Economics Debates of Note

Why do we use core inflation

2008-08-28T04:47:00.000-07:00

There is a lot of confusion over the Fed's use of core inflation as part of its policy making process. One reason for confusion is that we using a single measure to summarize three different definitions of the term "core inflation" based upon how it is used...more>>

Recession indicators

2008-08-24T17:01:00.000-07:00

Many people may not care whether our current situation meets the formal definition of a recession, but as I've explained previously, you should. Here's a summary of how I see the economy at the moment...more>>

The teaching/research trade-off --- never believed it!

2008-08-12T09:34:00.000-07:00

Here is a discussion among 4 economists of the teaching/research trade-off....more>>

A Top Economist Writes

2008-08-07T16:45:00.000-07:00

It is the nature of journalism, even pieces written by top economists, for the pithy remark to take the place of accuracy or meaning. Here are three examples from an article in The Guardian...more>>

"Re-thinking That ‘70's Inflation Show"

2008-06-16T17:54:00.000-07:00

Thomas Palley says "if the union price - wage spiral story of inflation is correct (which it is), Friedman's natural rate theory is wrong. My comments, along with supporting graphs, are at the end:...more>>

Stolper-Samuelson for the real world

2008-06-16T17:47:00.000-07:00

The Stolper-Samuelson theorem is a remarkable theorem: it says that in a world with two goods and two factors of production, where specialization remains incomplete (plus a few more technical assumptions), one of the two factors--the one that is "scarce"--must end up worse off as a result of opening up to international trade. Not in relative terms, but in absolute terms. But the theorem is also quite limited in its applicability. It applies only to a case with two goods and two factors, and so its real world relevance is always in question...more>>

Absolutely breathtaking

2008-06-03T06:43:00.000-07:00

Brad DeLong is a fine economic historian, but he is also an exceptionally partisan blogger, and today it shows with a fury. DeLong attacks Harvard economist and former Bush and Romney advisor Greg Mankiw. First, Mankiw in the New York Times....more>>

Menu Costs and Phillips Curves: The CalvoPlus Model and Intermediate Inputs

2008-05-23T09:06:00.001-07:00

Awhile back, I posted a summary of a paper by Golosov and Lucas. The paper is important because it raises questions about the ability of New Keynesian models to explain fluctuations in real output...more>>

Should Policymakers Try to Stabilize the Economy?

2008-05-11T07:57:00.000-07:00

The other issue concerns the practical problems with intervention. Since the "creative destruction" idea gets plenty of ink, and since I don't agree with it, let me offer a few thoughts on some of the difficulties policymakers face in trying to stabilize output and employment...more>>

JAMES K GALBRAITH VS. PAUL KRUGMAN

2008-05-10T08:55:00.000-07:00

I don't accept that much of use can be learned about policy in this way. When the world deviates from the principles, as it usually does, the simple lessons go astray. This is not a complaint against math. It is a complaint against indiscriminate application of the deductive method, sometimes called the Ricardian vice, to problems of human action. Mine is an old gripe against much of what professional economists do; not against science but against scientism, against the pretense of science. To combat it, I spend my research time wrestling with real-world data, and I spend much of my writing time warring against the policy ideas of aggressive, ahistorical deductivists....more>>

Money Debates

2008-05-09T19:31:00.000-07:00

Does money matter? The answer depends on who's talking. Suffice to say, however, Milton Friedman's dictum that inflation is always and everywhere a monetary phenomenon is now debatable in the academic community as well as in the board rooms of central banks around the world...more>>

Are Economists Different?

2008-05-04T01:37:00.001-07:00

I've been thinking about economists. We are a different breed, I think, at least in one sense. We see markets everywhere. Thinking of getting married? We see a marriage market where partners rationally look at the costs and benefits of a "partnership" and decide accordingly. It is all very sterile and scientific, nothing more than supply and demand, like always...more>>

Trade plolicy and market power

2008-04-28T16:33:00.000-07:00

A colleague, Bruce Blonigen, says we should pay more attention to the anti-trust implications of trade policy, something that is almost always ignored in trade policy discussions:...more>>

Monetary versus Fiscal Policy

2008-01-16T07:17:00.000-08:00

This is Axel Leijonhufvud on "Keynes and the Effectiveness of Monetary Policy." According to this, Keynes held monetary policy in higher regard as a stabilization tool than I thought. However, as noted below:...more>>

Public Goods and Pulic Bads

2007-12-13T05:56:00.000-08:00

"Twentieth-century government was all about public goods. This century will be all about public bads." Here's part of the longer article:...more>>

The Big Divide in Economics

2007-12-12T17:01:00.000-08:00

Greg Mankiw:

How do the right and left differ?, by Greg Mankiw: The conclusion of today's ec 10 lecture: In today's lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary....

