tag:blogger.com,1999:blog-8702840202604739302.post3599793118920811719..comments2022-09-29T22:40:14.740-07:00Comments on MacroMania: Roger Farmer on labor market clearing.David Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-8702840202604739302.post-938628978720576972014-11-16T16:31:20.183-08:002014-11-16T16:31:20.183-08:00The fake cross of AD(p, y, t) and AS (p, y, t) li...The fake cross of AD(p, y, t) and AS (p, y, t) lines is deadly sin, which is widely spread in “theoretical” economics. The fake cross has the following property:<br /><br />3-dimension AD/AS lines do not cross simultaneously in all 2-dimension projection planes (i.e. p-y, p-t, y-t).<br /><br />In temporal logic, we have 8 different logic assertions for describing AD/AS cross <br /> 1. ALL t, ALL p, ALL y AD(p,y,t) = AS(p,y,t)<br /> 2. EXIST t, ALL p, ALL y AD(p,y,t) = AS(p,y,t)<br /> 3. ALL t, ALL p, EXIST y AD(p,y,t) = AS(p,y,t)<br /> …<br /><br />Only the true cross (the first one above) gets redemption. My pet theory is that if you really want to have a true cross, you have to derive it from NIPA/FOF accounting identity since it requires AD-AS function equivalence (congruence). We cannot axiomatically assume it as equivalent function values by using a math sign “=”.<br /><br />As a reminder, the following AS/AD lines have fake crosses if thinking them in 3-dimension space-time in the economy.<br />AS(p,y,t) = MV, <br />AD(p,y,t) = PQ<br /><br />AS(p,y,t) = Nominal Interest Rate<br />AD(p,y,t) = Real interest rate + inflation rate<br />….<br />pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-36765846657147443692014-11-16T16:18:40.944-08:002014-11-16T16:18:40.944-08:00Thanks, Alchian (1969) lists three ways to adjust ...Thanks, Alchian (1969) lists three ways to adjust to unanticipated demand fluctuations:<br />• output adjustments;<br />• wage and price adjustments; and<br />• Inventories and queues (including reservations).<br /><br />Alchian (1969) suggests that there is no reason for wage and price changes to be used regardless of the relative cost of these other options:<br />• The cost of output adjustment stems from the fact that marginal costs rise with output;<br />• The cost of price adjustment arises because uncertain prices and wages induce costly search by buyers and sellers seeking the best offer; and<br />• The third method of adjustment has holding and queuing costs.<br /><br />There is a tendency for unpredicted price and wage changes to induce costly additional search. Long-term contracts including implicit contracts arise to share risks and curb opportunism over sunken investments in relationship-specific capital.<br /><br />These factors lead to queues, unemployment, spare capacity, layoffs, shortages, inventories and non-price rationing in conjunction with wage stability.<br /><br />Alchian and Woodward’s 1987 ‘Reflections on a theory of the firm’ says:<br /><br />“… the notion of a quickly equilibrating market price is baffling save in a very few markets.<br /><br />Imagine an employer and an employee. Will they renegotiate price every hour, or with every perceived change in circumstances? If the employee is a waiter in a restaurant, would the waiter’s wage be renegotiated with every new customer? Would it be renegotiated to zero when no customers are present, and then back to a high level that would extract the entire customer value when a queue appears?<br /><br />… But what is the right interval for renegotiation or change in price? The usual answer ‘as soon as demand or supply changes’ is uninformative.”<br /><br />Alchian and Woodward then go on to a long discussion of the role of protecting composite quasi-rents from dependent resources as the decider of the timing of wage and price revisions.<br /><br />Alchian and Woodward explain unemployment as a side-effect of the purpose of wage and price rigidity, which is the prevention of hold-ups over dependent assets.<br /><br />They note that unemployment cannot be understood until an adequate theory of the firm explains the type of contracts the members of a firm make with one another.<br /><br />Benjamin Klein’s theory of rigid wages in American Economic Review in 1984 is one of the few that explored rigid wages as an industrial organisation issue. Klein treated rigid wages as a response to opportunism and hold-up problems over specialised assets and are forms of exclusive dealership or take-or-pay contracts.<br /><br />Jim Rosehttps://www.blogger.com/profile/02233668500637892711noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-72319190630442463322014-11-16T07:59:54.377-08:002014-11-16T07:59:54.377-08:00The paper you refer to can be found here:
http://...The paper you refer to can be found here: <br />http://casee.asu.edu/upload/Prescott/1974-Lucas-JET-Equilibrium%20Search%20and%20Unemployment.pdfDavid Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-2426694781042559772014-11-15T22:54:07.949-08:002014-11-15T22:54:07.949-08:00Bob,
This is the way labour markets work: v(s, y,...Bob, <br />This is the way labour markets work: v(s, y, λ) max{λ, R(s, y) min[ λ, β ∫ v(s′, y, λ) f(s′, s)ds′]}. <br /><br />Ed<br /><br />Robert Lucas went on to explain in his professional memoir about this exchange in the early 1970s that:<br /><br />"we had agreed on notation: s stood for the state of product demand at a particular location, y stood for the number of workers who were already at that location, R(s, y) was the marginal product of labour implied by these two numbers, and v(s, y) stood for the present value of earnings that one of these workers could obtain if he made his decision whether to stay at this location or leave optimally.<br /><br />Other features of the equation were as novel to me as they are (I imagine) to you…a single parameter—Ed’s λ—stood for two different things: the present value of earnings that all searching workers would have to expect in order to leave a location and the present value that a particular location would need to offer to receive new arrivals…If I had to pick a single day to represent what I like about a life of research, it would be this one.<br /><br />Ed’s note captures exactly why I think we value mathematical modelling: it is a method to help us get to new levels of understanding the ways things work."Jim Rosehttps://www.blogger.com/profile/02233668500637892711noreply@blogger.com