tag:blogger.com,1999:blog-2546602206734889307.post5062118408097453634..comments2024-03-29T12:16:15.785+00:00Comments on mainly macro: Mistaking models for realityMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-2546602206734889307.post-29532934617676071262012-12-18T22:03:06.678+00:002012-12-18T22:03:06.678+00:00Steve:
1. Small point. The demand side rule *look...Steve:<br /><br />1. Small point. The demand side rule *looks* arbitrary, agreed. (Why isn't it the short side rule instead??). To my mind, one of the big advances of New Keynesian macro is that it fixed this problem. If you replace perfectly competitive firms with monopolistically competitive firms, start in equilibrium then hold prices fixed, then suppose demand increases, a monopolistically competitive firm will happily increase sales, as long as P remains above MC. Firms won't hit their MC curves (and ration buyers) unless there is a very big increase in demand. (Perfectly competitive firms would hit their MC curves, and ration buyers, almost immediately).<br /><br />2. In my little peanut parable, all stocks of peanuts are willingly held too. And nobody, in equilibrium, will be unable to trade money for peanuts or vice versa. But that does not mean that the stock of money is equal to the desired stock of money. In all the other markets in which money is traded, there will be an excess demand for money/excess supply of the other good.<br /><br />My "peanuts" are a metaphor for "those assets and goods which have flexible prices".Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-59056668480246757102012-12-18T21:19:09.094+00:002012-12-18T21:19:09.094+00:00Nick,
OK. In a Keynesian world, some goods prices...Nick,<br /><br />OK. In a Keynesian world, some goods prices get fixed, and then the quantities and asset prices move to give you an equilibrium, with some assumption about how the quantities achieve that. Usually, it's a demand-side rule, which is arbitrary, but important. All the markets are clearing, in the sense nothing is left on the table. But given market prices, some firms are not happy with what they are producing. In the models I know about, the assets - including money - are all willingly held, given the price level and asset prices. I don't know what you could mean.<br /><br />Simon,<br /><br />No, I'm not dodging anything. I give advice all the time, given the knowledge I (we) have. Suppose I'm talking to people in central banks, which I do sometimes. They want to know what they should be doing in the short run. They think, and I think, that money is not neutral in the short run. I know some mechanisms which can give me that, one of which is sticky prices and wages. But I'm not entirely sure that the nonneutralities I am seeing are due to sticky prices and wages. What do I tell the central banker? Some of this depends on how he/she thinks about the problem. Maybe he/she is a hardcore Keynesian, maybe he/she is more open-minded. I just try to be helpful.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-797172654163978052012-12-17T22:01:37.445+00:002012-12-17T22:01:37.445+00:00Steve: "How are you imagining we can have an ...Steve: "How are you imagining we can have an "excess demand for the medium of exchange?" You're thinking asset prices are sticky too?"<br /><br />I have this argument with keynesians all the time!<br /><br />Start with a model in which *all* prices are sticky. Cut the money supply (or increase money demand) and we get an excess demand for money, an excess supply of everything else, and a recession.<br /><br />Now suppose the price of one little good, say peanuts, is flexible. The peanut market now clears, at a lower price for peanuts. But we still have a recession. Do we say that there is no excess demand for money, because you can always sell peanuts to get money? Do we blame the recession on the price of peanuts being out of line with other prices?Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-30580337974703512692012-12-17T21:36:38.480+00:002012-12-17T21:36:38.480+00:00Another thought. Suppose we grant that there is so...Another thought. Suppose we grant that there is something we are not taking into account in standard approaches, related to the misery of unemployment. Suppose also that the inefficiency comes from sticky wages and prices. Then the fact that unemployment is miserable in ways we have not been modeling does not change how you think about the inefficiencies, relative to the distortions from taxation, for example. A tax will reduce the surplus from exchange (between workers and firms), and increase the unemployment rate. It's the same inefficiency.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-54596709931361665852012-12-17T20:01:12.261+00:002012-12-17T20:01:12.261+00:00The problem that New Keynesian models simply refus...The problem that New Keynesian models simply refuse to acknowledge is that once you recognize prices are sticky there's no reason to assume quantities are more flexible. If we have all sorts of non walrasian contracts, a lot of the observed price or wage stickiness is likely to be accompanied by sticky quantities. The quantities that adjust need not be affected by stickiness. But what matters for new keyensian economics is not individual level stickiness of some prices, but aggregate price level stickiness. Once you abandon walrasian contracts and supply/demand reasoning the link between the 2 is no longer obvious (see models of long term contracts and the models by Menzio et al mentionned by Williamson). Perhaps another way to think of it. We know at some basic micro level the housing decision (or the large business capital investment)is quite sticky due to fixe adjustment costs. You usually don't move that often. But aggregate investment is among the most volatile componenents of GDP. Oh, and the ZLB is not a problem with sticky prices, because Phillips curve logic does not work with