tag:blogger.com,1999:blog-17232051.post3753932189182543700..comments2017-04-24T14:38:59.196-04:00Comments on Noahpinion: The equation at the core of modern macroNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger89125tag:blogger.com,1999:blog-17232051.post-14136870500275462822017-04-11T21:50:38.650-04:002017-04-11T21:50:38.650-04:00Oho. I've got another idea. Suppose there...Oho. I've got another idea. Suppose there's reversed causality?<br /><br />When people are consuming more, they are more desparate to get money. They borrow that money. Therefore the banks can chargr higher interest rates. So interest rates rise when people consume more.<br /><br />This makes the (correct) assumption that most of the population is in debt, and that (as the MMTers have shown) loans precede deposits.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43305464214507164892015-07-01T15:03:17.425-04:002015-07-01T15:03:17.425-04:00The equilibrium assumption, which is blatantly wro...The equilibrium assumption, which is blatantly wrong, is indeed the deepest problem. Nobody believes in equilibrium. Everybody's expecting change around the corner... though people have wildly different predictions.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-57258560879569205012015-07-01T14:58:45.828-04:002015-07-01T14:58:45.828-04:00How about trying a wealth-effect model then?
If i...How about trying a wealth-effect model then?<br /><br />If interest rates are high, people figure they'll have more money later (thanks to the interest), so they spend more now.<br /><br />This fits the data. So use this as the basis of a macro model. See what you get.<br /><br />Noah, this is serious advice; if you get a decent model which makes good predictions out of it, you could become permanently famous.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-50039968264156242002014-02-18T05:53:13.265-05:002014-02-18T05:53:13.265-05:00"Could it be that the interest rate and the t..."Could it be that the interest rate and the time preference both measure the same thing"<br /><br />Yup. One's a preference; the other's a price. Find where the slopes are the same, and there's your solution. Jonas Feithttp://www.blogger.com/profile/13487448481194494386noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-85942271482515512272014-02-04T06:39:42.884-05:002014-02-04T06:39:42.884-05:00As a follow-up to my comment above, I attempted to...As a follow-up to my comment above, I attempted to extract time preference from widely-available monetary aggregates such as M2, V, Monetary Base, Excess Reserves and Inflation. Using IS/LM framework, I derive a data set going back 55 years which exhibits strong negative correlation to real consumption growth over the period. Any thoughts, critique will be much appreciated... Data set here http://tinyurl.com/qzp4h3fH. Publiushttp://www.blogger.com/profile/16019756383734059819noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62043132467349743932014-01-31T09:56:46.331-05:002014-01-31T09:56:46.331-05:00I think you should look into ABM (Agent Base Model...I think you should look into ABM (Agent Base Models) with heuristic decisions. Much of whats observed here could simply be that people use simple heuristic of looking at their bank account and when there is too much money in the account people transfer more money into a savings account. If that is true then the results will differ when real interest rate r is low or high for a long enough time. In other words, the euler equation might still hold if you use a rolling year average instead of a yearly average in the equation.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-54816694177374376372014-01-26T12:57:22.202-05:002014-01-26T12:57:22.202-05:00"Some papers are accepted for publication; so..."Some papers are accepted for publication; some are rejected. Some people get good jobs; some get bad jobs."<br /><br />If you consider peer review and job market performance as scientific benchmark iit is hardly surprising that you get virtually everything wrong.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-86702667303765340532014-01-24T23:14:49.464-05:002014-01-24T23:14:49.464-05:00Moll already has the solution for the comovement.Moll already has the solution for the comovement.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-66749082658484071552014-01-22T05:13:16.723-05:002014-01-22T05:13:16.723-05:00Actually, I tried to answer very similar questions...Actually, I tried to answer very similar questions in my thesis, see Essays 3 and 4 (http://www.diva-portal.org/smash/get/diva2:206706/FULLTEXT01.pdf). Rgds, MÃ¥rtenAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29418845478278314862014-01-21T21:38:22.904-05:002014-01-21T21:38:22.904-05:00Okay, I haven't read the paper, or thought abo...Okay, I haven't read the paper, or thought about this a whole lot, but here's my off-the-cuff guess.