Quick reaction: I wouldn't agree with the fourth reason...more>>

Is th Dollar Near the Bottom?

2007-12-11T17:34:00.001-08:00

Last week, I wrote a post examining what the measures of central tendency for the dollar's trajectory were, based upon some standard forecasts. This week, I want to examine more closely whether we should anticipate more depreciation, in real terms, by way of discussing alternative measures of the dollar's value...more>>

Greg Mankiw's Blog: The Elusive Phillips Curve

2007-12-02T18:05:00.000-08:00

Greg Mankiw's Blog: The Elusive Phillips Curve

Dollar weakness "cause" high Oil Price?

2007-11-05T06:14:00.000-08:00

There's an idea floating around that asserts that the high price of oil is -- at least in part -- due to the weak dollar. Does this make sense?...more>>

"Paul Krugman is Right!"

2007-10-30T22:38:00.000-07:00

Wow. Another Paul Krugman post is probably overkill, but I just noticed this paper by Anna Schwartz and Edward Nelson, "The Impact of Milton Friedman on Modern Monetary Economics: Setting the Record Straight on Paul Krugman’s “Who Was Milton Friedman?”" cites this blog in the list of references:...more>>

Once economic, one objective monetary policy.

2007-10-27T19:48:00.000-07:00

Has the conduct of monetary policy become the routine application of a set of core principles, much like the science of treating a dental cavity? The answer is: “not quite”, according to Stefan Gerlach in his guest lecture at the Bank of Mauritius yesterday. But, he adds, the overriding objective of monetary policy should be the fight against inflation. What do economists agree upon and what do they disagree upon as far as monetary policy is concerned?...more>>

Financial perspective on exchange rates

2007-10-23T17:21:00.000-07:00

Foreign exchange is used for cross-border trade in goods and assets, so two weighted exchange rates affect the international adjustment process: the financially-weighted exchange rate index operates via the valuation channel, and trade-weighted index via net exports. The importance of the valuation channel is secularly increasing, in line with the rapid growth in the gross levels of foreign assets and liabilities....more>>

Money supply - A question about credit

2007-10-20T22:15:00.000-07:00

I have received several questions recently about my statement "The problem with using M2 or M3 as a measure of money is that both include credit transactions." (See Is the Fed Deflating? for the source of the question)...more>>

Rule versus Disrection in Monetary Policy

2007-10-19T21:27:00.000-07:00

I had the privilege of attending a conference in St. Louis this week on Monetary Policy under Uncertainty at which I presented a paper on the response of interest rates to changes in the fed funds target. One of the interesting themes that came up in some of the other papers concerned whether the public's interests are best served when monetary policy follows mechanical rules as opposed to responding to events in a discretionary way. Here I report on some of the discussion of this issue from the conference...more>>

The Nobel prize in economics 2007

2007-10-16T09:32:00.000-07:00

The Nobel Prize in Economics goes to Leonid Hurwicz, Eric Maskin, and Roger Myerson...more>>
Why You Should Care About the 2007 Economic Nobel more>> more>>

What is Mechanism Design?

And here>>

Here more>>>

Fiscal Policy and Interest Rates in Australia

2007-10-12T22:29:00.000-07:00

Economics and...: Core Inflation and Price Stability

2007-10-07T20:30:00.000-07:00

Economics and...: Core Inflation and Price Stability

Calculating Inflation: Oil and Food or Guns and Funerals?

2007-10-04T18:36:00.000-07:00

Richard Fisher, president of the Federal Reserve Bank of Dallas, jumped into the debate about excluding food and energy from inflation calculations by discussing in a speech today his bank’s alternative measure for price increases...more>>

Economics and...: What is the core for?