flexible prices (except as an occasional correlation that may appear for example if the central bank follows a Taylor rule and the Fisher equation holds, or in some models with monetary frictions). In a flex price equilibrium supply and demand for financial assets determine real interest rates. Expected inflation adjusts to make this compatible with the central bank policy rate, or there is some decoupling of the relevant risk free rate for the economy and the central bank rate (due to some market segmentation). Also Keynesian economists would not be so dogmatic in their insistence that the output gap is the name of the game if they paid more attention to all the research about how things like financing constraints, market incompleteness and uncertainty or sentiment shocks can cause important, potentially highly inefficient fluctuations in the flexible price output level. But my sense is that Krugman still thinks he's fighting Kydland and Prescott back in 1982. He may be right in the sense that the pure RBC model without any inefficiencies is more friendly to the political positions of the Krugmans's republican/conservative devils, but in doing that he ends up dismissing a lot of relevant and serious macroeconomics.danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-27805642173667850772012-12-17T19:14:16.361+00:002012-12-17T19:14:16.361+00:00It's not at all obvious where we go with this ...It's not at all obvious where we go with this as economists. We have been successful as a species in part because we have evolved to "feel good" about work, not only because this allows us to eat, but because this is met with approval from other human beings. Of course, society also puts a value on work that is not rewarded in the market. But ideas about that change over time. For example, women seem to feel much differently about market work vs. homework than they did 50 years ago. Some economists think that those ideas are driven by technology, i.e. the social attitudes are not causal. But those are long-run issues, and you're thinking about the short run. The key question is, what is the key inefficiency that exists in a recession, and is there any kind of government intervention that can correct it, or at least mitigate it? I'm not sure the happiness studies are going to lead you where you want to go. This might tell you the government should just be handing out anti-depressants.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-7081112728947340452012-12-17T17:25:46.689+00:002012-12-17T17:25:46.689+00:00Click feelings at the end of the penultimate parag...Click feelings at the end of the penultimate paragraph, or look at any of the happiness literature.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-80878598154071115432012-12-17T17:24:22.525+00:002012-12-17T17:24:22.525+00:00That is a dodge. The debate is about the advice we...That is a dodge. The debate is about the advice we give now, with the knowledge we have. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-56270444050414934512012-12-17T17:16:19.739+00:002012-12-17T17:16:19.739+00:00Which link?Which link?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-87270856056274797212012-12-17T17:15:46.014+00:002012-12-17T17:15:46.014+00:00Neither. More work needs to be done. It seems surp...Neither. More work needs to be done. It seems surprising, but Keynesian economics is very much unfinished business.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-46940420357244022562012-12-17T17:00:30.455+00:002012-12-17T17:00:30.455+00:00I just look at the evidence, like the study I link...I just look at the evidence, like the study I linked to in my post. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-22115276194565197922012-12-17T16:47:57.963+00:002012-12-17T16:47:57.963+00:00I'd really like a reference (or explanation) t...I'd really like a reference (or explanation) to how greater price flexibility reduces the ZLB problem under inflation targeting in a NK model. But I also want to ask this. What do you conclude if you think there is no serious microfoundation for price stickiness?<br />1) that we have to fall back on less serious models (like Calvo)<br />2) that price stickiness does not existMainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-27437492650201374142012-12-17T16:40:24.263+00:002012-12-17T16:40:24.263+00:00The key feature of unemployment in recession is no...The key feature of unemployment in recession is not that it is long-term but that it is short-term. Large numbers of people are unemployed, or under-employed, who had previously been fully employed and reasonably expect to be so again. Simon is correct that the long-term unemployed don't regard their unemployment as "leisure", and when short-term unemployment becomes long-term there is a personal cost in physical and mental health problems, relationship breakup and even death. However, those who regard their unemployment as short-term don't view it as leisure either. They are working full-time (unpaid) looking for work. NK models that regard leisure as the positive side of unemployment (the negative side being loss of income) are behaviourally very, very far wrong. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-69160732973629043812012-12-17T16:21:57.038+00:002012-12-17T16:21:57.038+00:00"The moment we actually think we are capturin..."The moment we actually think we are capturing the costs of recessions using our models in this way, we once again confuse models with reality."<br /><br />The idea seems to be that you know what the costs of recessions are, and if the models don't give you the answer you want, they must be wrong. Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-31117146174191196992012-12-17T16:19:44.839+00:002012-12-17T16:19:44.839+00:00Nick,
