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Saturday, November 26, 2005

Xavier Sala i Martin and 15 Years of New Growth Research

I've been reading this paper, and its definitely a good review of recent growth research. He concludes by saying that:

(i) There is no simple determinant of growth.
(ii) The initial level of income is the most important and robust variable (so conditional convergence is the most robust empirical fact in the data).
(iii) The size of the government does not appear to matter much. What is important is the 'quality of government'.
(iv) The relation between most measures of human capital and growth is weak. Some
measures of health, however, (such as life expectancy) are robustly correlated with growth.
(v) Institutions (such as free markets, property rights and the rule of law) are important for growth.
(vi) More open economies tend to grow faster.

He repeats the idea that "life expectancy is one of the variables most robustly correlated with growth". Since I am now reasonably convinced that the increase in life expectancy is somehow connected with the decline in fertility, this is quite an interesting result.

On another front, I have just come across this paper:

The Impact of Poor Health on Total Factor Productivity
, by Matthew Cole and Eric Neumayer.

Here's the abstract:

"A number of recent studies have illustrated the link between health and economic growth. This paper argues that a key mechanism through which health affects growth is via total factor productivity (TFP). We first estimate TFP based on a production function and then estimate the determinants of TFP, paying particular attention to three indicators of health that are particularly problematic in developing regions: malnutrition, malaria and waterborne diseases. We find the impact of poor health on TFP to be negative, significant, and robust across a wide variety of specifications."

Friday, November 25, 2005

German Consumer Prices Drop

While Japan celebrates the minor victory of stopping the fall in consumer prices, Germany has just registered a month on month drop of 0.5 percent from October to November according to figures just out from the Federal statistical office. Of course most of the drop was brought about by a fall in the 'volatile elements', but still, hardly justification from a rate tightening exercise at the ECB, as the ever perspicatious Paul de Grauwe was arguing in the FT yesterday:

So it was quite surprising that several ECB policymakers came out arguing that the interest rate would have to increase in December. Sensing trouble, Jean-Claude Trichet, ECB president, announced unexpectedly that a rate rise in December was all but inevitable.

It is difficult to understand such a turnaround. One can only guess what underlies this “volte face” that put the financial markets on the wrong foot. Here is my explanation, which I cannot prove but which seems to make sense. There is a hard core of “hawks” in the governing council who cherish a monetarist agenda. This agenda has two items. One is to bring the rate of inflation back below 2 per cent, the only target the ECB has declared to be salutary and consistent with price stability. The second is to curtail the “excessive” growth of the money stock, M3, which has now reached an annual rate of 8 per cent (but this was also the case two weeks ago when the ECB declared that this was not sufficient to raise the interest rate). The hawks somehow managed to have the upper hand in the governing council and to make the president their spokesman when he came out declaring that a rate increase now had become necessary. This statement also makes a rate increase almost inevitable next month.

Good News, Now Let Battle Commence!

Most commentators are getting excited about the recent reading on the Japanese core consumer prices index which stopped falling in October. There is just one small snag, the core CPI in Japan - until next August - still includes oil and energy costs. Stripped of these it is estimated that the underlying CPI was still down by about 0.3 per cent. The reading does however mark the first 'near miss' of the Japanese index with positive prices in some years, so it is hardly a 'non-event'. Meantime, as the FT notes:

Instead of celebrating, politicians lined up to remind the Bank of Japan that it was too early to declare deflation dead or to ditch its super-loose monetary policy.

Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.

The government of Junichiro Koizumi, prime minister, is worried that the BoJ could choke off the lengthy, but fragile, recovery by exiting too early from the ultra-loose quantitative easing monetary policy adopted in 2001.

Curiously enough all of this has a striking parrallel with what is happening in Germany right now, where politicians, who want to address the fiscal deficit by raising taxes are worried that the ECB could choke off the fragile German recovery by exiting too early from the ultra-loose monetary policy operating for some months now in the eurozone.

Monday, November 21, 2005

The FT on the Dollar and the US Deficit

Brad Setser points us to a lead article in the FT argues dollar strength (v. Europe and Japan) can be sustained for several more years. Brad, of course, is rather critical of the piece, while I think it argues exactly the view I have been putting forward for some time now.(Incidentally I don't think it is quite right to say that "the FT is no longer worried", better put, the FT is facing up to reality, a reality that Brad doesn't like, and that worries both me and the FT in the long term).

For a currency that most experts predicted would fall this year, the dollar is in remarkably good shape. This week the US currency hit two-year highs against both the euro and sterling....

Until March this year, the focus was on the current account deficit, and the dollar steadily declined against those of its trading partners with floating exchange rates, notably the euro and sterling. But since spring the focus has shifted to the interest rate story, with the dollar rising against these two currencies and the Japanese yen....

Movements in short-term interest rates alone cannot explain large shifts in currencies. However, since the start of the year, the long-term interest rate differential has also moved in the US's favour, across the entire yield curve and against all its peers. This largely reflects better news on economic growth in the US than elsewhere......

None of this means that the dollar can forever escape the consequences of the current account deficit. The deficit is not sustainable in the long run, it will eventually narrow and this will require further overall depreciation of the dollar.

But a long-term requirement does not make a certain short-term bet. The current account dynamic may not bite for several years yet. In the meanwhile, there is nothing to prevent the dollar enjoying lengthy periods of strength.

I couldn't have put it better myself :).