2007-10-01T18:00:00.000-07:00

Economics and...: What is the core for?

and more here>>

Greg Mankiw's Blog: Behavioral Macroeconomics

2007-09-29T21:12:00.000-07:00

Greg Mankiw's Blog: Behavioral Macroeconomics

The Implications of Behavioral Research for the Phillips Curve

2007-09-28T22:56:00.000-07:00

San Francisco Fed President Janet Yellen discusses the use of behaviorally based macroeconomic models incorporating features such as money illusion, rules of thumb, and concern for issues such as fairness and equity to improve the ability of the New Keynesian Phillips curve to explain macroeconomic data:..more>>

Alex Cukierman: The Revolution in Monetary Policymaking Institutions

2007-09-27T06:48:00.000-07:00

What factors explain the movement toward increased central bank independence over the last twenty years?:

The Revolution in Monetary Policymaking Institutions, by Alex Cukierman, Vox EU: Twenty years ago and earlier, most central banks in the world functioned as departments of ministries of finance. They were expected - by law, custom, or both - to utilise their policy instruments to achieve a myriad of objectives, including high levels of growth and employment, provision of funds to government for the financing of public expenditures and addressing balance-of-payments problems.[1] They also were expected to maintain financial and price stability, but the price stability objective was one among several other objectives in the charter of the Bank and had no particular status. In some cases, like Spain and Norway, it did not even appear in the charter.[2] Paralleling this state of affairs, economic theory did not attribute particular importance to central-bank independence and the concept of credibility of monetary policy was in early stages of development. Furthermore, a notable legacy of the Keynesian revolution was the belief that a certain amount of inflation is conducive to economic growth...more>>

The Trade Advantage Argument

2007-09-24T18:01:00.000-07:00

Robert Driskill wrote a good Paper(pdf), and I decided to read it, because of the Thoughts of Dani Rodrik and Arnold Kling. It will inevitably led me into trouble, as I feel I must place my own impress upon the Issue. The confusion of the Issue resides in usage of the Ricardian Two-Good model in the first place. Understand that the Ricardian model is a formalization of an efficiency model which expounds methodology for compressing Production inputs in the Production process, in order to attain a higher rate of Output at less Cost. It works equally as effectively internally as externally, and will carry over into the arena of technological advance theory as well. One does not understand that the Ricardian model will work in the periphery of Trade Advantage, though Most assume that it will work effectively...more>>

The Nation As A Whole Gains, But...

2007-09-23T03:04:00.000-07:00

Dani Rodrik has a great post discussing Robert Driskill's excellent new paper, Deconstructing the Argument for Free Trade. Among many other things, Driskill asks a fundamental question that applies to both trade and immigration:

What does it mean for a change in economic circumstances to be "good for the nation as a whole", even when some members of that nation are hurt by the change?

The textbook economic model proves that...more>>

Economics and...: Keynes (quoted by DeLong) on Liquidationism

2007-09-22T18:38:00.000-07:00

Economics and...: Keynes (quoted by DeLong) on Liquidationism

Price fighter

2007-08-24T23:20:00.000-07:00

What is the perfect rate of inflation? It is the kind of odd question that economists like to ask each other for fun, but which central bankers have to decide for real.

You might think that the answer was, obviously, zero, but nobody has told the central banks. The Bank of England has an inflation target of 2 per cent, the European Central Bank aims to keep inflation below, but close to, 2 per cent, and the Federal Reserve has a “comfort zone” of between 1 and 2 per cent. Japan’s inflation rate is about zero – but when I visited Tokyo in May, one senior official told me: “We envy you your inflation.”...more>>

Greg Mankiw's Blog: Frank on Economics Education

2007-08-13T06:57:00.000-07:00

Greg Mankiw's Blog: Frank on Economics Education

An Overview of Research in Monetary Economics

2007-08-12T01:12:00.000-07:00

The subject matter of monetary economics encompasses a large part of macroeconomics. Most obviously, monetary economics is concerned with the conduct, effects, institutions, and history of monetary policy. But it extends far beyond that. The sources of aggregate fluctuations, the channels through which changes in monetary policy and other developments are transmitted to the macroeconomy, and households' and firms' decisions about consumption, investment, prices, and other variables that are critical to aggregate fluctuations are all important subjects in monetary economics...more>>

Trust and Economic Growth

2007-07-31T10:10:00.001-07:00

Economies in which people trust each other grow at lot faster than ones in which there's lots of mutual suspicion. That's the message of this new paper.
This finding is not new, and it accords with common sense. People who trust each other are more likely to invest in physical or human capital, more likely to engage in market for lemons transactions, more likely to exchange know-how, and more likely to invest in productive activity rather than rent-protection or extraction.
But until now, the link between trust and growth has been difficult to unravel...more>>

