Friday, May 29, 2015

The political method

Let's say someone thinks the Fed should raise rates sooner rather than later. Let's say that person is known as a hawk on monetary policy. Now let's say that person put together a model [pdf] that says this:

We conclude that in economies where the key friction is NSCNC and the net nominal interest rate threatens to encounter the zero lower bound, monetary policymakers may wish to respond with a price level increase. A chief rival to this response observed in actual economies—forward guidance on the length of time the economy will remain at the zero lower bound beyond the time when that bound is actually binding—would be inappropriate in the theory presented here.

Lo and behold the model comes out with not only that person's preferred policy but also says the policy that person opposes is bad. What a coincidence!

And now that person sends a copy of that study to the most prominent advocate of the the specific model.

Lo and behold, that advocate loves it!

Isn't politics the scientific method grand?

I bet you didn't think you'd be laughing when you read an economics paper ... laughing so hard you couldn't breathe ...

The private credit market completely solves the cross-sectional income inequality problem. It's quite awesome. I swear. (And can someone maybe label an axis, preferably two ... and what's with the Mathmatica 8 default formatting? Good enough for government work, I guess. What exactly does "non-stochastic" mean anyway? I used to teach a lab class and if one of the students presented this graph in their lab report it would have been all marked up in red. [Taken from the linked pdf, above]


  1. So consumption has no income elasticity whatsoever? Because you can always borrow other people's money to buy the stuff you want? Am I reading this chart correctly?

    1. In a life cycle model, consumption only responds to changes in permanent income i.e. moving the whole time distribution of income up or down.

    2. Yeah, the purported mechanism in the graph is that (assumed) perfectly functioning credit markets allow people to achieve the (assumed) desired state of constant consumption across all time periods.

      Why not just assume constant consumption? Or better yet assume uniformly distributed random consumption across millions of agents ...

  2. The only thing funnier than the St. Louis Fed paper is grown people, including this blog author, who don't believe money is neutral and super-neutral. They still believe in a Wizard of Oz (Fed) controlling the rate of inflation, despite all historical evidence to the contrary.

    1. Can things be "super-neutral" in the same way they can be "extra-medium"?

    2. Hi Ray,

      I'm not sure I understand your point. I believe the concept of neutrality (and "super"-neutrality) is that the Fed only controls inflation ... that monetary policy doesn't impact real variables, only nominal ones.

      This blog author also does believe in long run neutrality of money -- the basic equation used here -- dD/dS = k (D/S) -- is the simplest equation with dynamics consistent with long run neutrality.

      It does appear that long run neutrality is a symmetry that is spontaneously broken by a large ensemble of markets, however.

    3. Six -- I think it's more like "fierce mild" ... :)

  3. About Figure 3:

    The horizontal axis is time of economic life, represented by 241 quarters; the vertical axis is money, normalized so that peak quarterly earnings equals 1. As far as I can tell, "non-stochastic" means that there are no shocks to real wage growth. I. e., in the equation,

    λ (t, t + 1) = (1 − ρ) λ + ρλ (t − 1, t) + ση (t + 1)

    where λ (t, t + 1) is the rate of real wage growth, σ = 0. See pages 13 and 26.

    As for the comment about point-in-time income inequality, it obviously has nothing to do with the figure.

    1. Hi Bill,

      I was able to determine the units/axes from the text, but unless one is publishing something that is pure mathematics most journals require one to label the axes and give units for them directly on the figure or in the caption. I was also a bit ... um, strict? ... about these kinds of things myself when I taught physics lab classes. And I've written about these things elsewhere (and here) -- it's a bit of a pet peeve.

      As far as 'non-stochastic' goes, the word they were looking for is 'deterministic' (at least I didn't think they wanted 'chaotic') ... or better yet, 'assumed'.

      Regarding point-in-time inequality, that is what that picture is supposed to show -- private credit markets perfectly transform the red curve of household income into the blue curve of household consumption. Inequality is not being used the way it's commonly used in the blogosphere to talk about the 1% -- it's just saying income is unequal across time for a household (lower at the beginning and end, higher in the middle).

    2. I agree with you about labeling axes. But I do not know the economics sub-culture. Ditto "non-stochastic". :)

      How can a graph across time (241 quarters), show a point-in-time picture? That does not make any sense to me. The figure does not depict a temporal cross-section.


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