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June 18, 2015

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Posted: 18 Jun 2015 12:06 AM PDT

Fed Watch: June FOMC Recap

Posted: 17 Jun 2015 02:02 PM PDT

Tim Duy:

June FOMC Recap, by Tim Duy: The FOMC meeting ended largely as expected with a nod toward recent data improvement but no change in policy. It is still reasonable to believe that lift-off will occur in September, but only if incoming data removes any residual concern about the sloppy data from earlier this year. Still, as Federal Reserve Chair Janet Yellen emphasized today, the lift-off itself is less important than the subsequent path of rates. That path remains subdued.
The FOMC statement itself was little changed - see the Wall Street Journal statement tracker here. Key is the opening line that validates the belief that the first quarter weakness was largely transitory:
Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter.
Otherwise, growth is expected to continue at a moderate pace that justifies an extended period of low interest rates. The updated forecasts saw reduced growth expectations this year as expected, while the near-term unemployment forecast was raised modestly (I had felt the Fed would be wary of doing this given their tendency to be overly pessimistic on this point). Longer term forecasts were essentially unchanged. The forecasts:


The highest interest rate forecasts for 2015 were eliminated as was virtually required given the lack of any rate hike today. The median rate forecast suggests a rate hike this year, as did Yellen in her press conference. Still, she also said they are looking for decisive evidence to justify a rate hike, and I suspect that evidence will not arrive prior to the July meeting. Maybe September. Maybe not. It's all meeting by meeting now, you know.
Interestingly, although the inflation and unemployment forecasts for 2016 and 2017 were largely unchanged, the median interest rate projection fell along with the most hawkish forecasts. See this handy chart from Fulcrum Asset Management:


No change in the inflation and unemployment forecasts combined with a slower and longer path to normal rates suggests a modest change in the reaction function. In effect, the Fed has turned more dovish as the timing of lift-off is delayed. Even with unemployment falling to current estimates of full employment next year, they do not believe the economy needs (or maybe could withstand) a rapid pace of hikes. Persistently low inflation and wage growth is taking its toll on policy expectations. And even the most hawkish participants are falling in line with this story.
Bottom Line: Fed policy unchanged as expected, door still open for a rate hike in September, but the lower rate path indicates a modestly more dovish Fed resigned to a persistent low interest rate environment. It's the rate path we need to be watching, not the timing of the first hike.

'TPP Versus NAFTA'

Posted: 17 Jun 2015 12:17 PM PDT

Paul Krugman:

TPP Versus NAFTA: Many people — myself included — thought that TPP would, in the end, follow the model of NAFTA: a Democratic president would push the agreement through Congress, but the bulk of the votes would be Republican. But it doesn't seem to be going that way. Why?
Lydia DePillis suggests that procedural differences and the changed political environment are what changed. Maybe. But I'd suggest three additional factors.
First, while non-trade issues like dispute settlement and intellectual property already loomed large in NAFTA, it was nonetheless more of a genuine trade agreement than TPP...
Despite this, the real case for NAFTA involved foreign policy — which is also true for TPP (administration officials tell me that it's really about geopolitics.) But that case was much more compelling for NAFTA, which was about rewarding Mexican reformers. ...
Finally, I think it's fair to say that the liberal intelligentsia has been somewhat radicalized by Republican extremism; making common cause with those who share your basic values matters more than it seemed to a couple of decades ago. ...
So it really is a different game, and TPP supporters need to realize that old rules no longer apply.

'Why Anti-Keynesian Views Survive'

Posted: 17 Jun 2015 08:31 AM PDT

Simon Wren-Lewis:

Speak for yourself, or why anti-Keynesian views survive:
The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I'm an anti-Keynesian because I want smaller government.
Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark. Of course there is confirmation bias, and ideological bias, but as the term 'bias' suggests, it does not mean that evidence has no impact on the views of the majority of academics.
The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state.
It is also obviously false empirically. ...
Parts of the political right have always had a deep ideological problem with Keynesian analysis. As Colander and Landreth describe, the first US Keynesian textbook was banned. New Classical economists, for all the many positive contributions they brought to macro (in the view of most mainstream Keynesians), also tried to overthrow Keynesian analysis and they failed. 
When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favor of Keynesian theory.