Trade Openness and Inflation

2007-07-26T19:38:00.000-07:00

Changes in openness to trade can disrupt the inflation forecasting on which many nations' monetary policies depend. New research suggests an innovative time-series openness measures that addresses some of the shortcomings of existing measures...more>>

Benjamin Friedman, James Galbraith, and Allan Meltzer on the Problems with Inflation Targeting

2007-07-19T07:56:00.000-07:00

The purpose of this is mainly so that I have a searchable archive of this material, I doubt it will be of that much interest generally. It's three statements on monetary policy by Benjamin Friedman, James Galbraith, and Allan Meltzer, and a video of the hearing so the post is quite long...more>>

Greg Mankiw's Blog: The Phillips curve is alive and well...

2007-07-15T01:01:00.000-07:00

Greg Mankiw's Blog: The Phillips curve is alive and well...

Greg Mankiw's Blog: Taxing the Rich

2007-07-15T00:56:00.000-07:00

Greg Mankiw's Blog: Taxing the Rich

Economics and...: Keynesian Fiscal Policy

2007-07-09T03:25:00.000-07:00

Economics and...: Keynesian Fiscal Policy

What can we learn from successful autocracies?

2007-07-04T21:15:00.000-07:00

Autocracies are bad, but are sometimes economically successful. Empirical analysis provides lessons on how to institutionalise good government in a wider context....more>>

How to make global poverty history

2007-06-26T03:24:00.000-07:00

There are two schools of thought on this question--and the chasm that divides them is deep and wide.

One group of people believe the answer lies in spending a whole lot of money on schools, clinics, and new drugs in poor countries. What keeps poor people poor is that--well, they are too poor to help themselves. So the best thing that we can do is increase the resources they have command over.

But then there are those who think that poverty is caused by not inadequate resources--which is after all sort of tautological--but with inadequate opportunities. People do not invest in education or in health, or save enough, because they do not see enough (private) returns to doing so. So the way to get them to climb from poverty is to enhance the incentives that they face to help themselves and their community...more>>

Inflation: Local or Global?

2007-06-26T03:08:00.000-07:00

What does the empirical literature say about the sources of inflation movements in an era of globalization?

In a recent ">paper, Borio and Filardo of the BIS fire an opening shot in the debate over the best way to envisage the inflation process. In line with the view that the world is becoming ever more integrated along a number of dimensions, they conjecture a qualitative change in inflation dynamics. In "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation", they summarize their results thus:...more>>

Greg Mankiw's Blog: The Economics of the Iraq War

2007-06-23T16:39:00.000-07:00

Greg Mankiw's Blog: The Economics of the Iraq War

Oil price shocks, international risk sharing and external adjustment

2007-06-22T17:19:00.000-07:00

Critically, our analysis recognises that oil price changes do not take place in isolation; they are driven by demand and supply shocks, each of which have different effects on the price of oil, the world economy and countries’ external accounts. It is useful to differentiate between three distinct demand and supply shocks in the global market for crude oil:⁵

Shocks to the production of crude oil (“oil supply shocks”);
Shocks to global demand for all industrial commodities including crude oil (“aggregate demand shocks”); and
Oil-market-specific demand shocks such as shocks to the precautionary demand for crude oil driven by shifting expectations about future oil supply shortfalls (“precautionary demand shocks”)...more>>

Comparing Economies

2007-06-20T21:10:00.000-07:00

How to value the size of an economy, or the wealth of its citizents? ...more>>

"Marginal Productivity Theory and the Mainstream"

2007-06-07T23:02:00.000-07:00

Marginal productivity theory gives an explanation for why income is distributed in a particular way. The question is whether it provides an adequate theory for understanding the flow of income to the factors of production, and I think it does provide such a basis. So it helps us to understand why income is distributed as it is, but arguing about whether the result is equitable or not is fruitless since it will depend upon the definition of equity used to evaluate the outcome, and the definition can differ across individuals.

My own view is that we don't need, at least not yet, to discard the standard theoretical model....more>>

How Inflation Lowers Inflation

2007-05-29T02:13:00.000-07:00

As new money is created by the banking system, it enters the price system as the recipients spend it. As the prices of some goods rise, this should be captured in the CPI, right?

Not necesssarily. New money does not impact all prices uniformly. And the CPI does not include all prices, only consumer goods prices, and even then unevenly. If the effect of the new money is mainly felt through financial assets or those consumption goods not included in the CPI, then the CPI will not reflect impact of the new money on prices...more>>

Identity and economics: what are we missing?

