Thursday, August 07, 2008

Markets choke on bad Hamm

Just like Homer Simpson, the US stock market choked today on the news that the second Hamm twin was also pulling out of the Olympics. With no Hamms remaining on the US men's gymnastics team, the Dow Jones Index fell 150 points in heavy trading. As would be expected, both the Chinese and Hong Kong indexes rose on the devastating news.

The evolution of modern business cycle theory

Modern business cycle theory is built around two strikingly original ideas.

First was the audacious idea that the observed business cycle was not a problem but actually Pareto optimal in the sense that the economy was fully competitive, there were no externalities, and all agents were operating on their supply curves at all points in the cycle. This was the original real business cycle (RBC) theory of Prescott that the cycle was just the result of optimal responses to real shocks.

Second was the insight that the macroeconomics of imperfect competition was fundamentally different than that of perfect competition. Specifically, if firms face a downward sloping demand curve, then deviations from their optimal price are not infinitely costly and perhaps small nominal barriers to changing prices (menu costs) could deter rational profit maximizing firms from always immediately adjusting their price in response to a nominal disturbance. This was the original new Keynesian economics (NKE) of Mankiw and Blanchard & Kiyatoki.

Early RBC theory just didn't work. Even with a low bar for evidence (matching selected raw moments and a lot of free parameters), it didn't fit the data. Early NKE didn't work either. Ball and Romer showed that menu costs alone would not be sufficient to prevent rapid price adjustments and argued that some real rigidities were also needed. But real rigidities can kind of be a hard thing to theoretically justify.

These two initially competing strains of business cycle research then gradually merged over time with the methods of RBC being applied to the models of NKE. The acronym du jour is DSGE (for Dynamic Stochastic General Equilibrium). However, much of the theoretical purity and the goal of having models built from individual optimizing was lost as more and more ad hoc types of constraints and rigidities were built in to try and get the models to better match the data. Also the idea of state dependent price changes that characterize the theoretical models is often "proxied" by the Calvo rule which simply gives a fixed probability that a firm will be allowed to change its price in a period.

I really thought this literature was going to fade away (as the number of ad hoc ad ons to the models was approaching infinity), but there have been some great new advances recently. First is the work estimating the models rather than calibrating them, often using Bayesian computational methods, and testing the models in a more rigorous way. Second is the new attention being paid to regime switches in monetary policy. Third is work that allows for real state dependent pricing in the model. Fourth are new theoretical ideas being applied, like the paper I referenced yesterday that explores the public good aspect of a firm's price change.

It's a great time to be a macroeconomist!

Wednesday, August 06, 2008


You are in for a treat. A weird treat, but a treat.

Warcarting from Zack A on Vimeo.

Warcart web page. Really.

As it says, most of the features are actually illegal. Don't try Warcarting at home, kids. This guy is a trained sociopath; leave it to the professionals.

(Nod to KL)

Why it sucks to be President. Reason #1304850683

Teh interwebs, where this:

turns into this:

Firm-level price adjustments as a positive externality

In what I think is an insightful and potentially important paper, "Endogenous Information, Menu Costs and Inflation Persistence" (nber wp #14184, ungated version here ) Yuriy Gorodnichenko sets up a model where firms make "state dependent decisions on both pricing and acquisition of information". What he is able to do is produce more persistent effects of shocks without having to put some real rigidities in the model. Because here, when a firm changes it's price, it reveals it's information to other firms for free, so information embedded in a price change is a public good and firms postpone making them. As he puts it, "the information externality and menu costs reinforce each other in delaying price adjustment. As a result, the response of inflation to nominal shocks is both sluggish and hump shaped".

Yes! No Calvo model for price changes, no unmotivated quadratic costs of adjusting any or all real quantities (capital and labor), and he still gets the all important delayed hump inflation response!

Kudos sir.

Tuesday, August 05, 2008

Oh what a tangled web we weave.....

So I'm reading Mark Thoma's blog and I see a link to KathyG. Hmmm, I say, I've seen her ripping Megan McArdle, maybe I should check out her blog. So I do and I find a newish post ripping Megan and the Atlantic for only having one female blogger. Kathy says:

How about, say, the brilliant Echidne of the Snakes? The Atlantic's sole female blogger and supposed expert on economics, Megan McArdle, consistently embarrasses The Atlantic and herself by the many rudimentary errors about economics she makes.....

