tag:blogger.com,1999:blog-4979477022008569617.post5286168521602251699..comments2023-05-02T06:38:35.510-07:00Comments on Roger Farmer's Economic Window: My Quiz for Wannabe KeynesiansRoger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.comBlogger48125tag:blogger.com,1999:blog-4979477022008569617.post-27788354530992852442014-05-10T01:28:32.669-07:002014-05-10T01:28:32.669-07:00Thank you for sharing valuable information. Nice p...Thank you for sharing valuable information. Nice post. I enjoyed reading this post. The whole blog is very nice found some good stuff and good information here Thanks..Also visit my page<a href="http://www.rentalaccountants.co.nz/" rel="nofollow"> IInvestment Property </a> We are a Registered Tax Agent and have a close working relationship with the Inland Revenue Department (IRD). <br /> Anonymoushttps://www.blogger.com/profile/08307301450488766339noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-78208298496528893042014-03-05T17:28:59.125-08:002014-03-05T17:28:59.125-08:00Greg and Matias
Thanks for your suggestions. I hav...Greg and Matias<br />Thanks for your suggestions. I have ordered them both.<br />RogerRoger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-33196481714469370052014-03-04T12:34:38.250-08:002014-03-04T12:34:38.250-08:00There are many books by Shackle, since we was a pr...There are many books by Shackle, since we was a prolific writer. My preferred one is really a history of thought one, The Years of High Theory, but the one that would make more sense in this context would be Expectations, Investment, and Income.Matias Vernengohttps://www.blogger.com/profile/09521604894748538215noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-82069375645159270292014-03-02T19:10:30.073-08:002014-03-02T19:10:30.073-08:00Matias will have his own list, but I recommend G.L...Matias will have his own list, but I recommend G.L.S. Shackle, "The Years of High Theory," which is a history of economic theory between the wars, and "Keynesian Kaleidics," which is a very short book about the essence of Keynes's economics from Shackle's point of view. For what it's worth, here's my take: http://works.bepress.com/cgi/viewcontent.cgi?article=1004&context=greg_hillAnonymoushttps://www.blogger.com/profile/11677815746117897839noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-90491303180151132062014-03-01T04:42:29.000-08:002014-03-01T04:42:29.000-08:00You can take the model of Angeletos and Lao and ge...You can take the model of Angeletos and Lao and get large inefficiencies if for example sentiment shocks affect interbank markets and the resaleability of collateral, so a negative sentiment shock could explain tighter financing constraints (now often obtained in models via direct exogenous shocks to loan to value ratios or monitoring costs), or you could even have sentiment shocks about the level of idiosyncratic uncertainty shocks facing firms.<br />Also Bob Hall has recently emphasized how in models with matching frictions and dynamic labour demand, the discount factor volatility directly impacts demand for labour, since hiring is like an investment decision. <br />I'm still tending to prefer a theory where sentiment shocks a la Angeletos/Lao + maybe some systematic deviations from rational expectations towards greater pessimisn in recessions (which look like discount factor movements in rep agent models)+feed back into lower consumer search in product markets and lower marketing efforts by firms in recessions which reduces the matching efficiency of product markets explain big recessions without relying on the indeterminacy of bargaining your models are relying on (why would firms take prices and wages as given if there are significant gains from trade? Why not directed search+price/wage posting as a way to eliminate the indeterminacy).<br />But I'll keep an eye on your models and consider giving them a nontrivial weight in my conditional forecasts.danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-76983400078530918602014-02-28T12:03:55.657-08:002014-02-28T12:03:55.657-08:00I admit to not having read Shackle. Do you have a...I admit to not having read Shackle. Do you have a recommended source?<br /><br />As for the Post-Keynesians; the Post-Keynesians that I have talked to are in broad agreement with me. The main difference is that I accept neoclassical tools.<br />Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-43830879973168148612014-02-28T11:59:35.145-08:002014-02-28T11:59:35.145-08:00daniels:
These are great questions.