2007-05-28T21:21:00.000-07:00

Is identity the missing motivation of economics? UC Berkeley's George Akerlof and University of Maryland's Rachel Kranton certainly think so. In a recent London lecture at the LSE, Akerlof explains how this interest arose:...more>>

Frederic Mishkin: Estimating Potential Output

2007-05-27T02:37:00.000-07:00

This is a nice summary of how economists measure the economy's maximum sustainable level of output...more>>

Ricardo vs Heckscher-Ohlin

2007-04-28T19:08:00.000-07:00

Here is an academic, but also policy-relevant, question. Which model is more useful in thinking through issues in trade policy: the Ricardian model or the Heckscher-Ohlin model?...more>> and more

What Caused the Great Inflation?

2007-04-20T18:20:00.000-07:00

Recently, we've had quite a bit of discussion about the types of models and policies used by monetary and fiscal authorities during the 1960s and 1970s (see the bottom of this post for links to the entire discussion), and the debate that follows between Allan Meltzer and Christina Romer on the causes of the Great Inflation of the 1960s and 1970s discusses these issues in some detail (e.g., see Table 1 for a brief summary of the policy frameworks used in various eras)...more>>>

New estimates of macroeconomic effects of tax changes

2007-04-16T19:11:00.000-07:00

How can one use historical data to estimate the effects of tax changes on GDP? The simple idea of looking at how the two series are correlated obviously won't do, since tax revenues would necessarily rise during an economic boom as an immediate consequence of the fact that, with a given tax schedule, people would owe more taxes if they earn more income. The correlation between tax revenues and GDP would then be telling us the effect of GDP on tax revenue rather than the effect of tax rates on GDP. The common method of calculating cyclically adjusted tax revenue could correct for this, but only partially. For example...more>>

I Trust Bruce Bartlett Understands Crowding-out

2007-04-06T19:49:00.000-07:00

Bruce’s contention that a mix of tight money and easy fiscal policy is good for long-term growth is relevant today as the Federal Reserve increased interest rates as the economy got closer to full employment. But this strikes me as absurd as it appears to be saying lower national savings and higher interest rates somehow encourages growth. Bruce should go revisit the Solow growth model if he believes this...more>>

My Father is Darth Vader

2007-03-28T17:34:00.000-07:00

I believe Alan is terribly wrong-headed about this topic.

Suppose some country had high tariffs that prevented many goods and services from being imported from abroad. Then a new President eliminated the tariffs. Alan would, I believe, applaud the policy move, despite job losses for some workers in previously protected industries.

But the rise in offshoring is much the same...more>>

Some Comments on "Freaks and Geeks"

2007-03-27T18:32:00.000-07:00

In the April 2nd 2007 issue of the New Republic, Noam Scheiber has written a long piece titled "Freaks and Geeks"($$$). All academic economists should read this piece because it raises a host of issues concerning where academic economics is going...more>>

Frederic Mishkin: Inflation Dynamics

2007-03-24T19:07:00.000-07:00

If you are interested in inflation dynamics and recent research suggesting that inflation dynamics have changed, this speech by Federal Reserve governor Frederic Mishkin looks at three important questions:

What is the available evidence on changes in inflation persistence in recent years?
What is the available evidence on changes in the slope of the Phillips curve?
What role do other variables play in the inflation process?...more>>

Trade and Full Employment

2007-03-24T19:02:00.000-07:00

I hadn’t realized that Smith had said anything about full employment being a necessary condition for countries to benefit from trade. Come to think of it, I do not recollect Smith saying anything about employment being ‘full’, ‘partial’ or non-existent. Trade is about consumers, not producers, who may very well be producing domestic goods for local exchange and not goods for foreign trade...more>>

Should Marriage be Subsidized?

2007-03-12T21:23:00.000-07:00

David Cameron, the leader of the Conservative Party, set off a considerable debate in Great Britain on marriage when he recently claimed "Families come in all shapes and sizes and they all need support [because]…married couples stay together longer. Therefore, there is a very strong case for supporting marriage [in the tax system]. Children do better if their mother and father are both there to bring them up"...more>>> and more>>>

Readings on (Mostly) Monetary Theory and Policy

2007-03-12T20:56:00.001-07:00

A benefit of blogging is that you can harvest links for your classes as you look for things to blog about, and then post them as required or additional reading on a class blog or web page. In case anyone finds them useful, here are the additional readings and applications I've posted on the class blog for my Monetary Theory and Policy class so far this quarter (just short of 100 articles). I've been surprised at how many people in the class actually read these (I give short summaries of most of the articles posted as additional reading, so that probably helps encourage people to read more):...more>>

Where do Interest Rate Come from?