<br /><br />I think it's critical to take into account the factor or factors that cause interest rates to change. When a shock affects interest rates, that shock simultaneously affects expectations for growth, which causes a complete shift in the consumption path. The Euler equation describes the ongoing expected rate of change in consumption, but it doesn't capture the shift. And the shift probably goes in the opposite direction of the interest rate change.<br /><br />Think of it in terms of asset values: if interest rates fall, assets like gold go up in price, but their expected rate of change going forward declines. So gold prices go up when interest rates fall, even though Hotelling's Euler equation says nonrenewable resource prices go up at the rate of interest, and thus imply smaller price increases when interest rates are smaller.<br /><br />There's a good chance I'm wrong about this, but given the clear negative correlation, I'm wondering if this is just a conceptual mistake.<br /><br /><br />Someone please correct me if I'm wrongMichael Robertshttp://www.blogger.com/profile/16455035518968529794noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44045006935443256242014-01-20T15:55:51.989-05:002014-01-20T15:55:51.989-05:00Isn't it all a bit circular? Not the Euler equ...Isn't it all a bit circular? Not the Euler equation, obviously, but the relationship between interest rates, saving and consumption? <br /><br />I was going to make a dumb remark about inflation, but r is the real interest rate, obvs. <br /><br />Also, an observation about safe assets, since r is assumed to be the rate of interest on safe assets. The interest rate on safe assets tends to fall in recessions as people move out of risky assets into safe ones. Consumption also tends to fall in recessions because people have less money, duh. And vice versa also applies for both. Is there even correlation, let alone causation? You tell me. Frances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87419886449990930862014-01-20T10:36:29.459-05:002014-01-20T10:36:29.459-05:00Nope. Different one!Nope. Different one!Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19027312801925749222014-01-20T08:03:50.664-05:002014-01-20T08:03:50.664-05:00Dumb question: is the Euler Equation the same as t...Dumb question: is the Euler Equation the same as the Euler-Lagrange equation from mechanics? You know the first order condition for a path to be make the action integral an extremum?<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-39331507930758392962014-01-19T20:21:49.341-05:002014-01-19T20:21:49.341-05:00Also used for asset pricing, and that has worked s...Also used for asset pricing, and that has worked so well in finance. Yes indeed, a professor could make a good income from that work.lewhttp://www.blogger.com/profile/14382538340412538887noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-71936878611340704192014-01-19T20:20:11.300-05:002014-01-19T20:20:11.300-05:00So Euler equations don't fit facts for fundame...So Euler equations don't fit facts for fundamental reasons, the models based on them don't work so people don't use them outside of economics departments, but professors go on working on the models because they can't think of anything better?<br /><br />Wow. I think economics could explain that, if they tried.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19334168454142698762014-01-17T11:10:32.273-05:002014-01-17T11:10:32.273-05:00Just read the paper. They assume the IES is 2. Plu...Just read the paper. They assume the IES is 2. Plug in -2 and you'd probably get a pretty much perfect fit.<br /><br />"In other words, the Euler Equation says that if interest rates are high, you put off consumption more. That makes sense, right? Money markets basically pay you not to consume today. The more they pay you, the more you should keep your money in the money market and wait to consume until tomorrow. But what Canzoneri et al. show is that this is not how people behave. The times when interest rates are high are times when people tend to be consuming more, not less."<br />Seriously Noah, you must have heard of income and substitution effects? What you describe just means that the income effect dominates the substitution effect. It does not in any way mean that the Euler equation does not hold.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-61734015155027915882014-01-17T09:03:37.651-05:002014-01-17T09:03:37.651-05:00My two cents: Could it be that the interest rate a...My two cents: Could it be that the interest rate and the time preference both measure the same thing, namely the difference between the marginal utility of consumption today and that of future consumption? Accordingly, current consumption may be correlated to the difference between those two measures rather than the absolute value of interest rates. If interest rates are higher than time preference, consumption will decline. If interest rates are lower than time preference, consumption will increase. <br /><br />Also, interest rates may be a lagging measure since they are