by Lars P. SyllServaas Storm’s has a recent article that is a marvellous final take down of the ridiculous aspirations of New-Classical-New-Keynesian macroeconomic modelling. DSGE models are worse than useless - and still, mainstream economists seem to be überimpressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models, its rational expectations, and microfoundations!
Reserve Bank of India yesterday released a study titled, Risk Premium Shocks and Business Cycle Outcomes in India. This study investigates the dynamic effects of financial shocks on the business cycle. Against the backdrop of high non-performing assets (NPAs) of banks, a financial shock is conceived to be a shock to the interest rate spread stemming from a change in the default risk of borrowers. It is termed as the risk premium shock and occupies the central stage in this study. Business cycle implications of such a shock have been characterised and quantified in two steps.
At the outset, micro-level evidence on the effect of default risk on interest rate spread and credit growth is provided. Then, this micro-level evidence and predictions of dynamic stochastic general equilibrium (DSGE) models have been exploited to identify and estimate the impact of a risk premium shock using a sign-restricted VAR (SRVAR) model. The study notes that bank-level panel data analysis shows that an
The rupee has been in the news over the last few days and it breached the 75 mark recently. When it comes to currency, there are two conflicting interests: Those who import would desire a stronger currency while those who export prefer a weaker one.
However, a currency that is weakened substantially may result in increased cost of imports that may spill over to production costs in case of inputs being imported. This is what makes it important to strike the right balance when it comes to the value of currency.
Currency manipulations were thought to have potentially destabilising effects over the long term, but there are instances where countries have deliberately kept their currency undervalued to benefit their exporters. The recent statements by the US about naming China a currency manipulator are largely driven by concerns about the fair value of the Chinese Renminbi. Japan too has been accused of the same in the past. The strategy of currency manipulation does help the country th