Remittances from foreign workers to their families at home are an important source of income in some countries. Whether this is a good solution for the long term is debatable, though, as it may create a dependency. Thus it is important to understand whether these remittances end up not just fueling consumption but build the basis for investment in various forms of capital and future domestic income.
Christian Ambrosius looks at Mexico and finds that receiving remittances is strongly associated with the ownership of a savings account, especially in rural areas. So at least all of the remittances are going into consumption. More interesting is that there is also evidence that it also builds up some borrowing capacity, especially in microfinance banks. Once more, it is not the big financial institutions that seem to be the key to the development of the poorest, but the small institutions that rely on the local social network. And remittances are perfect to finance that.
31 Mayıs 2012 Perşembe
30 Mayıs 2012 Çarşamba
A Bond Market Meme, Revisited
About a year ago, I pointed out a fashionable trend: Some pundits were saying that long-term interest rates couldn't go much lower. Since then, the yield on a 10-year Treasury bond has fallen from 3.18 to 1.65 percent.
The lesson: Don't try to time the market. My own asset allocation remains 60 percent stocks, 40 percent bonds, with wide diversification in each category.
The lesson: Don't try to time the market. My own asset allocation remains 60 percent stocks, 40 percent bonds, with wide diversification in each category.
Why does Angola invest in Portugal?
Standard theory tells us that a country with a low capital endowment, relative to its labor endowment, should have high capital returns and thus should be attracting foreign capital until capital returns are equal at home and abroad. While there is foreign direct investment from the North to the South, it is by far as high as it should be, and capital returns are far from being equalized. There are proposed answers to this puzzle, from mismeasurement to country-specific risk, but that does not explain why there would be foreign direct investment from the South to the North.
Carlos Pestana Barros, Bruno Damásio and João Ricardo Faria look at the case of Angola investing substantially in its former colonial master, Portugal. They build a model of a open economy subject to corruption practices. It is not quite clear to me how this model maps into the linear equation that is estimated (partly because not all equations display in the paper). But at this points, the interesting results is that this FDI is driven by exports and mostly by corruption. One has to understand that corruption in Angola is among the world's highest. For example, there is an unexplained residual in the country's fiscal account that corresponds to about a quarter of its GDP, which is absolutely mind boggling. This corruption is so big that not only does it dry out the FDI flow from Portugal, it reverses it.
Carlos Pestana Barros, Bruno Damásio and João Ricardo Faria look at the case of Angola investing substantially in its former colonial master, Portugal. They build a model of a open economy subject to corruption practices. It is not quite clear to me how this model maps into the linear equation that is estimated (partly because not all equations display in the paper). But at this points, the interesting results is that this FDI is driven by exports and mostly by corruption. One has to understand that corruption in Angola is among the world's highest. For example, there is an unexplained residual in the country's fiscal account that corresponds to about a quarter of its GDP, which is absolutely mind boggling. This corruption is so big that not only does it dry out the FDI flow from Portugal, it reverses it.
29 Mayıs 2012 Salı
More Competition
University of Michigan economist Miles Kimball is now blogging. Incidentally, many years ago, Miles was my very first PhD dissertation advisee.
Foreclosure crisis: it is not about irrationality and sneaky bankers
Why has there been a foreclosure crisis in the United States? Two popular explanations are that 1) evil mortgage brokers forced people to take mortgages they could not possibly honor, and 2) those taking the mortgages did not understand what they were doing. As an economist who insists on logic and rationality, it is difficult to adopt these points of view, except that a point could be made about perverse incentives in the mortgage industry where the risk is masked and pushed unto unsuspecting people. But were mortgage holders really that stupid to think they would be able to make it? After all, I know several PhD economists who are still underwater, and they do not look stupid to me.
