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Thursday Sticky 7/16 (self.badeconomics)

wumbotarianI want to be the Walrasian Auctioneer when I grow up[M] が 投稿 - stickied post

You people need to stop commenting as much.

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トップ新着論争中古い順Q&A

[–]IntegraldsI am the rep agent AMA 2ポイント3ポイント  (0子コメント)

Everyone needs more homework.

Discussion point:

In your subfield of economics, what is a simple naive model of behavior, and how does your subfield's fancypants model beat it?

In macro, here are two examples:

  1. Consumption. Naive view: people consume their income, C=Y. Fancy model: the Permanent Income Hypothesis, that people make consumption and saving decisions based on lifetime expected wealth. A good paper on the extent to which people actually follow the PIH is Hseih (2003 AER). People are more likely to follow the PIH when income streams are well anticipated and any shocks are large; people tend to react more naively to small income shocks.

  2. Forecasting. The naive model for any stationary macro variable (GDP growth, inflation, unemployment) is "almost a random walk." My naive forecast of unemployment next month is unemployment this month, plus or minus a small factor based on whether unemployment is currently high or low by historical standards.

    More sophisticated view: vector autoregressions. These tend to beat the naive forecast.

    Even more sophisticated view: full-blown DSGE forecasts. These tend to beat the naive forecast, um, not as much.

[–]Meta-Cognition"Neoclassical Bernankean shill" 0ポイント1ポイント  (1子コメント)

In keeping with the theme of the five policies thing we've had going on in the past few stickies, I figured I'd try my hand at one. You have to choose one policy to improve these areas:

  • Healthcare:

  • Science/technology:

  • Taxation:

  • Fiscal/monetary stimulus:

  • Welfare:

However, there is a catch. You can't choose a "paradigm-shifting" policy. So no single-payer/SHI systems, nGDP futures markets or NIT. Go!

[–]say_wot_againI guess I mod /r/goodeconomics now? 0ポイント1ポイント  (0子コメント)

Welfare is easy. Beef up the EITC and gut... Uhhhhh, what's left at a federal level after EITC, TANF, and CHIP? Gut that.

Monetary policy: NGDPLT. Less of a leap than futures market but still helpful.

Healthcare: /u/HealthcareEconomist3 for HHS Secretary.

Taxation: Cutting loopholes and corporate tax rates. Enough consensus amongst politicians that this could happen.

Fiscal stimulus: No giod.

[–]wumbotarianI want to be the Walrasian Auctioneer when I grow up[S] 0ポイント1ポイント  (0子コメント)

So I've given a bit more thought to the ABCT and what we would expect to see happen in the economy if the ABCT were true.1

Roger Garrison wrote that money and inflation/deflation don't have anything to do with the Hayekian ABCT. Okay.

But, what about when everything goes south? I'm trying to make heads or tails of what I wrote previously about the ABCT of whether or not we can generalize the ABCT as a "supply-side" or "demand-side" recession.

When firms start to realize that people are consuming on the short-end of the Hayekian Triangle and the investment spending they did will no longer be profitable, all the firms stop investing for the future. So investment falls. But, in broad terms, the ABCT is about an "overaccumulation of capital." If that were the case, then investment into capital falls and Y falls. We can see this in the Solow Growth model.

So I think we can classify the ABCT as a negative-supply shock. Why is this important? Well prices are sticky in the short run (even Roger Garrison agrees). So then we ought to see an increase in inflation during a recession that can be explained by the ABCT. Why? Because negative supply shocks are inflationary.2

What does that mean? That means we could probably take a look at recessions and if there's an increase in inflation that should at least exclude the Keynesian/Monetarist negative demand shock argument.

Here's a graph of inflation with grey areas representing recessions (data is quarterly). What do you see? Most recessions are associated with drops in inflation. Two exceptions pop out: the six month long recession in 1957-1958 and Stagflation. Not sure what '57-'58 was. But we know that the 70s was a huge oil price shock, so it can't be the Fed.

So really, we don't have any evidence that recessions are huge supply shocks and thus inflationary. This doesn't disprove the ABCT but it does show that the ABCT is not able to explain post-War business cycle fluctuations in the US. Just another nail in the coffin.

  1. I was going to actually post this to /r/PraxAcceptance but someone asked for a new sticky so I thought I'd put it here.
  2. This realization came to me today while eating a sandwich at Jimmy John's.