogan is also insisting that high interest rates cause inflation, even though it is low interest rates that put more money into circulation, encouraging people to borrow and spend more, and tend to increase price. This is the statement by Erdogan. But, in actual terms it is not true. He is continuously pushing the state bank of the Turkey to offer cheap loan to the households and businesses so that the borrowing can continue in Turkey.

 

Economists’ viewpoint on Erdogan’s rigidity and their solutions

Economists argue that by keeping the interest rate low consumers will be more eager to keep shopping and business will be more inclined to borrow, invest the amount in the economy and hire workers. He also stresses that if the Turkish Lira loses value against dollar Turkish exports will be simply cheaper and the foreign consumers will want to buy more. Economists say that this is theoretically true, but, when it comes to Turkish imports, it has high imports on the automobile parts, medicine, fertilizers, fuel, and other raw materials. And when the Turkish Lira depreciates even more further it is certain that those imports are going to cost high. This aspect is ignored by Erdogan.

To be refrain of the basic economic theory it has discouraged the foreign investors in Turkey as well.  Foreign investors were eager to provide loan to the Turkish businesses but now they are afraid of the currency depreciation. And eventually the low interest rate will lead to rise inflation even further.

Economists suggest that to solve the present context the interest rate should be risen for now so that the economy could be corrected. They suggest that the economy should not be looked by President Erdogan solely and his dogmatic beliefs should not interfere the functioning the economy (President used to say that the interest charge is against the Islamic law and violates the Islamic precepts). They also say that the suggestions from the foreign nations should be taken instead of blaming those for the price rise. 

 

Source: Analysts at Indian Express, The Hindu, New York Times, and Forbes.

Thank You

Aditya

Plz, laud with comments.

WHY THE FEDERAL RESERVE IS PLANNING TO RISE THE INTEREST RATE IN THE FUTURE ? (International Economics)

 

Why Fed is going to do so ?

The Federal Reserve is the central monetary authority to the largest economy of the world, the USA. After the pandemic of the COVID-19 almost all the countries experienced a slowdown in the economic growth and the USA being one of the largest economies, was not free from its impact. The general rule of Economics is that whenever the economy is alarmed to the situation of the crisis such as asset bubbles, hyperinflation, or any economic catastrophic crash downs, the central monetary authority (Fed in the USA and NRB is Nepal) tends to raise the interest rate so as to ensure the economic and financial stability. Doing this could help the economy move on its track.

Controlling the interest rate is one of the significant tools for which any central bank has privilege to deal with it. The governor (popularly known as the Chair) of the Federal Reserve, Jerome Powell on December 15, 2021 proclaimed to increase the Federal Funds Rate (also called as the Federal funds target rate) for the coming economic time. Powell seemed quite confident to set a target range for the federal funds rate through the meeting of the Federal open market committee. This rate would be the rate of reference or the base rate for the commercial banks to charge on their overnight loans. The average of the rates that banks negotiate for the overnight loans in the effective federal funds rate. This is seen to impact the other rates such as, the SOF rate and the prime rate.

Why do we bother if Fed raises the interest rate?

We must do it, because, as we know, this change in the interest rate by Fed can influence the interest rate throughout the global economy. It is a general rule of economics that when the interest rate in increased the cost of credit is also increased and it definitely impacts the entire economy. And the impact is assessed when every business tycoons and even people spend more of their money for the interest payments. Those who do not take the courage to pay such higher interest rate, they for sure, postpone their projects or their business undertakings and financing. This can lead people to save money for the higher interest payments. This eventually tends to decrease the supply of the money or the flow of credit in the economy and help curb the inflation. One of the reason behind Fed is doing this is also to control inflation in the future which is skyrocketing these days (6.8 percent – November, 2021).

Impacts into the various sectors and economic domain

The impacts of it on various sectors is resembled as –

·         Impact on Stock

According to the rule of thumb, higher market interest rate lays a negative impact on the stocks. The cost of doing business raises for the general people and business tycoons rises when the borrowing is very expensive. The higher value of costs and less growth of the businesses results in the low growth of the revenue and eventually the price of the stock declines. Some social psychologist proclaim that the rate surge can affect the market psychology and as far as the trading is concerned the traders can immediately sell the stocks to move towards the defensive investments. This can create distortions in the stock market indices.

·         The impact on the Bond

The market prices of the existing bonds decline quickly when the Fed announces the increase in the interest rate. This is generally because the new bonds will be soon coming into the market that will offer investors higher interest rate payments. For the reflection of the higher overall rate, the existing bond will decrease in price and that will eventually lead for the low interest rate payments attracts the investors even more. The economist Chan quotes that the inflation also degrades the actual face value of the bond, which seems to be the particular concern for the longer maturity debts.

·         Impact on the Saving Account and Deposits

The people with a saving account can be quite happy with the surge in the interest rate. Because in the USA the funds rate of the Fed is also a benchmark for a deposit account’s annual proceedings yields. Whenever the open market committee raises the rates banks increase the amount that people earn from the deposit accounts. The annual percentage yield that people earn on the savings accounts, checking accounts, certificate of deposit, and money market accounts also rises to the higher level. The online savings accounts are more reacting to the increase in the Fed rates due to the fierce competition for the online deposits among the online banks. However, the annual percentage yields by conventional bricks and mortar banks respond very slowly to the increase in the Fed rates.

·         Impact on the credit to the consumer

The consumer credits like personal loans, line of credit, credit card, respond more quickly to the increase in the Fed rates. The Fed rate is also more sensitive to the variable rate loans as the interest rate charge are in with the base with the federal funds rate.

Impact on Nepalese economy

The Nepalese economy is heavily reliant on the Indian Economy and the Chinese economy and relationship with the economy of the USA (only 1.2 percent of the total trade of Nepal with the world is in trade with USA), it is in a very small amount. However, major companies in the USA and their brands which are sold in Nepal are surely going to be affected by this. We can also say that it can affect the External Commercial Borrowings in Nepal from the USA. The research is yet to be done in detail regarding this.

 

Note: Please, laud with comments.

Thank You

Aditya Pokhrel

MBA, MA Economics, MPA (rng)

Asst. Director         

Nepal Rastra Bank (the central bank of Nepal)

 

References: Speech by the Chair, Jerome Powell – The Federal Reserve (2021)

                  Connell and Curry (2021) – Economists at Forbes

 

Underidentification of the structural models (Simultaneous Equation Method) Applied Econometrics

Thank you

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Source: Econometrics (Madalla), Modern Econometrics (Jand D), Thomachan Sir's Notes (University of Calicut).