Christopher Foote, Kristopher Gerardi and Paul Willen come to the rescue. They argue that market participants made perfectly rational decisions given the information they had a the time, and in particular given the beliefs they had. The latter turned out to be too optimistic in retrospect though. Foote, Gerardi and Willen come to this conclusion with an interesting data analysis. They draw 12 "facts" that together contradict the popular explanations. Foremost, it does not appear that there is any correlation between exploding mortgage rates and mounting foreclosures. Also, even borrowers with spotty credit have had a remarkably good repayment history. One should thus not conclude that mortgages were designed to fail. Furthermore, all the instruments and innovations in the mortgage industry were introduced well before the past decade, and there was no significant regulatory change. Market participants knew what they were doing, had plenty of information and understood the risks. They were too optimistic though. Finally, no top-rated mortgage-backed security turned out to be toxic. The same cannot be said about similar bond-based securities.
All in all, there was nothing really wrong with the mortgage market apart from being too optimistic. In other words, there was a bubble, which can be a perfectly rational outcome. So there. But we still need to better cope with the eventuality of a bubble.
Christopher Foote, Kristopher Gerardi and Paul Willen come to the rescue. They argue that market participants made perfectly rational decisions given the information they had a the time, and in particular given the beliefs they had. The latter turned out to be too optimistic in retrospect though. Foote, Gerardi and Willen come to this conclusion with an interesting data analysis. They draw 12 "facts" that together contradict the popular explanations. Foremost, it does not appear that there is any correlation between exploding mortgage rates and mounting foreclosures. Also, even borrowers with spotty credit have had a remarkably good repayment history. One should thus not conclude that mortgages were designed to fail. Furthermore, all the instruments and innovations in the mortgage industry were introduced well before the past decade, and there was no significant regulatory change. Market participants knew what they were doing, had plenty of information and understood the risks. They were too optimistic though. Finally, no top-rated mortgage-backed security turned out to be toxic. The same cannot be said about similar bond-based securities.
All in all, there was nothing really wrong with the mortgage market apart from being too optimistic. In other words, there was a bubble, which can be a perfectly rational outcome. So there. But we still need to better cope with the eventuality of a bubble.
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31 Mayıs 2012 Perşembe
Do remittances create credit?
Remittances from foreign workers to their families at home are an important source of income in some countries. Whether this is a good solution for the long term is debatable, though, as it may create a dependency. Thus it is important to understand whether these remittances end up not just fueling consumption but build the basis for investment in various forms of capital and future domestic income.
Christian Ambrosius looks at Mexico and finds that receiving remittances is strongly associated with the ownership of a savings account, especially in rural areas. So at least all of the remittances are going into consumption. More interesting is that there is also evidence that it also builds up some borrowing capacity, especially in microfinance banks. Once more, it is not the big financial institutions that seem to be the key to the development of the poorest, but the small institutions that rely on the local social network. And remittances are perfect to finance that.
Christian Ambrosius looks at Mexico and finds that receiving remittances is strongly associated with the ownership of a savings account, especially in rural areas. So at least all of the remittances are going into consumption. More interesting is that there is also evidence that it also builds up some borrowing capacity, especially in microfinance banks. Once more, it is not the big financial institutions that seem to be the key to the development of the poorest, but the small institutions that rely on the local social network. And remittances are perfect to finance that.
30 Mayıs 2012 Çarşamba
A Bond Market Meme, Revisited
About a year ago, I pointed out a fashionable trend: Some pundits were saying that long-term interest rates couldn't go much lower. Since then, the yield on a 10-year Treasury bond has fallen from 3.18 to 1.65 percent.
The lesson: Don't try to time the market. My own asset allocation remains 60 percent stocks, 40 percent bonds, with wide diversification in each category.
The lesson: Don't try to time the market. My own asset allocation remains 60 percent stocks, 40 percent bonds, with wide diversification in each category.
Why does Angola invest in Portugal?
Standard theory tells us that a country with a low capital endowment, relative to its labor endowment, should have high capital returns and thus should be attracting foreign capital until capital returns are equal at home and abroad. While there is foreign direct investment from the North to the South, it is by far as high as it should be, and capital returns are far from being equalized. There are proposed answers to this puzzle, from mismeasurement to country-specific risk, but that does not explain why there would be foreign direct investment from the South to the North.