2007-02-28T18:22:00.000-08:00

Frank Fetter was the great American Austrian who devoted a fantastic part of his professional life to arguing on behalf of the pure time preference theory of interest. His work is lucid and powerful, and largely would have been forgotten if Murray Rothbard had not assembled this excellent volume of his writings. It supports the Misesian case in every detail, and set it against the productivity theory and other false notions of interest...more>>

Inflation and Unemployment II

2007-02-26T18:48:00.000-08:00

This post from earlier today noted that there is evidence that the relationship between inflation and measures of real activity such as the unemployment rate has weakened in the last twenty-five years. I want to return to this topic because I think two different questions are being mixed up in some of the discussion surrounding this result...more>>

Behavioral Economics and Economies of Scale

2007-02-23T17:41:00.000-08:00

Via Greg Mankiw, we have this from Jane Galt:

....behavioural economics, which the left seems to believe is a magical proof of the benevolence of government intervention, because after all, people are stupid, so they need the government to protect them from themselves. My take is a little subtler than that:
People are often stupid.
Bureaucrats are the same stupid people, with bad incentives...more>>

What is meant by Economic schools of Thought

2007-02-11T16:46:00.000-08:00

Very roughly speaking, each school of thought differs by the set of economic phenomena they wish to explain, the economic methodology used, and the assumptions (either explicit or implicit) used in order to explain those economic phenomena...more>>

Hyperinflation example

2007-02-07T18:25:00.000-08:00

Mankiw: I talked about hyperinflation in my Ec 10 lecture last week. In today's NY Times, we can read about a modern example in Zimbabwe:...more>>>

Must read

2007-01-30T21:51:00.000-08:00

Here is George Akerlof's Presidential Address to the American Economic Association, to be delivered tomorrow, on "The Missing Motivation in Macroeconomics."

Who Was Milton Friedman?

2007-01-30T21:31:00.000-08:00

The New York Review of Books has:

Who Was Milton Friedman? by Paul Krugman

If I can find time later, I'll pull some excerpts. For now, here's how Krugman concludes the much longer essay on Friedman's economics and politics:...more>> and more>>

How economists measure whether you're happy.

2006-12-09T19:46:00.000-08:00

All things considered, are you happy with your life as a whole these days? Yes? Good. But are you sure?

Happiness is a big question both for researchers and for policy wonks these days, so it is slightly discomfiting to reflect that people may not even know the answer to the simple question, "Are you happy?"...more>>

Bumbling, Impractical, Disconnected Economists

2006-12-09T19:41:00.000-08:00

More on how clueless economists are. My comments are in brackets and bold:

How many economists does it take to change a lightbulb?

Two: One to change the bulb and one to assume the existence of a ladder.
Eight: One to screw in the light bulb and seven to hold everything else constant.
None: They are all waiting for an invisible hand...more>> more>>

Stiglitz on Phelps

2006-12-04T20:23:00.000-08:00

Joseph Stiglitz with a very nice description of Edmund Phelps' contributions to macroeconomics, and how some have misinterpreted his work to mean we are powerless to affect the unemployment rate through government policy:...more>>>

Methodological Issues in Economics

2006-12-01T21:30:00.000-08:00

Continuing a recent conversation on methodological issues within economics, this is part of a much longer article "The Philosophy of Economics" from The Stanford Encyclopedia of Philosophy. It was written by Daniel M. Hausman:...more>>

Macroeconomics 101 in two paragraphs

2006-12-01T21:24:00.000-08:00

Not really -- but this Brad DeLong essay contains two paragraphs that do an excellent job of explaining the complex interplay between what John Maynard Keynes and Milton Friedman believed:...more>> more>>

Neoclassical Theory under Fire from the Sciences

2006-10-29T23:29:00.000-08:00

This is Philip Ball, "consultant editor of Nature and the author of Critical Mass," with a criticism of neoclassical theory:...more>>

