Pandemic Bond

The Bloomberg radio talks about rates and stop markets every 15 minutes, sure they got something better to cover: Here’s Larry Summers on Pandemic Bonds. 

Two questions are in order: First, what is a reasonable price for these bonds? Second, when would the bond default? These are hard questions that perhaps requires economist to solve.

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Growing Like China

This is a nice paper. Illustrating two things:

  1. Why China grows with high investment and high rate of return to investment
  2. Why China grows with an ever increasing saving – loan level (current account surplus)

This is explained in a neoclassic growth model, but with financial friction (and contractual imperfection). Small firms are more productive but have to self-finance, while state owned enterprises have good access to finance but are less productive.

One thing I do not quite understand here in the conclusion: some commentators have tried to explain the puzzle by attributing it to government manipulation of the exchange rate that holds the value of the Chinese currency artificially low. This argument is controversial, as it attributes a long-standing imbalance to a nominal rigidity, without explaining why the peg of nominal interest rate did not trigger an adjustment of real exchange rate pressure.

TPP not a free trade agreement.

An article by Stiglitz: This is saying that TPP, is creating managed trade, not free trade. For two reasons:

First, by protecting patent right by too much, it actually dis-encourage

(A question here: do too much patent right encourage or discourage innovation?)

Second, it can be used as a weapon against country’s regulations. The tabacco industry is an example. TPP is used a weapon so government cannot post signs such as “smoking hurts health” on the label, and in other times the public have to pay for the profit lost due to government regulations.

Third, we probably know, the tariff is already quite low, and what’s remaining are industries that are hardest to move. Australia’s agriculture, New Zealand’s diary, et al.

The oil price and inflation (with RQ)

An interesting post on oil price and inflation by the Economist (Explaining low inflation, the Lowdown)

The article argues that oil price may not be the key driver of inflation, especially core inflation (which excludes oil and food). A graph shows the price change and energy intensity of the different sectors are not correlated (0 correlation).

Also a stronger dollar is not necessarily the cause for the low inflation. Mainly because service sector inflation is below its long-run trend, and service goods cannot be imported. (Question: what about the price of lower living cost translates into lower service price increase? This also seem to be a story)

What has caused the service sector inflation to slow? One possibility is that the service sector face no need to increase its price. The other (the article claim this the best) is because of the stagnant wage.

Research Question: What has caused the price of one sector to increase? Is it mainly the wage, or is it the price of surrounding sectors? This is the network project I was working on before, and perhaps I will need a Granger causality test or something along that way.  This is hard research to carry due to bilateral causality.

More comment: Is it wage that push up price, or price push up wage? I think reality it happens both ways. Higher Demand –> Higher Price –> Workers Demand Higher Wage.  Higher Demand –> Longer Working Hours –> Higher Wage –> Higher Price.