1) You can ...daniels:<br /><br />These are great questions.<br /><br />1) You can take the supply side of my model and add your preferred theory of aggregate demand. My contribution in recent books and papers was to explain the Keynesian theory of aggregate supply. Main conclusion; the 45 degree line in the income expenditure model is an AS curve. <br /><br />That begs the question; what determines aggregate demand. Initially, as you will see from reading my piece on AD and AS in IJET, I believed that the model would justify a large fiscal expansion. My views evolved as my reading of the evidence suggests that the multiplier is at best around 1. That comes down to the question: If G increases; how much will AD increase?<br /><br />This is very different from the 1st generation indeterminacy models which relied on a classical theory of demand and supply in the labor market. See my survey on the difference between 1st and 2nd generation models of indeterminacy <a href="http://rogerfarmer.com/NewWeb/PdfFiles/EBC%20Farmer%20Double%20Spaced.pdf" rel="nofollow"> here. </a> <br /><br />2) Another great question. Probably not. For any model where the equilibria are Pareto suboptimal, there will always be an alternative where the equilibrium is efficient. <br /><br />For example, I am working now on why the stochastic discount factor is volatile. My answer is that sunspot fluctuations cause a Pareto inefficient reallocation of resources between agents. There is an alternative explanation; the discount rate of the representative agent is a persistent random variable that moves around over time. I think my explanation is more plausible; but there will always be holdouts who are wedded to the idea that equilibrium is tautologically optimal.Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-8554119925568512282014-02-28T11:46:15.420-08:002014-02-28T11:46:15.420-08:00Thanks for your very detailed account of the histo...Thanks for your very detailed account of the history of expenditure. We still have the issue of identification to deal with. <a href="http://www.econ.ucsd.edu/~vramey/research/RZUS.pdf" rel="nofollow"> Here </a> is a paper by Ramey and Zubairy that gives me pause for thought. To quote from the abstract:<br /><br />"This paper investigates whether U.S. government spending multipliers differ according to two potentially important features of the economy: (1) the amount of slack and (2) whether interest rates are near the zero lower bound. We shed light on these questions by analyzing new quarterly historical U.S. data covering multiple large wars and deep recessions. We estimate a state-dependent model in which impulse responses and multipliers depend on the average dynamics of the economy in each state. We find no evidence that multipliers are different across states, whether defined by the amount of slack in the economy or whether interest rates are near the zero lower bound. We show that our results are robust to many alternative specifications. Our results imply that, contrary to recent conjecture, government spending multipliers were not necessarily higher than average during the Great Recession."<br /><br />I am aware that other researchers make different claims. <br /><br /><br /><br />Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-5145549477180893292014-02-28T11:40:48.425-08:002014-02-28T11:40:48.425-08:00Thanks for the reply Roger. One question, and I kn...Thanks for the reply Roger. One question, and I know classifications and schools of thought are often imperfect, but your views, in which there is no tendency for the<br />economy to converge to a long-run natural rate of unemployment, and the latter can be anything depending on the confidence of investors resembles a lot Shackle's views of Keynes. Is that fair to say? And if so, how does it differ from certain Post Keynesian views?Matias Vernengohttps://www.blogger.com/profile/09521604894748538215noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-80602369021054116152014-02-28T11:35:20.198-08:002014-02-28T11:35:20.198-08:00Nick
"Does it make any difference to the mod...Nick<br /><br />"Does it make any difference to the model if the unemployed spend their time searching for jobs, digging their gardens, walking the hills, or waiting miserably? As long as they would prefer a job."<br /><br />YES. It matters a lot. Search is an input to the matching function. If you want to complicate the model by adding leisure -- thats fine. But now the participation rate becomes a separate variable.<br />Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-50155305192687507582014-02-27T23:00:38.482-08:002014-02-27T23:00:38.482-08:00Roger, forgetting all the discussion about what di...Roger, forgetting all the discussion about what did Keynes mean or not and getting back to your version of keynesian economics. <br />1) If the government reduces labour taxes on firms subsidised by a lump sum tax, does it raise employment in your model? In the 1st generation of RBC models with indeterminacy employment would fall (same if productivity increases)- see Aiygari's critique <br />http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=477<br />.<br />2) Can you distinguish your model with standard data sets from a version of Angeletos' and Lao's model of sentiment driien business cycles which in the baseline version at least has a pareto optimal equilibrium? Same question for the sentiment model of your Benhabib et al<br />http://www.expectational-coordination.com/wp-content/uploads/2012/07/Benhabib-Wang-Wen-2012-Sentiments-and-Aggregate-Fluctuations-slide.pdf<br />?danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-81142175807171415642014-02-27T17:22:17.705-08:002014-02-27T17:22:17.705-08:00Figure 1 works as a nomogram (or nomograph). It de...Figure 1 works as a nomogram (or nomograph). It demonstrates that expenditure calculated with one formula equals income calculated with a second formula. The two formulas yield equal results at the 45 degree line for all values.