Monday, February 22, 2016

Employment shocks as nominal output shocks

I've combined this calculation (solving for NGDP by integrating a differential equation) with this finding (that the nominal shocks in the DSGE form of the model are approximately given by shocks to employment) -- the latter meaning that the the noise function n(t) is given by changes in employment.

The result is fairly good (for such a simple model) over short periods (the validity of the DSGE form). In the graphs: the IT model is blue, the IT model using empirical shocks is red (this should recover the original data -- errors are numerical), and the NGDP data is black.

One thing to note is that the employment shocks result in a much smoother transition to recession. That's because employment is much smoother than NGDP.


  1. Replies
    1. I was impressed because the red line tracked the black line so well, but I guess I overlooked this bit:

      "(this should recover the original data -- errors are numerical)"

      I'm not sure what that means.

    2. It is the exact sequence of shocks (noise function) required to reproduce the data. Solve for n(t) given everything else.

      It was a check on the numerical integration. The difference between the red curve and the black represents error in integrating the differential equation numerically.

  2. Unemployment is bad?? Who knew? Seems to be a good argument for European-style employment support during recessions, or things like governmental job guarantee programs, etc. Recessions do seem to be a part of the business cycle, and they lead to real damage to the economy, not to mention the deleterious effect they have on the long term earnings of people who have the misfortune of entering the job market at a bad time.

    1. According to laissez-faire capitalism, unemployment is a feature, not a bug.

  3. "the latter meaning that the the noise function n(t) is given by changes in employment."

    Neoclassical economics meets entropy.


  4. Jason,

    From one of your first posts in April 2013:

    "Imagine we are aliens measuring fluctuations in CO2 production from a distant observatory."

    And what if, we, as aliens, could see on the surface of this particular blue planet with our extra high powered telescopes, conglomerations of regularly shaped structures, increasing in number over time, separated by sometimes long narrow linear features and sometimes long narrow curved features with evidence of moving objects on these long narrow features, at first seemingly inexplicable. How would we explain these phenomena with equations that would make Mr. Boltzmann smile with approval?

    1. Probably the same way we explained what were featureless statistical objects as complex atoms made of electrons, photons, quarks and gluons. That is we'd expand the first order theory with a second order theory that is consistent with the first order theory. Cesar Hidalgo calls cars and cities crystallized information ... And in physics there is a field that is consistent with thermodynamics that studies the detailed properties of crystals (solid state physics).

      When I made that metaphor, I was bothered by the fact that economics lacked a first order theory that could reject second order theories. So I've tried to come up with one.

      The question you pose is "what about the second order phenomena?" ... To which my answer is: "Let's get a working first order theory first."

    2. Jason,

      Cities aren't perfect crystals. There are other forms of matter which exist, take rocks or soil, which appear to be irregular admixtures of crystalline substances. Are there "third order" laws which can explain these forms? Cities are more like these irregular forms, yes?

    3. Jason: "Let's get a working first order theory first."

      Hear, hear! :)

    4. If ecophysicists are still working on first order theories then they have a long way to go.

      I've just been re-reading an historical account of the rise and demise of the Gold Standard of the late 19th and early 20th centuries. Somehow I don't think I would find that account in a book dealing with quantum mechanics.

    5. The crystal metaphor is from Cesar Hidalgo and has nothing to do with perfect crystals.

      "Somehow I don't think I would find that account in a book dealing with quantum mechanics."

      I'm not sure what that means ... that a quantum textbook doesn't have a chapter on the gold standard? Seems like a good editing choice to me to cut that chapter.

  5. "Seems like a good editing choice to me to cut that chapter."

    Exactly, can't have reality messing things up.

    1. Now that doesn't make any sense. Why should you learn about the gold standard in QM class?

      "Now we've finished the solving the schrodinger equation for the Hydrogen atom, let's talk about the bank of France in the interwar period."


    2. Why should we learn about QM in economics class? :-)

    3. E.g.

      But you said:

      Somehow I don't think I would find that account in a book dealing with quantum mechanics."

      Which says "we should teach Econ in QM", not "we should not teach QM in Econ" ... So your last comment isn't supporting evidence of your odd claim that we should teach the gold standard in QM.

  6. You're connecting these things and drawing these conclusions.

    My question was rhetorical rather than an argument.

    Evidence not needed.

    Anyway, perhaps the French return to gold and the stock market collapse could be modeled as phase delayed quantum entanglement?

    1. The definition of rhetorical question is a question asked not to be answered, but to make a point.

      Points need evidence or arguments to support them.

  7. Not necessarily. You can make a point without trying to prove it.


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