Once Again, There is Too a Short-Run Phillip's Curve

2006-10-20T21:12:00.000-07:00

One more time, There is Too a Short-Run Phillips Curve. This commentary disagrees with economists who claim there is a permanent inflation-unemployment tradeoff. However, it's been quite a long-time since anyone seriously suggested a permanent tradeoff between inflation and unemployment, particularly since Phelps, Friedman, Lucas and others came up with came up with the expectations augmented short-run Phillips curve to rebut this idea. Thus, the commentary below strikes at a position - a permanent tradeoff between inflation and output - that no economist that I know of holds. It is the nature of the short-run Phillip's curve that is at issue, how long the short-run tradeoff persists, the steepness of the tradeoff, whether hybrid versions of the Phillips curve are needed, etc., and contrary to what is stated in this commentary, the existence of a short-run Phillip's curve is well-accepted. I do agree with the commentary's suggestion that somebody doesn't understand this literature, but I doubt very much that it is Bernanke, Mishkin, and others at the Fed that are the ones missing key pieces of this line of research:...more>>

"Inflation Persistence in an Era of Well-Anchored Inflation Expectations"

2006-10-14T01:50:00.000-07:00

John Williams from the San Francisco Fed asks whether there has been a fundamental shift in the behavior of inflation:...more>>

Globalization and the Phillips Curve

2006-10-04T22:15:00.000-07:00

Last week, I attended the Academic Consultants meeting at the Federal Reserve, where nerdy economics professors like me discussed globalization with Ben Bernanke (an erstwhile nerdy economics professor) and his colleagues. I was assigned to discuss a paper by Larry Ball on whether globalization has fundamentally changed inflation dynamics as described in modern Phillips curve equations. I thought readers of this blog might enjoy reading my discussion...more>>

Neuroeconomics: The Role of the Brain in Economic Decision-Making…or Why We Sometimes Make Stupid Decisions

2006-10-03T09:46:00.000-07:00

I recently purchased tickets for a Jack Johnson concert. I’m a big fan of Jack Johnson and I was excited to get a chance to hear him live. On the night of the concert I hopped on the local train and arrived at the venue with plenty of time to spare. When the attendant asked for my tickets, I reached into my pocket and realized with horror that the tickets were gone. I searched everywhere, but to no avail. When the attendant asked me if I’d like to buy another two tickets I was offended. Why would I purchase another set of tickets? I had already paid for the initial set. I left the concert and rode the train home despondent at not seeing my favorite artist.

Economists would call this an irrational decision...more

Immigration and Productivity

2006-10-01T19:37:00.000-07:00

This is an argument against illegal immigration on the basis that it stifles innovation and technological change by taking away the incentive to lower costs:...more>>

An interesting Economist economic focus column this week. Curve ball: A link between unemployment and inflation is fashionable again

2006-09-29T07:45:00.000-07:00

An interesting Economist economic focus column this week. Curve ball: A link between unemployment and inflation is fashionable again

If haircuts and dress styles can come back into fashion, then so can economic theories. That is why policymakers have recently been debating the implications of the shape of that very 1960s concept, the Phillips curve...more>>

Smith and Marshall and Wealth and Poverty

2006-09-28T08:03:00.000-07:00

Greg Mankiw's recent post on the origins of supply-and-demand analysis -- and his mention of Alfred Marshall's role in the history of making this valuable tool such a central part of economics -- recalled to my mind another interesting feature of Marshall's Principles of Economics. I was going to blog on this other feature when I vaguely remembered doing so earlier. Here's that earlier post, from August 2004, which points out a telling difference in the great Alfred Marshall's perspective on the world compared to the perspective of the great Adam Smith:...more>>

"Ricardo's Difficult Idea"

2006-09-25T23:20:00.000-07:00

The usefulness of mathematical modeling, a subject brought up by Krugman in this commentary, seems to have struck a bit of a chord. So let me follow up with one or two more commentaries from Krugman on this topic. Let's start with this defense of both economic models and Ricardo's theory of comparative advantage (this is fairly long -- Section 4, "The Two Cultures," deals directly with mathematical modeling):..more>>

"The Many Faces of Adam Smith"

2006-09-23T07:43:00.000-07:00

The real Adam Smith was a complex thinker, capable of holding and exploring ideas even when they were in conflict. To understand Smith, Ms. Rothschild says his contributions must be viewed in light of 18th-century institutions...more>>

Economists as Engineers

2006-09-16T23:28:00.000-07:00

Today I was thinking about the fact that I mainly got into economics to understand how the world works, not to do policy or try to use the tools of economics to recommend how to change economic institutions, though economic policy was certainly of interest too. But mostly I just wanted to understand it all, like a kid taking apart a toy to figure out how it works. I was particularly interested in understanding how money functions and what affect changes in the money supply would have on the economy. I have no idea why economics interests me so much, but it does...more>>

The Exchange Rate-Consumer Price Puzzle

2006-09-16T21:03:00.000-07:00

Diego Valderrama, an Economist at the San Francisco Fed, discusses a puzzle. Why are consumer prices so unresponsive to exchange rate movements? Is it transportation costs, non-traded goods, or market power?:...more>>

Has economics grown up?

