RBNZ report for savings working group
Is very good. Read it.
I don’t agree with 100% of it, but I agree with the vast vast majority of it.
Archive for year: 2010
Psychics, data, theory, and economics
When Dr Bem’s study on psi was released, I chose to focus my discussion on how the study – if perfect and accepted – would give us a test of determinism vs free will. When I initially saw the study, two things entered my head – and were filled up during a coffee meeting with a political scientist friend of mine:
- This acts as a test of determinism vs free will,
- It is MORE likely to lead to a realisation, and decision around, the weakness of statistical methods then to achieve any sort of belief about psi. This is a good thing, as it is important to understand causal mechanisms when using data.
I was surprised, pleasantly, at the pace that psychologists actually moved onto that second point – see here (ht Marginal Revolution).
Now this is also a major point for economics, as has been pointed out by Chris Blattman and Alex Tabarrok (ht Offsetting Behaviour). As discussed in this comment on the post on neo-classical economics, economists do recognise many of these limitations – which is why we often seem “pigheadedly” obsessed with theory.
There are ebbs and flows of course, when Chris states:
I don’t know if I believe a single cross-national result any longer.
I have to agree.
However, the fact that economists don’t feel like they can interpret the data cleanly enough, combined with the fact that the economic method is so broad that we can often explain the same set of data with entirely different models, with entirely different policy conclusions, is what makes it interesting 😉
Why QE will (and should) lead to inflation past the Fed target
I think QE was necessary, and I think the Fed has done a good job implementing it. But one thing we have to be honest about is that it WILL, if it is done right, lead to inflation past the target at some point in the future.
There are many ways we can view the process of the Fed expanding its balance sheet and buying up a mix of Treasury and risky private debt:
- They are increasing the money stock directly, which if it gets spent will increase the money supply stimulating the economy,
- They are buying up long term debt, pushing down longer term interest rates directly,
- They are taking on risk at a point in time where people may be too “risk averse”.
All these considerations have their pro’s and con’s – but none of them directly imply that the Bank will deviate from its inflation target in the future. Instead it is a fourth, and arguably the most important, part of QE policies that ensures they will do so – their use of the Fed balance sheet to influence their own future behaviour, making the “optimal path” for monetary policy time consistent.
Economists and Facebook events
Yes, this is how a general economist analyses social situations:
An invitation is an option that can be exercised at any time before the date of the party. The people who did not respond immediately are waiting to decide whether to exercise the option. If she’s a true friend then this is because she has a potential conflict that would prevent her attending. … When she is sure there is no conflict she will say yes.
The other people are hoping for an excuse not to come. Once they get a better offer, manage to schedule a conflicting business trip, or otherwise commit themselves, they will send their regrets.
…
Those who want to come but haven’t gotten out of their conflict give up and send their regrets. Those who hoped to get out of it but failed to come up with a believable excuse give up and accept. … So, a simple measure of how much your friends like you is the proportion of acceptances that arrive in the final days.
It isn’t that economists are ignorant of social realities – we might just spend a little too much time analysing what is going on, a reality that is obvious when you see us uncomfortably twitching around 😉
I would note that, in the case of Facebook, the situation is a little different now. Previously you would see invites on the home page – so you had to make a conscious decision everytime you logged in (so about 24 times a day). However, now you receive an email and don’t hear about it again until close to the date – as I get so much spam I don’t often notice events until close to the date.
So I’m sure I’ve got a valid excuse for not accepting until the last minute 😉
Update: Eric Crampton has a great example of this.
Aimless call of the day
From Bloomberg:
U.S. Representative Mike Pence, chairman of the House Republican Conference, said he plans to introduce a bill tomorrow that would end the Federal Reserve’s dual mandate, forcing the central bank to focus on inflation.
“It’s time for the Fed to be solely focused on price stability and not the recently announced QE2,” said the 51- year-old lawmaker.
Inflation and inflation expectations are below what the Fed considers consistent with it’s mandate to keep price growth stable. As a result, even if the Republicans changed the mandate policy wouldn’t change.
In fact, the whole idea of a “dual mandate” is really just pleasant advertising – as the Fed believes that it can only stabilise economic activity insofar as it ensures that the inflation rate is at trend. In essence, even with a “dual mandate” they continue to respond to demand shocks (and not respond to supply shocks) in a way that is consistent with a “single mandate” to control inflation.