Raghuram Rajan

how hidden fractures still threaten the world economy

Fault lines

From one of the most important economic thinkers of our time, a brilliant and far-seeing analysis of the current populist backlash against globalization. Raghuram Rajan, distinguished University of Chicago professor, former IMF chief economist, head of India's central bank, and author of the 2010 FT-Goldman-Sachs Book of the Year Fault Lines, has an unparalleled vantage point onto the social and economic consequences of globalization and their ultimate effect on our politics. In The Third Pillar he offers up a magnificent big-picture framework for understanding how these three forces--the state, markets, and our communities--interact, why things begin to break down, and how we can find our way back to a more secure and stable plane. The "third pillar" of the title is the community we live in. Economists all too often understand their field as the relationship between markets and the state, and they leave squishy social issues for other people. That's not just myopic, Rajan argues; it's dangerous. All economics is actually socioeconomics - all markets are embedded in a web of human relations, values and norms. As he shows, throughout history, technological phase shifts have ripped the market out of those old webs and led to violent backlashes, and to what we now call populism. Eventually, a new equilibrium is reached, but it can be ugly and messy, especially if done wrong. Right now, we're doing it wrong. As markets scale up, the state scales up with it, concentrating economic and political power in flourishing central hubs and leaving the periphery to decompose, figuratively and even literally. Instead, Rajan offers a way to rethink the relationship between the market and civil society and argues for a return to strengthening and empowering local communities as an antidote to growing despair and unrest. Rajan is not a doctrinaire conservative, so his ultimate argument that decision-making has to be devolved to the grass roots or our democracy will continue to wither, is sure to be provocative. But even setting aside its solutions, The Third Pillar is a masterpiece of explication, a book that will be a classic of its kind for its offering of a wise, authoritative and humane explanation of the forces that have wrought such a sea change in our lives.

How Markets and the State Leave the Community Behind

The Third Pillar

I Do what I Do

Luigi Zingales

Raghuram Govind Rajan

What is the secret of prosperity? Why are the rich rich and the poor poor? The answer lies in the structure of financial markets and the willingness to allow the capitalist system to let creative destruction work its wealth-creating wonders.

Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity

Saving Capitalism from the Capitalists

SHORTLISTED FOR THE FINANCIAL TIMES AND MCKINSEY BUSINESS BOOK OF THE YEAR AWARD 2019 From one of the most important economic thinkers of our time, a brilliant and far-seeing analysis of the current populist backlash against globalization and how revitalising community can save liberal market democracy.

How Markets and the State Leave Community Behind

: How Hidden Fractures Still Threaten The World Economy is an enlightening book that aims to draw your attention to the fault lines that are present in the world's economy today. The author believes that these fault lines were responsible for the financial crisis that the world saw, in the year 2008. He also believes that the world could be in for some more severe financial situations, if the fault lines that are mentioned in this book are not attended to, immediately.The author mentions his belief that the financial meltdown experienced by the world has been due to these fault lines and not solely due to the choices made by individuals, such as government officials, bankers and homemakers. He believes that the decisions made by these people were made as a logical response to the fault lines in the world's economy.In this book, the author chalks out a fixed course of action that the world's economies must adopt, if they want to see things change for the better. He also chalks out a specific developmental plan for India as well. He stresses upon the fact that the country must act upon the advice that is given in this book, if change is to take place for the better, in the near future.

How Hidden Fractures Still Threaten The World Economy

Fault Lines

About the Book : - The financial collapse of 2007 and the 'Great Recession' that followed left many economists on the defensive. News programs, magazines, pundits, and even the Queen of England asked, with some variation, the same question: Why didn't you see it coming? While there are broad similarities in the things that go wrong in every financial crisis, this was a crisis centred on what many would agree is the most sophisticated financial system in the world. What happened to the usual regulatory checks and balances?What happened to the discipline imposed by markets? What happened to the private instinct for self-preservation? Is the free enterprise system fundamentally flawed? These are not questions that would arise if this were just another emerging market crisis. And given the cost of this crisis, we cannot afford facile or wrong answers. Fault Lines is a perceptive, detailed look at where the answers to the questions that were raised during the recession may lie.

unleashing the power of financial markets to create wealth and spread opportunity

Saving capitalism from the capitalists

Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.

Financial Dependence and Growth

Abstract: Transactions take place in the firm rather than in the market because the firm offers agents" who make specific investments power. Past literature emphasizes the allocation of ownership as the" primary mechanism by which the firm does this. Within the contractibility assumptions of this" literature, we identify a potentially superior mechanism, the regulation of access to critical resources." Access can be better than ownership because: i) the power agents get from access is more contingent" on them making the right investment; ii) ownership has adverse effects on the incentive to specialize." The theory explains the importance of internal organization and third party ownership."