<br /><br />I have problems with the overlay equation(s) X = A + I + G +bY because of the way it behaves when Y approaches zero or becomes negative. It WOULD make sense to me if Y were considered accumulated money supply (capital?) but then Y would not be income.<br /><br />I can see that Keynes and others are suggesting that more income would result in more spending. I think that is correct.. Unfortunately, the display in Figure 1 does not logically translate well. <br /><br />I would suggest fixing the logic by labeling the Y axis as "Y plus Annual Money Supply Change (AMSC)". The 45 degree line would than represent two equation equality, as it does now. The equation<br />"X = A + I + G + b*(Y + AMSC)" would make a lot of sense.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-52283572944545182952014-02-27T15:20:43.225-08:002014-02-27T15:20:43.225-08:00This comment has been removed by the author.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-21431955577526270592014-02-27T09:41:08.568-08:002014-02-27T09:41:08.568-08:00The government sets both T (lump-sum transfer) and...The government sets both T (lump-sum transfer) and t (tax rate).<br /><br />And we impose the condition that the budget must be balanced in equilibrium. Which means T=tY.<br /><br />But then the equilibrium level of Y drops out immediately: Y = T/t.<br /><br />Does it make any difference to the model if the unemployed spend their time searching for jobs, digging their gardens, walking the hills, or waiting miserably? As long as they would prefer a job.<br /><br />That's why I said I didn't think that search was playing any role in this model.<br /><br />Here is a 3 year old post where I tried to build a very simple "Roger Farmer type" model. Not sure if I interpreted you correctly. But it is very simple, and does have search, and money, and microfoundations. http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/a-monetarist-search-model-of-keynesian-unemployment.htmlNick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-40403868393152006962014-02-27T08:33:15.607-08:002014-02-27T08:33:15.607-08:00Roger:
I think I agree with your interpretation o...Roger:<br /><br />I think I agree with your interpretation of GT chapter 3. If you start with the labour demand curve for a competitive economy: W/P = MPL, then set W=1 for numeraire, then rearrange stuff, multiply and divide, etc. you get Chapter 3. It is basically the same behavioural equation that generates the textbook SRAS curve in a model that holds W fixed.<br /><br />I will check my old lectures notes tomorrow, to see what I thought David said!<br /><br />I did a post on my interpretation of the 45 degree line: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/the-45-degree-line-means-yminydys.htmlNick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-80648358260381746702014-02-27T08:10:06.901-08:002014-02-27T08:10:06.901-08:00America has never had a wartime situation on its o...America has never had a wartime situation on its own soil. Adam Zielinskihttps://www.blogger.com/profile/17722105565702132869noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-72394416816835535082014-02-26T19:22:03.282-08:002014-02-26T19:22:03.282-08:00I agree with you on #3, and so would Keynes. Regar...I agree with you on #3, and so would Keynes. Regarding #5, survey data show that about 40% of Americans are living paycheck-to-paycheck, with 47 million relying on food stamps. Why not add a bit of heterogeneity here, distinguishing between households that spend all, or almost all, of any small addition to their income, and households whose spending is explained by permanent income?Anonymoushttps://www.blogger.com/profile/11677815746117897839noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-80371114712403029682014-02-26T19:14:29.920-08:002014-02-26T19:14:29.920-08:00By the way, in the US there are only two large-sca...By the way, in the US there are only two large-scale war episodes for which we have GDP data: World War II, which increased military spending as a fraction of GDP by about 40 percentage points; and the Korean war, which led to a increase of about 9 percentage points. All other wars, including Vietnam, led to an increase of 2 percentage points or less, and from a macroeconomic perspective were (relatively) negligible.<br /><br />What happened in these two wars? As I already mentioned, World War II followed a playbook quite consistent with the Keynesian framework: the initial surge in military spending increased private spending as well, but eventually military spending grew high enough to caused crowdout.<br /><br />The Korean war is also friendly to the Keynesian story, although not overwhelmingly so. Despite the large increase in military spending, *every* component of private demand except residential investment increased from the prewar 1950Q2 to the peak defense spending 1953Q2 immediately before the armistice. Real PCE increased at a 3.8% annual rate, which is identical to the 3.8% trend growth rate in real PCE over the 20 years following the start of quarterly national accounts in 1947. The performance of private investment over the period was a little worse, with 1.8% average annual growth - this is due to the constraction in residential investment, which happened to be in a very large boom immediately before the start of the war and was hurt by the Fed-engineered interest rate hike.