Fiscal Policy and Macroeconomics...

Interesting panel discussion on fiscal policy from February's MIT's 150 anniversary symposium.  I particularly enjoyed Olivier Blanchard's remarks on the Eurozone debt crisis and the recent currency dispute between China and the U.S. 

Blanchard looked a bit uncomfortable during the question and answer segment when panel moderator Ricardo Caballero tried to get him to speculate about what might happen if the Eurozone was unable to address their debt issues fast enough for the "markets" and a new crisis took hold.

I suppose it is unwise to prod the Chief Economist at the IMF to speculate about what might happen if countries the IMF is currently loaning billions of dollars to were to effectively default on those obligations.

Looking to be distracted?...

Check out these "Grand Challenge" white papers for Future Research in the Social, Behavioral & Economic Sciences from the American Economic Association (AEA).  They are especially useful for any MSc's out there who read this blog and might be thinking about doing a PhD.  Lots of really good ideas for research...


Thanks to Keshav for the pointer! 

Second Life...

Does this qualify as a model of a real economic system? Or as an actual real economic system?  Apparently the official Second Life currency, the Linden dollar, has been fairly stable over the past 3-5 years (the Linden dollar is apparently pegged to the U.S. dollar).  What amazes me the most second-most is that, at least according to the Wikipedia article, the owners of Second Life have developed their own monetary policy in order to maintain the peg!  What amazes (but does not surprise me) the most, is that the Gini coefficient hovers around 0.9 (i.e., 90% of wealth is held by 10% of users)!  Although this estimate is probably not very scientific, I would tend to be much more sceptical of a claim that inequality was low...


Second-Life should start publishing data...actually no, they shouldn't...if they do start publishing data then I am likely to get distracted from doing more productive research...

Quote of the Day...

"It is a capital mistake to theorize before one has data.  Insensibly one begins to twist facts to suit theories, instead of theories to fit facts."

-Sherlock Holmes, (Courtesy of N. Gregory Mankiw's first-year undergraduate text!)

I am proud to say that I spent a good bit of time canvassing the empirical finance literature for evidence that the density of financial networks can be destabilizing before I actually sat down to try to develop a theoretical model of this phenomenon.

Applications of Financial Network Analysis...

For anyone interested in applications of financial network analysis being done at leading central banks I would highly recommend the following research database available via the Financial Network Analysis blog...

A nice quote from a recent European Central Bank paper related to my current research area:

"...in order to enable financial network analysis to fulfil its promising role in better understanding financial stability, work is needed on three aspects: (1) a better theory on contagion channels in the financial system, on the information content of financial links and on the behaviour of financial institutions under both normal and stress situations; (2) better tools to manage and analyse the financial information available; and (3) a broader set of data on financial linkages – at bank-to-bank level, cross-market and cross-currency, both nationally and on a cross-border basis. Developments on all these three aspects are likely to depend on each other."

My current paper contributes (perhaps trivially) to (1).  Prof. John Moore's work on liquidity and financial contracting is crucially important to (1)...

Advanced Macroeconomics...

Today I had my first lecture in advanced topics in macroeconomics.  The lecture was good, and focused on several basic versions of over-lapping generations models.  What really caught my attention, however, was this paper on endogenous business cycles by J.M. Grandmont that was listed in the recommended reading for the course.

I am almost finished with my a major draft of my first year paper (I hope to be finished sometime tomorrow) at which point I will send it off to my supervisor and Prof. Moore for comments and feedback.  Once I have finished the draft I think I will spend a couple of days really going through the Grandmont paper and writing some blog posts summarizing some of the key ideas...

Watson, Machine Learning, and Macroeconomics...

Nice video about the recent Jeopardy competition involving and IBM computer called Watson...


Question: Would it be useful to apply techniques from machine learning to model the macroeconomy? Cosma Shalizi has been awarded a grant from INET for research in this area...which I take to be a good sign.  Any opinions about this? Or links to share?

Ashamed to admit it, but...

Today I went through a properly rigorous mathematical treatment of the basic IS-LM model for the first time.  Alpha Chiang gives an excellent treatment of the IS-LM framework in his Fundamental Methods of Mathematical Economics.

I am embarrassed to say that this is my first time going through IS-LM!  I assume that this would be something that a second (or maybe even first) year undergraduate would have encountered.  I am only slightly absolved because I never studied undergraduate economics.  It was covered, very briefly, in my MSc at the University of Edinburgh.  However it wasn't stressed as being useful, and we weren't examined on it.

Having spent my entire day going through increasingly sophisticated versions of IS-LM, I feel pretty good.  I feel like I learned quite a bit about how the macroeconomy works.  I pose to my readers the following question: Why is it that some economists believe that IS-LM has been discredited?

I take as given that the economists in question are extremely intelligent and have thought deeply about the issues involved...so there must be some other reason.  I was actually surprised that a Google search for: IS-LM "discredited" turned up (for the most part) fairly positive articles.  If anyone has what they think is a convincing refutation of the IS-LM framework I would appreciate it if you send a pointer in my direction!

I will be teaching a very basic (and non-mathematical) version of the model in first year macroeconomics in a few weeks...

Update: Sean passed Tyler Cowen's critique of IS-LM to me via email.  My quick take on Tyler's critiques: points 1 and 4 are well taken.  Point 2 (and to a lesser extent point 5) would seem to implicitly assume that investment decisions are made solely on the basis of real and not nominal variables.

A photo from St. Andrews...

A photo of Seppo Honkapohja and myself from the recent SIRE event in St. Andrews just before I gave my presentation on my extension of the Credit Cycles model. My presentation came on the heels of his excellent lectures on models of learning dynamics in macroeconomics...

Quote of the Day...

“Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people’s knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem”

-F.A. Hayek, The Use of Knowledge in Society

(It is ironic that at the moment I came across this quote, I was taking a short break from working through Fundamental Methods of Mathematical Economics)

English tuition fees...

Most English universities look like they are planning to charge maximum fees.  University officials and students both seem to believe that, in this case, price is a strong signal of university quality...

State of Working America...

Really nice interactive graphic documenting the rise in income inequality in the U.S.: State of Working America.

Update: Forgot to thank Keshav for the pointer!

Quote of the Day...

"No one ever saw a dog make a fair and deliberate exchange of one bone for another with another dog."

-Adam Smith, Wealth of Nations