But instead of, or in addition to, McArdle, they could have a real live Ph.D.-wielding economist who actually knows what the f**k she's talking about! Imagine that! In addition to her economic expertise, Echidne is a damned good writer. Even though she grew up in (I believe) Finland and English isn't her first language, Echidne, even on her worst day, writes with wit, verve, and style. In English. Whereas McArdle would be hard-pressed to write her way out of a paper bag. In English.

Wow, I say, this Echidne must be great. So I go check her blog and I find this:

Wouldn't peace be nice right about now? We could then focus on arguing about all the nitty-gritty stuff, such as rebuilding the dangerous infrastructure of this country. Of course Banana Republics require a dangerous infrastructure and as a Banana Republic seems to be on the plank of the Republican Party as the future of this country I guess that we won't see those bridges fixed. Could someone tell me, please, how much work has been done since last summer's bridge collapse? And how much money has been spent in Iraq during the same time frame?

On the other hand of the scales of victory, there is a new Kentucky Fried Chicken store in Fallujah. So the troops can come home now and start fixing the bridges, right? I love being a naive goddess.

WTF?? First some crazy unsubstantiated raving:

America's infrastructure is "dangerous"?

Republicans want America to be a "banana republic"?

Then, though, the laziness:

"Could someone tell me please how much work has been done.... and how much money has been spent in Iraq?"

Wow, isn't that your whole point? Why don't you look it up and tell us. And while you are at it, why don't you unpack for us your implicit argument that every dollar of war spending would instead flow to infrastructure if there was peace, and that the troops would be building bridges here if not fighting there.

Now to be fair, a lot of bloggers are lazy (including me!) so I guess I'm not ripping Echidne, but rather KathyG for suggesting the "naive goddess" as an brilliant economic expert who's being kept from blogging at the Atlantic only by gender bias. I searched a fair amount of the Echidne blog and the post I report is quite representative of the commentary there.

All that said, I agree with Kathy that it is ridiculous that there is only one woman blogger at the Atlantic. I nominate Great Satan's Girlfriend!

Monday, August 04, 2008

Politicians are scum

The WSJ is asking "top political and business leaders" the following question: "How would you spend $10 billion of American resources over the next for years to improve the state of the world"? Two such top dogs gave their views in today's paper:

Here, in a nutshell, is John Boehner's (House minority leader) idea: Give a $10 billion tax rebate and shoot Nancy Pelosi so we can drill, drill, drill.

Here is a succinct summary of Harold Ford's (DLC chairman) answer: Great a vast new bureaucracy, the "National Infrastructure Bank" and convert the money into earmarks. Plus, since this is obviously such a great idea, let said bureaucracy borrow even more funds on private capital markets to "further maximize the public benefit".

So the one guy justs wants to be let alone to drill for oil and the other guy wants to combine Fannie Mae with the World Bank with the apparent goal of converting all GNP into Congressional earmarks. And people wonder why (A) Americans don't like their politicians very much and (B) the world doesn't like America very much??

These guys are either really really stupid or have an incredibly low view of their audience (or both). FWIW let me state the obvious. The world is much bigger and on average a heck of a lot worse off than America. It's unlikely that any of the $$ should be spent here (unless maybe to buy out the farmers and protectionists once and for all).

WWAD you ask?

I would appoint a commission of Tyler Cowen, Mark Thoma, Greg Mankiw, and Gabriel Milhalache. I would have private groups from around the world apply to said commission for funding of educational initiatives and have the commission award the $$ according to the quality of the plan and the underlying conditions in the host country (to help gauge the long run success prospects of the initiative). However, I would also let the commission spend the money another way if they were able to unanimously agree on an alternative.

Angus' summer reading

This is a great era for fiction. Here is at least some of what I've been reading over the summer.

1. Darkmans by Nicola Barker. Flashes of brilliance, with great character studies, dialogue and comic set pieces but on the other hand a few dry spells and neither the conventional mystery nor the supernatural one are very coherent (which is not necessarily a problem in my view). Overall though, I'd recommend it. It's not as good as "Cloud Atlas" though.

2. Then We Came to the End by Joshua Ferris. I started this and put it down, but ran out of stuff on our trip to Madagascar and took it up again. I am very glad I did. The first person plural voice and lack of affect are a bit hard to get used to, but if you can, the book itself is really good. Consistently good throughout.

3. The Brief Wondrous Life of Oscar Wao by Junot Diaz. This is a fantastic book. The way the story of Trujillo is interwoven with the story of Oscar's family is seamless, and to me, enthralling. The tone, the Spanglish, the footnotes. This one is really excellent.

