tag:blogger.com,1999:blog-8702840202604739302.post3499140468559593548..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: A Journey in Macroeconomic ThinkingDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-8702840202604739302.post-30205277974658439972021-02-23T07:48:37.677-08:002021-02-23T07:48:37.677-08:00That is a bad answer though. The fact that a simp...That is a bad answer though. The fact that a simplified model gives wrong answers when increasing returns to scale are incorporated is not a reason to ignore them. I discuss that argument and why it is bad here https://themountaingoateconomics.com/2021/01/08/competition-with-increasing-returns-to-scale/<br /><br />Sure, some models incorporate increasing returns to scale. But since we know they exist, change the results of macroeconomic models, and likely are becoming increasingly important the question is why don't all models incorporate them. themountaingoathttps://www.blogger.com/profile/16357561391694619706noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-80235230168250812602021-02-22T21:08:19.666-08:002021-02-22T21:08:19.666-08:00The standard answer to this question is that globa...The standard answer to this question is that global increasing returns at the firms level lead to the counterfactual prediction that a single firm would own all the output in the economy, which is not true. Hence, it's difficult to work mathematically with increasing returns.<br /><br />The other answer is that a bunch of macro models do have increasing returns at the center stage, like Romer (1990). So maybe pick up a textbook on endogenous growth theory and come back to join the discussion afterwards?agylhttps://www.blogger.com/profile/01433607387668818739noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-50495929388191898962021-02-22T17:30:01.164-08:002021-02-22T17:30:01.164-08:00Maybe related, M1 has exploded in Japan, especiall...Maybe related, M1 has exploded in Japan, especially deposits. The Japanese already keep enormous amounts of cash in circulation, something near the equivalent of $9000.<br /><br />Perhaps, as a practical matter, governments must migrate to money-financed fiscal programs.<br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-85781692399023853012021-02-22T09:52:24.403-08:002021-02-22T09:52:24.403-08:00Thought provoking as usual, but perhaps not quite ...Thought provoking as usual, but perhaps not quite as ecumenical as it might have been - it is a huge area to wander about in.<br /><br />"Believe those who are seeking the truth. Doubt those who find it."<br /><br />Gide might have been on to something. If he was then you are left wondering whether the search for truth is a waste of time, particularly as it might relate to macroeconomics.<br /><br />Firstly, re the 1970s stagflation you mention. It seems to me the behaviour of the economy in the west is easily explainable - no grand theories required (Lucas made much of it in trying to bury Keynesianism). The economies in the west suffered two shocks. There was the oil price supply side shock which caused the hyperinflation and then there was also a demand side shock which caused the massive transfer of income from the west to oil producing economies which resulted in stagnation in the west.<br /><br />The mystery of the missing inflation, even in the face of extensive and prolonged QE, of the last twenty years is also easily explainable, I believe. The supply side - the globalization of the last 40 years has resulted in the dislocation of labour and goods markets in the west. Cheap goods based on cheap, pliable labour coming firstly from Japan, then south east Asia and eastern Europe after the collapse of the Soviet Union and now China have flooded western markets. The demand side - secular mal-distribution of income and wealth over the last 50 years has destroyed the purchasing power of the less well off. The combination of QE and this mal-distribution of income have diverted the inflationary forces resulting in the asset bubbles of the last decade.<br /><br />I am re reading Big Ideas In Macroeconomics by Athreya. Early on in the book Athreya writes of his extensive training in microeconomics and in the next breath mentions macroeconomics as if somehow the two should be/can be related. His book is an apologetic for the 40 wasted years of the New Classical/Neoclassical diversion in macroeconomics. <br /><br />Microeconomics (i.e. essentially New Classical/Neoclassical economics)is a theory of optimal resource allocation under constraint (given income and full employment of resources)driven by relative prices. How can it explain sub full employment of resources output?<br /><br />On the other hand, the Keynesian consideration of the level of spending (income) easily accounts for sub full employment output.<br /><br />I believe the two approaches can be reconciled and synthesized but not in the manner currently conceived.<br /><br />Henry Rech<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-6764674702649365562021-02-22T08:03:25.178-08:002021-02-22T08:03:25.178-08:00Thank you for this insightful article. Lots to unp...Thank you for this insightful article. Lots to unpack here and I am sure I will be spending much time reading all of this. One thing that I've always struggled with is the equivalent treatment given to "overheating" and "inflation". Per my understanding, inflation is broad-based and persistent, i.e. it requires a positive feedback loop. Perhaps in the 60s and 70s, the feedback loop was negotiated wage contracts through unions. Fiscal stimulus, even if assumed to be greater than output gap like now, does not in my mind trigger a feedback loop. I mean, I cannot intuitively understand why people and businesses would anticipate prices to go up year on year on year at a higher or accelerated pace than before. Especially now. Right now, we are definitely going through both a demand and supply shock and are unclear about which dominates. Once we approach herd immunity, the most logical course seems to me to be that supply lags demand. For businesses hardest hit by the pandemic, it makes sense to wait for signs of demand to pick up before increasing supply to pre-covid levels and let prices go up, also because the earliest to demand travel/hospitality services upon vaccination will also be the ones most willing to pay a premium for it. How sharp the price increases are depends on how sharp the demand pick up is. But