<br /><br />Furthermore, following the war there was a slowdown or outright contraction in most components of private demand, leading to the first NBER recession of the 50s. From 1953Q2 to 1954Q2, PCE inched up by only 0.8%, well below the rate at which it increased during the war. Durable goods PCE actually fell outright by 1.9%, and private investment fell by a spectacular 10.0%, due to large falls in equipment and inventory investment (which overwhelmed the increases in structures). This came despite a 12.5% decrease in defense spending.<br /><br />Thus the Korean war, while not as dramatically supportive of a Keynesian model, hardly indicates a multiplier well below 1: continued private demand growth from prewar to the war's peak indicates a multiplier of about 1, while the fall in private demand at the end of the war indicates a multiplier of above 1. My guess is that these events reflect the fact that <br /><br />(1) there was relatively little slack at the beginning of the war (the economy was in a healthy rebound from the 1948-1949 recession),<br /><br />(2) the war was primarily financed by an increase in taxes (the budget was roughly balanced throughout the Korean war), dampening or eliminating the traditional Keynesian multiplier, and<br /><br />(3) the Fed continued to raise interest rates throughout the war to restrain private demand, and then failed to cut interest rates quickly enough when the war ended to prevent a brief but nontrivial recession.Just a macroeconomisthttps://www.blogger.com/profile/02754908358694476417noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-25473504308044211812014-02-26T19:11:34.620-08:002014-02-26T19:11:34.620-08:00The macroeconomic response in the US to World War ...The macroeconomic response in the US to World War II is actually much subtler than you indicate here, and (in my view) much more amenable to Keynesian conclusions.<br /><br />Following the Nazi invasion of Western Europe in May 1940, the US began a large-scale military buildup, even though it was not yet officially in the war. This is visible in the national accounts (annual, since quarterly data is not available for this era): there was a 74% increase in real national defense spending from 1939 to 1940, and a spectacular 420% increase in real national defense spending from 1940 to 1941. The overall effect was to push up national defense as a share of GDP from 1.8% in 1939 to 11.9% in 1941, already a very large impulse. (Though, of course, not nearly as large as the increase to come, once the US actually entered the war.)<br /><br />What was the effect on nondefense spending? It did quite well, with no visible crowdout whatsoever. Real personal consumption expenditures had increased by 5.6% from 1938 to 1939, and they increased by 5.2% and 7.1% from 1939 to 1940 and 1940 to 1941, respectively. The 1940 to 1941 interval is the most remarkable: despite the 420% increase in national defense spending, durable goods PCE increased by a robust 15.4%! Indeed, despite the vastly increased allocation to military expeditures, literally every component of private demand increased in both 1940 and 1941 - durable PCE, nondurable PCE, services PCE, nonresidential structures investment, nonresidential equipment, residential investment, you name it. This certainly suggests a multiplier greater than 1.<br /><br />Private consumption and investment only decreased starting in 1942, once the US entered the war and built up military spending even further. This is no surprise: at some point, capacity constraints will be reached, and any further expansion without monetary offset will result in runaway inflation. (Of course, what actually happened during was that inflation during the war was artificially bottled up by price controls and rationing.) Even the most extreme Keynesian believes this - the question is, starting from a given amount of slack, *when* it will happen. And the real GDP data (which I am drawing from NIPA table 1.1.1) seems to indicate quite clearly that this point was only reached *after* a buildup that had already increased defense spending by 10 percentage points of GDP, far larger than any stimulus program ever contemplated in the postwar era.<br /><br />Just a macroeconomisthttps://www.blogger.com/profile/02754908358694476417noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-18016530642824577392014-02-26T10:54:59.544-08:002014-02-26T10:54:59.544-08:00I argue that the "Phillips curve" is pre...I argue that the "Phillips curve" is predominantly a property of the unemployment rate: it tends to rise quickly and fall slowly with an almost predictable slope. Therefore most of the time series data comes from periods of falling unemployment (recovery, economic growth and a general rise in the price level).<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2013/10/the-phillips-curve.html" rel="nofollow">The Phillips Curve</a><br /><br />(There appears to be a stable relationship between inflation and a more complicated function of unemployment and its derivative that masquerades as the Phillips curve because for most of the time series data the derivative < 0.)Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-189046113560167262014-02-26T10:41:52.247-08:002014-02-26T10:41:52.247-08:00Kaleberg
"Did Keynes really think that ... [i...Kaleberg<br />"Did Keynes really think that ... [investment is driven by the animal spirits of investors.]?" Judge for yourself:<br /><br />"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities." GT Ch VII.<br /><br />I think it simply shows ignorance to argue that...<br /><br />"... falling C during WWII shows that G always crowds out C." Did I say that somewhere? Nope...<br /><br />"Also, don't be too quick to dismiss the possibility of a large multiplier. It's one of the reasons high taxation is associated with high economic growth "<br /><br />Interesting point of view. Lets raise taxes.<br /><br /><br /><br /><br />Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-29683996331468125032014-02-26T10:33:17.660-08:002014-02-26T10:33:17.660-08:001. Fair point.