Power in a Theory of the Firm

The Politics of Financial Development in the 20th Century

The Great Reversals

Banca d'Italia

An Economic Rationale

Why Banks Have a Future

Rajan and Zingales demonstrate that free and open financial markets inspire human ingenuity, make nations competitive, and spread prosperity. In the wake of recent business scandals, financial markets are often thought of as parasitic institutions that feed off the blood, sweat, and tears of human endeavour. Saving Capitalism from the Capitalists shows that such markets in fact supply the fuel of a vital economy. And they are the only effective antidote to counteract the manipulations of elite groups that keep a tight grip on capital and restrict the economic development of nations and the entrepreneurial success of individuals.'Saving Capitalism from the Capitalists will dismay both titans of industry and their foes across the barricades, the anti-globalisation left that sees little in capitalism worth saving. It's written for the rest of us - all those who simply want a fair chance to prosper.'Business Week'Saving Capitalism from the Capitalists is a highly original study of the ways in which vested interests have sought throughout history to protect their wealth and power by rigging the market structure, even subverting free markets entirely when it suits them.'Washington Post

Binomial option pricing offers an easy, flexible, comprehensive method for pricing commodity -linked bonds when there is risk both of default and of changes in commodity prices.

Pricing Commodity Bonds Using Binomial Option Pricing

Giovanni Dell'Ariccia

Enrica Detragiache

Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank-dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises have been more severe.

The Real Effect of Banking Crises

Kalpana Kochhar

Arvind Subramanian

Utsav Kumar

Ioannis Tokatlidis

India has followed an idiosyncratic pattern of development, certainly compared with other fast-growing Asian economies. While the importance of services rather than manufacturing is widely noted, within manufacturing India has emphasized skill-intensive rather than laborintensive manufacturing, and industries with higher-than-average scale. Some of these distinctive patterns existed prior to the beginning of economic reforms in the 1980s, and stem from the idiosyncratic policies adopted after India's independence. Using the growth of fastmoving Indian states as a guide, we conclude that India may not revert to the pattern followed by other countries, despite reforms that have removed some policy impediments that contributed to India's distinctive path.

India's Pattern of Development: What Happened, What Follows?

Abstract: In the last two decades the European financial markets have become more market oriented. We analyze the economic and political forces that have triggered these changes as well as their likely welfare implications. We also try to assess whether this trend will continue. Based on our analysis, we conjecture that even if Europe might benefit from a continuation of the trend, in the near future political support for it is likely to become much weaker. Furthermore, without serious reforms, the trend is likely to benefit Southern Europe less than Northern Europe.

The Changing Character of European Finance

Banks and Markets

Mr.Eswar Prasad

In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms.

A Proposal

Controlled Capital Account Liberalization

The Third Pillar: The Revival of Community in a Polarised World

Kenneth Rogoff

Olivier Blanchard

Lawrence H. Summers

Leading economists consider the shape of future economic policy: will it resume the pre-crisis consensus, or contend with the post-crisis “new normal”? What will economic policy look like once the global financial crisis is finally over? Will it resume the pre-crisis consensus, or will it be forced to contend with a post-crisis “new normal”? Have we made progress in addressing these issues, or does confusion remain? In April of 2015, the International Monetary Fund gathered leading economists, both academics and policymakers, to address the shape of future macroeconomic policy. This book is the result, with prominent figures—including Ben Bernanke, John Taylor, and Paul Volcker—offering essays that address topics that range from the measurement of systemic risk to foreign exchange intervention. The chapters address whether we have entered a “new normal” of low growth, negative real rates, and deflationary pressures, with contributors taking opposing views; whether new financial regulation has stemmed systemic risk; the effectiveness of macro prudential tools; monetary policy, the choice of inflation targets, and the responsibilities of central banks; fiscal policy, stimulus, and debt stabilization; the volatility of capital flows; and the international monetary and financial system, including the role of international policy coordination. In light of these discussions, is there progress or confusion regarding the future of macroeconomic policy? In the final chapter, volume editor Olivier Blanchard answers: both. Many lessons have been learned; but, as the chapters of the book reveal, there is no clear agreement on several key issues. Contributors Viral V. Acharya, Anat R. Admati, Zeti Akhtar Aziz, Ben Bernanke, Olivier Blanchard, Marco Buti, Ricardo J. Caballero, Agustín Carstens, Jaime Caruana, J. Bradford DeLong, Martin Feldstein, Vitor Gaspar, John Geanakoplos, Philipp Hildebrand, Gill Marcus, Maurice Obstfeld, Luiz Awazu Pereira da Silva, Rafael Portillo, Raghuram Rajan, Kenneth Rogoff, Robert E. Rubin, Lawrence H. Summers, Hyun Song Shin, Lars E. O. Svensson, John B. Taylor, Paul Tucker, José Viñals, Paul A. Volcker

Raghuram Rajan

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