4. A Spot of Bother by Mark Haddon. I liked this book so much I stayed up late finishing it, like Homer Simpson frantically racing to finish the free tainted ham before it killed him. To me this is better than his earlier, more popular, "The Curious Incident of the Dog in the Night-Time". It's more of an old fashioned story than any of the above three but it really struck a chord with me. It reminded me a bit of "The Corrections" by Franzen but it's more kind to the human race than that. Maybe "The Corrections" meets "My big fat Greek wedding"!

More later.

Sunday, August 03, 2008

Scots wa hae!

In the greatest Scottish victory since Robert the Bruce defeated the British at Bannockburn, Andy Murray (the best looking Scot in all of human history) defeated Serbian punk Novak Djokovic 7-6 7-6 to win his first Masters Series event ever.

Scottish eye candy y'all!!

Oh yeah, this almost makes up for the way that Rafa Nadal tanked against Djokovic in the semis. That was a disgraceful case of phoning it in. Rafa had clinched the #1 ranking (as of August 19th) and just totally tanked it.

5th Horseman of the Apocalypse

There's a new chapter in the Book of Revelations and the NY Times is kind enough to print it for us. It turns out that the problem with our government's response to the housing crisis to date is that it has not been nearly generous enough! Really, I am not making this up. I will let the Prophet Peter Bernstein (PPB) tell it in his own words:

"ASSISTANCE to individuals and institutions in trouble always raises concerns about the moral hazards of bailouts, especially when a case can be made that people underrated risks or were blindsided in their decision-making. But we have no choice here. The economy teeters on the edge of not just a recession, but also a more profound decline where trouble in any single sector can spread breakdowns throughout the system, driving unemployment to intolerable levels. To sit back and let nature take its course is to risk the end of a civil society."

In other words, "screw moral hazard, we are at the edge of an unprecedented catastrophe"!!

It's pretty funny that PPB thinks what has been done so far is sitting back and letting "nature take its course". And what a course it would be in his mind. People, we survived the great depression without experiencing the "end of a civil society" for Pete's sake, so I guess PPB is forecasting something worse than that? Without further bailouts we are looking at a Mad Max / Road Warrior situation?

Phone call for the owl of Minerva!!!

Friday, August 01, 2008

Tyler crosses the line

I think he may just be trying to get a rise out of me because I often mock his beloved Beatles, but in his post about Ohio, the Lebron James of bloggers says:

"Popular music: I can't think of much...Boz Scaggs doesn't count nor does Peter Frampton. Lonnie Mack's The Wham of That Memphis Man! is one of the least known great albums. Doris Day is a very good singer and do see Pillow Talk if you don't already know it."

AAAAARRRGH!!! OK T, I'm taking the bait.

Guided. By. Voices.
The Breeders, The Amps (and 1/4th of the Pixies), i.e. the inimitable Deal sisters.

People, that's just from Dayton! Robert Pollard and Kim Deal. You could just listen to their stuff and nothing else all your life and be way way way ahead of the game.

But that's not all. From the Cleveland area: Eric Carmen (the Raspberries), Devo, and Pere Ubu!

And if that wasn't cruel enough, T goes on to opine:

Director: Wes Craven remains underrated; I still like his The Serpent and the Rainbow, among others. I can't think of a notable movie set in Ohio, can you?"

Umm, phone call for Dr. Cowen. Dr. Cowen, call your office!!

People I give you Jim F. Jarmusch!! You know, the guy who directed Stranger than Paradise (set in Ohio too by the way), Mystery Train, Night on Earth, Dead Man, Ghost Dog, and Down by Law.

Holy Crap. He got me real good.

The King is dead, viva el nuevo Rey

Roger Federer has been #1 for 235 weeks. However, since Rafa Nadal beat him on clay in the French and grass at Wimbledon, a lot of people (including me) consider him the "real" #1. Now though Nadal is poised to take over the official top spot as well. Federer lost in the 3rd round of the Master's series event in Cincinnati at the hands of serving machine Ivo Karlovic. If Nadal wins the tournament, he gets the top ranking. In one of the small injustices that plague modern tennis, Federer lost the match without ever having his serve broken (and having broken Karlovic's). Rafa next plays Lapentti (I'm penciling Nadal in for the W) and then the winner of the match between rising start Ernests Gulbis and Serbian punk Novak Djokovic. In the other half of the draw lurks Andy Murray, the best looking Scotsman in all of human history! Have I mentioned that I like tennis?