Carlos Pestana Barros, Bruno Damásio and João Ricardo Faria look at the case of Angola investing substantially in its former colonial master, Portugal. They build a model of a open economy subject to corruption practices. It is not quite clear to me how this model maps into the linear equation that is estimated (partly because not all equations display in the paper). But at this points, the interesting results is that this FDI is driven by exports and mostly by corruption. One has to understand that corruption in Angola is among the world's highest. For example, there is an unexplained residual in the country's fiscal account that corresponds to about a quarter of its GDP, which is absolutely mind boggling. This corruption is so big that not only does it dry out the FDI flow from Portugal, it reverses it.
Carlos Pestana Barros, Bruno Damásio and João Ricardo Faria look at the case of Angola investing substantially in its former colonial master, Portugal. They build a model of a open economy subject to corruption practices. It is not quite clear to me how this model maps into the linear equation that is estimated (partly because not all equations display in the paper). But at this points, the interesting results is that this FDI is driven by exports and mostly by corruption. One has to understand that corruption in Angola is among the world's highest. For example, there is an unexplained residual in the country's fiscal account that corresponds to about a quarter of its GDP, which is absolutely mind boggling. This corruption is so big that not only does it dry out the FDI flow from Portugal, it reverses it.
29 Mayıs 2012 Salı
More Competition
University of Michigan economist Miles Kimball is now blogging. Incidentally, many years ago, Miles was my very first PhD dissertation advisee.
Foreclosure crisis: it is not about irrationality and sneaky bankers
Why has there been a foreclosure crisis in the United States? Two popular explanations are that 1) evil mortgage brokers forced people to take mortgages they could not possibly honor, and 2) those taking the mortgages did not understand what they were doing. As an economist who insists on logic and rationality, it is difficult to adopt these points of view, except that a point could be made about perverse incentives in the mortgage industry where the risk is masked and pushed unto unsuspecting people. But were mortgage holders really that stupid to think they would be able to make it? After all, I know several PhD economists who are still underwater, and they do not look stupid to me.
Christopher Foote, Kristopher Gerardi and Paul Willen come to the rescue. They argue that market participants made perfectly rational decisions given the information they had a the time, and in particular given the beliefs they had. The latter turned out to be too optimistic in retrospect though. Foote, Gerardi and Willen come to this conclusion with an interesting data analysis. They draw 12 "facts" that together contradict the popular explanations. Foremost, it does not appear that there is any correlation between exploding mortgage rates and mounting foreclosures. Also, even borrowers with spotty credit have had a remarkably good repayment history. One should thus not conclude that mortgages were designed to fail. Furthermore, all the instruments and innovations in the mortgage industry were introduced well before the past decade, and there was no significant regulatory change. Market participants knew what they were doing, had plenty of information and understood the risks. They were too optimistic though. Finally, no top-rated mortgage-backed security turned out to be toxic. The same cannot be said about similar bond-based securities.
All in all, there was nothing really wrong with the mortgage market apart from being too optimistic. In other words, there was a bubble, which can be a perfectly rational outcome. So there. But we still need to better cope with the eventuality of a bubble.
Christopher Foote, Kristopher Gerardi and Paul Willen come to the rescue. They argue that market participants made perfectly rational decisions given the information they had a the time, and in particular given the beliefs they had. The latter turned out to be too optimistic in retrospect though. Foote, Gerardi and Willen come to this conclusion with an interesting data analysis. They draw 12 "facts" that together contradict the popular explanations. Foremost, it does not appear that there is any correlation between exploding mortgage rates and mounting foreclosures. Also, even borrowers with spotty credit have had a remarkably good repayment history. One should thus not conclude that mortgages were designed to fail. Furthermore, all the instruments and innovations in the mortgage industry were introduced well before the past decade, and there was no significant regulatory change. Market participants knew what they were doing, had plenty of information and understood the risks. They were too optimistic though. Finally, no top-rated mortgage-backed security turned out to be toxic. The same cannot be said about similar bond-based securities.
All in all, there was nothing really wrong with the mortgage market apart from being too optimistic. In other words, there was a bubble, which can be a perfectly rational outcome. So there. But we still need to better cope with the eventuality of a bubble.
Kaydol:
Kayıtlar (Atom)