Friday, October 4, 2013

Exogenous and endogenous

In some previous posts I explained there were different models based on whether information sources and destinations were "floating" or "constant". I took these terms from the original paper which in an update (v3) has changed the language to "constant restriction" and "floating restriction". In either case, mathematically the come down to whether an integral is:

$$ \frac{1}{y_0} \int dy \quad \text{ or }\quad  \int \frac{1}{y} dy $$

The question is whether $y$ is set inside (floating, or the second integral) or outside (constant, or the first integral) the market.

While not a precise translation from information theory to mathematics to economics, these terms are pretty close to the terms endogenous and exogenous. Therefore, the IS-LM model has an exogenous aggregate demand, an endogenous aggregate supply and an endogenous money supply. Scott Sumner's** model (LS-MS) treats AD as endogenous in the money market but exogenous in the labor market. In the case of accelerating inflation, the model has an exogenous money supply and endogenous aggregate demand. In my model, everything is endogenous.

Again, this is not a precise translation (see endogeneity), but in the loose sense of exogenous meaning outside the model and endogenous meaning inside the model we can switch back and forth between the two languages.

** The model is not really his in the sense that he came up with it. I built it in the information transfer framework based on what he's said in his blog.

1 comment:

  1. "mathematically the come down to"

    should be (?)

    "mathematically they come down to"

    ReplyDelete

Comments are welcome. Please see the Moderation and comment policy.

Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.