'Microcredit: Neither Miracle nor Mirage'

Posted: 17 Jun 2015 08:10 AM PDT

On microcredit:

Microcredit: Neither miracle nor mirage, by Orazio Attanasio, Britta Augsburg, Ralph De Haas, Heike Harmgart, Costas Meghir, Vox EU: Recent years have seen an intense debate between microfinance proponents and detractors on whether microcredit can lift people out of poverty. The microfinance industry has long painted a picture – often backed by inspiring individual success stories – in which households can escape poverty once they receive a microloan. Women are thought to benefit in particular as access to credit allows them to become economically and socially more independent. More recently, doubts have emerged about the ability of microcredit to improve living standards in a structural way. Some point out that many villages where microcredit was first introduced in the 1970s are still as poor today as they were then. Others take offense at the very high interest rates that some microfinance institutions (MFIs) charge.

What has been absent from this heated debate is solid evidence. To fill this gap, a number of research teams across the world started randomized evaluations (large field experiments) to rigorously measure the impact of access to microcredit on borrowers and their households. Studies were set up in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia, Morocco, and the Philippines. Research took place in both urban and rural areas and evaluated both individual-liability and joint-liability (group) loans. Some of the participating microfinance institutions were for-profit organizations whereas others were non-profits. Nominal annual interest rates varied between 12% (Ethiopia) and 110% (Mexico).

Four main lessons

Together, these studies have produced a rigorous body of evidence on the impact of microcredit in a wide variety of settings. Earlier this year the research results were published in a special issue of the American Economic Journal: Applied Economics (references at the end of this article). They paint a remarkably consistent picture and contain four main lessons:

  • Across all seven studies, microcredit did not lead to substantial increases in borrowers' income. It did not help to lift poor households out of poverty. This holds both when measured over the short term (18 months) and over the longer run (three to six years).

A possible explanation for this finding is that while microcredit clients overwhelmingly reported using loans at least partially for business purposes, many of them also reported to have used part of their loans for consumption. Another possible explanation is that not all borrowers are natural entrepreneurs. Of those that use microcredit to open or expand a small business, some borrowers are more successful than others. Though business investments and expenses increased for borrowers in several countries, researchers did not find any overall effect on borrowers' profits in Bosnia and Herzegovina, Ethiopia, India, Mexico, and Mongolia. In the evaluation in Bosnia, we only found positive profit impacts among a small segment of all borrowers.

  • Access to microcredit also did not appear to have tangible impacts on borrowers' well-being or the well-being of others in their households.

For instance, three of four studies found no effect on female decision-making power and independence. In Mexico, where the microfinance institutions emphasized empowerment, women did enjoy a small but significant increase in decision-making power. In six studies, microcredit access did not increase children's schooling.

  • On the upside, the data collected by the research teams show that households with access to microcredit enjoyed greater freedom in deciding how they earned and spent money.

In Bosnia and Herzegovina and in Morocco, microcredit allowed people to change their mix of employment activities, reducing earnings from wage labor and increasing income from self-employment activities. In the Philippines, it also helped households insure themselves against income shocks and to manage risk. In Mexico, households with access to microcredit did not need to sell off assets when hit by an income shock.

  • Importantly, there is no evidence of systematic harmful impacts of access to microcredit.

For instance, overall stress levels among borrowers were no different from the comparison group in Bosnia and Herzegovina or the Philippines, though male borrowers experienced significantly higher levels of stress in the Philippines.