ultimately they will equilibrate at a permanently higher level at best and in the process, push up wages in certain sectors at best. That still is only temporary overheating and not inflation. Anonymoushttps://www.blogger.com/profile/06416795773243600653noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-37330222407594578672021-02-22T06:33:45.054-08:002021-02-22T06:33:45.054-08:00There is another way to find out of course! Read ...There is another way to find out of course! Read what other people have done. There is a lot of interesting work in this area already. Unfortunately though none of it appears to really have led to much change in the field: my impression is that most of it has largely been ignored. It would be helpful to know the reasons why to ensure that any work I do won't be ignored for similar reasons. It is also difficult to engage in research on your own without having anyone to run ideas by. Currently I think that increasing returns means that intertemporal maximization and representative agent paradigms don't really make sense, but it is difficult to advance further on my own.<br /><br />So I will continue to work on Post-Keynesian economics and learning about increasing returns will remain a hobby.themountaingoathttps://www.blogger.com/profile/16357561391694619706noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-1047504090060235232021-02-22T05:51:08.797-08:002021-02-22T05:51:08.797-08:00Sorry, mistakable: I meant a meaningful link betwe...Sorry, mistakable: I meant a meaningful link between concrete technological innovations (and regress?) and ups & downs of GDP.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-21219110260773566982021-02-22T05:39:51.514-08:002021-02-22T05:39:51.514-08:00I have a question regarding the idea that technolo...I have a question regarding the idea that technological innovations are the (main) cause of economic fluctuations: suppose you have a model, in which the production function of individual firms is fixed (i.e. technological innovations in the strict sense are absent by design), and fluctuations are caused for example by investment spending of firms (e.g. multiplier–accelerator model). A "statistical office" in the model calculates time series for economic variables according to the system of national accounts ("capital stock" for expample is the monetary value of all available capital goods, regardless of their utilization). Suppose further that the cyclical moments of the model generated SNA time series mimic their real world counterparts quite well - including the moments of total factor productivity. We can tell than the latter are nothing more than statistical artifacts. <br />Of course this exercise would demonstrate only the principal possibility that tfp fluctuations are just statistical artifacts, but as nobody has seen them in real life so far (in a meaningful statistical sense)...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-17840459313767693562021-02-21T20:45:26.663-08:002021-02-21T20:45:26.663-08:00A place to start, I think, is to ask how IRS matte...A place to start, I think, is to ask how IRS matters for a specific question you'd like to address. A good way to do this, I think, is to take an existing model with CRS and study its results and how they square with the data. Then, rework the model using IRS. What changes? Does the model fit the data better? Are the policy implications different? Etc. There's only one way to find out -- do it!<br /><br />P.S. I did not include IRS because I didn't think of it. I also didn't include expectation formation, and many other things. Will try next time! Thx.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-70798400201958492072021-02-21T20:41:46.017-08:002021-02-21T20:41:46.017-08:00Hi Ben, thanks. I'm working on something that ...Hi Ben, thanks. I'm working on something that might help answer that question. My hypothesis is that economists did not forecast the large secular increase in the demand for U.S. Treasury securities. Keep a look out! DavidDavid Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-11826007986029294492021-02-21T18:28:38.507-08:002021-02-21T18:28:38.507-08:00I am curious as to why you don't mention incre...I am curious as to why you don't mention increasing returns to scale as a possible avenue to reforming macroeconomics in your post. Increasing returns to scale is a phenomena that we know exists for many firms and that we know changes macroeconomic results in important ways (see for example https://www.jstor.org/stable/2078025?seq=1#metadata_info_tab_contents). Given those factors I would think that incorporating increasing returns into macroeconomic models ought to be standard, yet doing so does not seem to be seen as important by many in the field. The possible role of increasing returns to scale in providing microfoundations for "real" keynesian results and for understanding the current lack of inflation seems to barely be discussed.<br /><br />I wonder sometimes if the lack of attention to increasing returns in economics education is responsible for their neglect. Econ 101 and graduate microeconomics focus largely on convex production sets, so are perhaps less prepared to take increasing returns to scale seriously than they incorporated into economics education more often. For example, I think analysis such as what I do in this(https://themountaingoateconomics.com/2020/11/19/the-math-behind-supply-curves/) post, where I make clear that firms with decreasing costs are demand limited, would perhaps go a long way towards getting increasing returns taken seriously in macro.themountaingoathttps://www.blogger.com/profile/16357561391694619706noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-24391980315790045022021-02-21T16:02:33.511-08:002021-02-21T16:02:33.511-08:00Excellent review. Even I could get it.
I would li...Excellent review. Even I could get it.<br /><br />I would like to see a post on how highly intelligent observers of the economic scene, such as Paul Volcker or Martin Feldstein were wrong for 40 years in a row on the direction of interest rates and inflation. <br /><br />Then consider that before the pandemic, Japan had 150 job openings for every job seeker yet was very close to deflation a situation that has persisted for a couple decades.<br /><br />If we are generating macroeconomic principles, do they apply only in the US or globally?Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.com