determined in the market for borrowing and savings and also are heavily influenced by the Fed. On the other hand, people have a real-time sense of whether they will be poorer or richer in the future, which ultimately determines their time preference. Basically, interest rates always play catch-up to the time preference. Furthermore, in periods such as the last 4 years, when people expect to be poorer in the future, meaning they have a negative time preference (in plain English, future consumption has higher marginal utility than current consumption), interest rates can never quite catch up because of the lower zero bound. In effect, you have sustained conditions of depressed consumption and interest rates new zero.H. Publiushttp://www.blogger.com/profile/16019756383734059819noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29393539487361007102014-01-16T15:51:38.783-05:002014-01-16T15:51:38.783-05:00Yes, there is plenty of this stuff going on, just ...Yes, there is plenty of this stuff going on, just look at Anthony Smith at Yale or Victor Rios-Rull at Minnesota. The fact that Noah, and the rest of the nitwit commenters on this blog, don't know what is actually going on in macroeconomics is an indictment of them, not us.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24320471692828002372014-01-16T13:44:28.594-05:002014-01-16T13:44:28.594-05:00Thought you would like this. Causality in reverse...Thought you would like this. Causality in reverse.Lordnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-81553593044049657152014-01-16T09:41:45.045-05:002014-01-16T09:41:45.045-05:00Heh, I didn't really read thoroughly enough to...Heh, I didn't really read thoroughly enough to catch the word "real", but then I also think that the majority of economically untrained people neglect the difference between nominal and real values. And I think that there's a very strong anti-deflationary bias in the public and private financial sectors. And each increase in inflation is countered by an even stronger increase in interest rates.Alexander Sebastian Schulzhttp://www.blogger.com/profile/15135338616598357444noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72377721261731420992014-01-16T09:07:55.293-05:002014-01-16T09:07:55.293-05:00The interest rate the EE would predict depends cri...The interest rate the EE would predict depends critically on the intertemporal elasticity of substitution. Essentially you can generate every kind of correlation between the observed and predicted parameter with different values for that elasticity. I only had a quick glimpse at the paper, but what they seem to be doing is just assume that this elasticity takes the value 2, and then the EE does not fit. But that doesn't mean that the equation is wrong but just their parameter.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-11713077653432701872014-01-16T07:13:21.939-05:002014-01-16T07:13:21.939-05:00I did.
It's been a long week, man.
I'm n...I did.<br /><br />It's been a long week, man.<br /><br />I'm not an idiot. Really.Squarely Rootedhttp://squarelyrooted.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-90324938168862197132014-01-16T04:52:40.122-05:002014-01-16T04:52:40.122-05:00"its exogenous with high expectations of futu..."its exogenous with high expectations of future growth."<br /><br />I think you mean ENDogenousreasonhttp://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-6499552308178029192014-01-15T20:43:48.901-05:002014-01-15T20:43:48.901-05:00Perhaps the rate at which people adjust their expe...Perhaps the rate at which people adjust their expectations about future consumption also increases - i.e. their "error correction" ramps up over time as extra growth and income comes down the pipeline, like 2003-2007 for example, and even when the extra growth and income disappears, it takes a break in the system to dampen down those expectations. Since higher interest rates are most likely to occur when growth and income have ramped up for a number of years, this might lead to a "negative" co-efficient for the interest rate effect. In essence people over extrapolating, and increasingly so over time.<br /><br />Warning: I am not an economist ;-D<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40268211195023703142014-01-15T20:29:19.597-05:002014-01-15T20:29:19.597-05:00It actually gets better than that. You can easily ...It actually gets better than that. You can easily show that for many models in finance the wrong models (with the explicitly wrong assumptions) outperform the true models (with exactly right assumptions). It's all a function of how small your samples are and how hard it is to filter the noise away. Complex models with lots of structure overfit data sets generated from the very models! Simpler but wildly wrong models are less susceptible to noise and vastly outperform the trues ones. Beware of realistic models. The noise is waiting for you.Krzyshttp://www.blogger.com/profile/15794655390770135247noreply@blogger.com