2. No its not- but there is a t...1. Fair point.<br /><br />2. No its not- but there is a transformation that makes it so. Take a look at <a href="http://rogerfarmer.com/NewWeb/PdfFiles/adas.pdf" rel="nofollow"> Figure 1 </a> on page 91.<br /><br />3. I mean "are there forces in play that will retire a classical equilibrium?" My answer: NO.<br /><br />4. A+<br /><br />5. In my view, permanent income, or wealth, is a more important determinate of consumption. Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-25960009426134731052014-02-26T10:28:14.957-08:002014-02-26T10:28:14.957-08:00Matias
"Keynes actually did believe that fle...Matias<br /><br />"Keynes actually did believe that flexible prices would make things worse"<br /><br />Yes he did. And yes, that IS Modigliani speaking. What a lot of damage he did. <br /><br />The post-Keynesians had a point when Joan Robinson referred to the watered down version of Keynesian economics that came from Cambridge Mass as "bastard Keynesianism". Regrettably; no-one from Cambridge England articulated the post-Keynesian view in a language that neoclassicals could accept.Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-90650299543885208462014-02-26T10:22:08.314-08:002014-02-26T10:22:08.314-08:00p.s.
Thanks do much for spending the time to comme...p.s.<br />Thanks do much for spending the time to comment. I always enjoy reading your blog.Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-40742444219604107222014-02-26T10:20:51.517-08:002014-02-26T10:20:51.517-08:00Nick
We have different recollections of David'...Nick<br />We have different recollections of David's lectures. I recall him saying that the 45 degree line IS an aggregate supply curve; we should ask him. In any case; whatever David thinks, in my view the 45 degree line in the income expenditure model IS an aggregate supply curve. Try reading Chapter 3 of thee GT and comparing it with what I say in the piece I linked above.<br /><br />"If we deleted search ... nothing would change"<br /><br />NOT SO!! That is the point of the AD-AS piece. Think of the Beveridge curve as an isoquant of a search technology. We can fill 100 jobs if 1000 search for 200 vacancies or if 200 workers search for 1000 vacancies. Both are equilibria in my model because there are no price signals to guide the search process.<br /><br />"If we allowed households to live longer than one period...."<br />That is what I do in my EJ articles <a href="http://rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf" rel="nofollow"> here </a> and <a href="http://rogerfarmer.com/NewWeb/PdfFiles/EJ_Financial%20Crises.pdf" rel="nofollow"> here </a> and in my book <a href="http://www.amazon.com/Expectations-Employment-Prices-Roger-Farmer/dp/0195397908/ref=sr_1_1?ie=UTF8&s=books&qid=1255040846&sr=1-1" rel="nofollow"> here </a>.<br /><br />"... The only equilibrium is p=infinity".<br />The model described in those papers is a purely real model. No money. The wage is a numeraire. For the monetary version see my piece in the new Phelps Volume <a href="http://rogerfarmer.com/NewWeb/PdfFiles/Farmer_Phelps_Volume_Revision.pdf" rel="nofollow"> here. </a>Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.com