One Economics, One Objective for Monetary Policy

Has the conduct of monetary policy become the routine application of a set of core principles, much like the science of treating a dental cavity? The answer is: “not quite”, according to Stefan Gerlach in his guest lecture at the Bank of Mauritius yesterday. But, he adds, the overriding objective of monetary policy should be the fight against inflation. What do economists agree upon and what do they disagree upon as far as monetary policy is concerned?

One Economics, Many Exchange Rate Policies

Which is better, a flexible exchange rate regime or an inflexible one? As always, the answer, it seems, is: “it depends.” According to economists Aghion, Bacchetta, Ranciere and Rogoff, it depends on the degree of financial development. In countries with underdeveloped financial sectors, the volatility of exchange rates induced by a flexible exchange rate regime is a drag on economic growth. On the other hand, countries with advanced financial sectors benefit from flexible exchange rate regimes. Here are highlights of this paper, which was the topic of a guest lecture given yesterday by Philippe Bacchetta at the Bank of Mauritius:

Rewards and the Allocation of Talent

The academic community in Mauritius is rather peculiar. Many academics do not seem to be interested in, well, being academics! Research is often done out of a simple necessity: to get that job promotion that enables one to (1) finally earn a certificate for tax-free car, (2) to take on more administrative duties and exercise more power (yes, there is a place on earth where academics like admin!), (3) to be noticed by politicians and hopefully become their adviser! And some, unable or unwilling to do research, resort to bickering, office politics, etc. Yet, it is generally agreed that the best part of the job is the pleasure one gets from uncovering and learning things, from the independence in one’s thinking and from one’s contribution to society. So, why do people misallocate their effort and talent?

The Monkey Trade

Monkeys are intelligent creatures: they care for their siblings, they are altruistic towards their peers and they possess a strong sense of fairness. They can even be trained to use money and exchange it for food and sex! The fact that they are used in medical research leave us in a rather awful moral dilemma. For some, their use is essential in advancing medical research, especially in the study of neurodegenerative diseases, such as Parkinson’s and Alzheimer’s and infectious diseases, such as AIDS. Others claim that (1) research has not borne much fruits, (2) there are alternatives to animal testing, (3) animals are routinely used in unessential things such as cosmetics. It remains that the use of non-human primates in US and European labs is heavily regulated and is likely to remain so in the foreseeable future. But little is known about the treatment of these animals before they reach those labs. In fact, the monkey trade is a very lucrative business and for the past 10 years, Mauritius has taken it seriously – the country is second to China in the monkey export.

A Million Mutinies

“Why are rich nations more ‘tolerant’ than poor nations?”, asks Chris Dillow, my favourite British econblogger. I think he may have a point: I have seen overt displays of racism, xenophobia, homophobia, intolerance towards ethnic minorities and towards the disabled, more often in the latter than in the former. He could also have asked why in poorer countries people tend to be, on average, more superstitious and more prone to religious indoctrination and irrational beliefs and more gullible towards conspiracy theories than in richer countries? And they also care less about animals, about the environment and about human rights. His answer: “I suspect that the rich know better than the poor that diversity is a source of wealth. Differences in tastes and abilities are what lie behind the division of labour, comparative advantage and hence prosperity.” So, how do the rich become rich and how do they keep intolerance and superstition at bay? Chicago economist, Robert Lucas explains:

How the wind made some rich, while others stayed poor…

According to the United Nations, there are 51 countries that classify as Small-Island Developing States (SIDS). These are low-lying coastal countries, which, because of their smallness and insularity, are deemed to be vulnerable to economic shocks and the vagaries of nature. These islands offer a natural experiment in finding out the historical causes of economic growth. When they were colonised during the Discoveries, they were generally sparsely inhabited, if at all, and their per capita income roughly similar. Yet, their fortunes have since then diverged, ranging from poor Comoros Islands, with a per capita GDP of $700, to wealthy Singapore and Bermuda, with per capita incomes of $30,000 and $20,000 respectively. In a recent paper, economists James Feyrer and Bruce Sacerdote have found the following: the longer time a small island state has been colonised, the richer it now is. And there is a reason why some have had a longer colonial experience than others: wind patterns. Islands located near routes in the prevailing winds made useful stopovers and were more easily revisited and colonised.