How are you imagining we can have an "...Nick,<br /><br />How are you imagining we can have an "excess demand for the medium of exchange?" You're thinking asset prices are sticky too?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-57278297482515605542012-12-17T13:42:27.621+00:002012-12-17T13:42:27.621+00:00Couldnot you solve most of it by making the econom...Couldnot you solve most of it by making the economic formula/model PART of the decisionmaking and not effectively being the total decisionmaking.<br />Nice list with pro and cons, economic model outcome being one (probably important one).<br />Pro/cons including how strong is your model (in general and under the current circumstances). Items put at zero (nil) that might be of more importance than that than in the research on which the model was based, etc..<br /><br />Subsequently you could make a new model for the decisionmaking, but probably donot have time for that in most situations.Riknoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-85820104908885335812012-12-17T07:13:49.811+00:002012-12-17T07:13:49.811+00:00"Men cannot be employed when the object of de..."Men cannot be employed when the object of desire (i.e., money) is something which cannot be produced and the demand for which cannot be readily choked off” (GT,1936, 235). <br /><br />“If we sought to condense Keynes’s whole thesis concerning employment into a single sentence, “we might say that he ascribes the possibility of involuntary general unemployment to the existence of a liquid asset in a world of uncertainty” (G.L.S. Shackle,1974, 28).Anonymoushttps://www.blogger.com/profile/11677815746117897839noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-46159818873654840452012-12-17T05:12:51.198+00:002012-12-17T05:12:51.198+00:00Steve: if barter is costly, so people use monetary...Steve: if barter is costly, so people use monetary exchange, and if prices are sticky in terms of money, and the money supply falls, so there's an excess demand for the medium of exchange, why can't we call that "deficient demand" (for non-money goods)?Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-40433094017963405982012-12-17T02:31:40.812+00:002012-12-17T02:31:40.812+00:00"Keynesian recessions arise because of defici..."Keynesian recessions arise because of deficient demand."<br /><br />Wrong. That language is not descriptive of what is going on in those models. It's either sticky wages and prices or its a coordination failure (multiple equilibrium) phenomenon. People use the "deficient demand" language for marketing purposes. To your average lay person, it sounds good.<br /><br />"...that price is the real interest rate."<br /><br />Sure, the relative prices are screwed up on that margin too, for example in a New Keynesian model.<br /><br />" However when nominal interest rates hit zero and there are inflation targets, flexible prices may not be enough..."<br /><br />That's not correct in the standard NK model.<br /><br />"What we have in a recession is a coordination problem."<br /><br />Different model now. Measuring the welfare loss is now a different problem of course. Note that, in coordination failure models, the policy solutions tend to look very "non-Keynesian." The ones that work well are those that kill off the bad equilibria - doesn't look anything like "demand management" for example.<br /><br />"The problem with modelling price rigidity is that there are too many plausible reasons for this rigidity - too many microfoundations."<br /><br />No, the problem is that there are no microfoundations. No one has written down a serious model of nominal contracting with stickiness. I know some models, however, that exhibit stickiness, and where money is neutral - e.g. Berentsen/Menzio/Wright.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-15736645723649282022012-12-16T21:57:00.809+00:002012-12-16T21:57:00.809+00:00"In terms of modelling it has allowed busines..."In terms of modelling it has allowed business cycle costs to be measured using the same metric as the costs of distortionary taxation and under/over provision of public goods, which has been great for examining issues involving fiscal policy, for example. "<br /><br />I think something can be measured if the resulting measurements approximately reflect reality -- in most contexts a measurement is something one does with a real thing when trying to describe it. A yardstick* is not put up against a theory to measure its length.<br /><br />In the rest of the post, you argue that the costs of business cycles are grossly miss-measured if one uses representative agent models. [rudeness deleted -- I am honestly trying].<br /><br />I think that the representative agent approach to assessing (not measuring) welfare is much less appropriate in micro even than in macro. There is simply no way to understand why we have progressive taxation using a representative agent. How do you model social insurance assuming complete perfect insurance markets to begin with ? Yes the analysis is used a lot and is influential. In that sense it is great. But I see nothing good in it.<br /><br /><br />* or "meter stick" "metre stick" "metre" ??? I'm drowning in the Atlantic even though I'm sitting inItaly)Roberthttps://www.blogger.com/profile/14455788499385673507noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-60149022781035440922012-12-16T18:54:36.532+00:002012-12-16T18:54:36.532+00:00"the long term unemployed typically do not th..."the long term unemployed typically do not think that at least they have more leisure time, so they are not so badly off. Instead they feel rejected, inadequate, despairing, and it scars them for life."<br /><br />Unemployment also kills, not just by suicide, but by physical illness. <br /><br />See, for instance, Unemployment as a disease and diseases of the unemployed. Scandinavian Journal of Work, Environment & Health, 23(suppl 3),79-83. ( http://www.sjweh.fi ).<br /><br />Unemployment is a public health problem that affects not only the unemployed but people close to them.Minnoreply@blogger.com