Implications for the microfinance industry

Small changes to product design may have a big influence on how people use and benefit from microcredit. For instance, repayment begins for the typical microloan two weeks after loan disbursement and payment is usually required on an inflexible weekly basis. This can be an effective strategy to limit default, but may also limit borrowers' income growth. In India, granting (some) borrowers a grace period – so that they can build a business before they need to start repaying – led to increased short-run business investment and long-run profits, but also increased default rates (Field et al. 2013). In addition, monthly or seasonal repayment schedules that better reflect borrowers' income flows can help borrowers to make better use of their loans. For instance, microfinance institutions like Enda Arabe in Tunisia and FINCA in Armenia offer loan products where repayment schedules are matched with expected cash flows (which depend on the seasonality of agricultural products). Further research is needed to evaluate the impact of such flexible loan products in terms of repayment rates and poverty outcomes. In Mali, researchers found that a credit product designed around agricultural timing had positive impacts and did not lead to increased defaults (Beaman et al. 2014).

Related to the previous point, microfinance institutions and borrowers could benefit from better segmenting the market and offering larger, more flexible products to clients most likely to perform well, and smaller, less flexible loans to less promising borrowers. Better ex ante differentiation is, however, not straightforward and would require better screening methodologies (Fafchamps and Woodruff  2014).

In addition, financial institutions can pilot better ways to help high-performing micro-entrepreneurs become eligible for small and medium enterprises (SME) lending. Today, successful and growing clients that need more funding may get stuck, too large for microfinance but not yet viable clients at traditional lending institutions. Microfinance institutions could set up arrangements with local banks to transfer such successful clients (for a fee) to a bank so that they can continue their growth trajectory. Likewise, banks with both microfinance and SME department should ensure that fast-growing micro clients can easily graduate to SME status.

Lastly, we note that the rapid expansion of lender competition can tempt some clients to borrow from various lenders (double dipping) which may result in over-borrowing and repayment problems. A potential mechanism to prevent such problems is to let lenders share borrower information via a credit registry. These considerations are particularly urgent for countries, such as Tunisia, that are currently opening up their microfinance sector to increased competition.


Angelucci, M, D Karlan and J Zinman (2015), "Microcredit Impacts: Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco", American Economic Journal: Applied Economics 7(1), 151-82.

Attanasio, O, B Augsburg, R De Haas, E Fitzsimons and H Harmgart (2015), "The Impacts of Microfinance: Evidence from Joint-Liability in Mongolia", American Economic Journal: Applied Economics 7(1), 90-122.

Augsburg, B, R De Haas, H Harmgart and C Meghir (2015), "The Impacts of Microcredit: Evidence from Bosnia and Herzegovina", American Economic Journal: Applied Economics 7(1), 183-203.

Beaman, L, D Karlan, B Thuysbaert and C Udry (2014), "Self-Selection into Credit Markets: Evidence from Agriculture in Mali", mimeo.

Banerjee, A, E Duflo, R Glennerster and C Kinnan (2015), "The Miracle of Microfinance? Evidence from a Randomized Evaluation", American Economic Journal: Applied Economics 7(1), 22-53.

Banerjee, A, D Karlan and J Zinman (2015), "Six Randomized Evaluations of Microcredit: Introduction and Further Steps", American Economic Journal: Applied Economics 7(1), 1-21.

Crépon, B, F Devoto, E Duflo and W Parienté (2015), "Estimating the Impact of Microcredit on Those Who Take It Up: Evidence from a Randomized Experiment in Morocco", American Economic Journal: Applied Economics 7(1), 123-50.

Fafchamps, M and C Woodruff (2014), "Identifying Gazelles: Expert Panels vs. Surveys as a Means to Identify Firms with Rapid Growth Potential", CAGE Online Working Paper Series 213.

Field, E, R Pande, J Papp and N Rigol (2013), "Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India", The American Economic Review, 103(6), 2196-2226.

Karlan, D and J Zinman (2011), "Microcredit in Theory and Practice: Using Randomized Credit Scoring for Impact Evaluation", Science 332(6035), 1278-1284.

Tarozzi, A, J Desai and K Johnson (2015), "The Impacts of Microcredit: Evidence from Ethiopia", American Economic Journal: Applied Economics 7(1), 54-89.

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