2006-09-15T10:51:00.000-07:00

Neoclassical economics no longer dominates a mainstream economics as it once did. Is the neoclassical economics research programme breaking down, being supplanted by other research programmes - or are we simply seeing a new maturity in economics?

John Davis considers the issue in the latest Journal of Institutional Economics. His article The turn in economics: neoclassical dominance to mainstream pluralism? (PDF) is available to download. Here is the abstract:...more>>

Phillips Curve

2006-09-09T07:39:00.000-07:00

In Arthur Laffer’s case, it might have been carelessness in the use of words, but the latest attack on the Phillips curve by Larry Kudlow (discussed by Mark Thoma and pgl) is unmistakably either disingenuous or ignorant. (I'd prefer not to use such inflammatory terms, but I just can't think of a nice way to say it.) I single out Larry Kudlow only because his is the most recent example. I’ve heard similar arguments in the past, and I’m never sure whether the people making the argument realize that they are attacking a straw man – a man made completely of straw, that is, with no hope of even finding the Yellow Brick Road. But it’s one or the other: either Larry Kudlow is trying to pull the wool over people’s eyes, or he is somehow unaware of the last 40 years of Phillips curve research...more>>

What is Inflation?

2006-09-09T07:35:00.000-07:00

I’m not sure what combination of carelessness, ignorance, malice, and/or rhetorical convenience causes Arthur Laffer to mischaracterize the Phillips curve, but…maybe I should be nicer, since I actually agree with Laffer’s main point. ..more>>

Measuring Poverty: Income vs Spending

2006-09-04T00:57:00.000-07:00

In today's Washington Post, Nicholas Eberstadt says poverty is mismeasured because the poverty rate is based on annual income. Applying the logic of the permanent income hypothesis, he suggests that consumer spending is a better measure of a family's well-being, and he says that its use would lead to very different conclusions.

Here is the essence of his argument:...more>>

Nash Equilibrium is Not a Theory of Bargaining

2006-08-26T19:35:00.000-07:00

Nash did not resolve the bargaining problem, brilliant as his 1950 paper was and remains. He engineered the outcome of bargaining– not the process of bargaining – into neo-classical equilibrium. It is pure homo economicus (Beinhocker does not appear to have noticed this at all). He has bought right into the notion that Nash demonstrated the pay-offs from co-operation – yes, but only by Nash assuming they were not bargaining at all! He writes:...more>>

Economists and Their Values

2006-08-22T20:46:00.000-07:00

I haven't posted at Environmental Economics for a while, and this actually reverses the flow by posting their stuff here. Oh well. This discusses a disconnect between the public and economists on public policy issues, environmental policy in particular: ...more>>

What market failure does a central bank address?

2006-08-20T23:52:00.000-07:00

And does it succeed? Better then other (private, market-based) alternatives?

This post certainly cannot answer such momentous questions. I would, however, like to use these questions as a focal point for thinking about one of the hot topics on the economics blogs. I think a lesson that comes out of this (are you listening, grad students?) is that monetary policy questions can have very deep roots in fundamental questions about the nature of money and markets....more>>

Money and mental health

2006-08-20T00:40:00.000-07:00

Yes - money can buy mental health. That's the finding in this new paper (pdf):

We offer new evidence by using longitudinal data on a random sample of Britons who receive medium-sized lottery wins of between £1000 and £120,000 (that is, up to approximately U.S. $200,000). When compared to two control groups -- one with no wins and the other with small wins -- these individuals go on eventually to exhibit significantly better psychological health...more>>

Is Paul Krugman a Better Economist Than James Tobin?

2006-08-20T00:27:00.000-07:00

Now, on the more substantive point, again, here's my best guess of how Krugman would respond:

The logic seems to run as follows:

1. Krugman advocates policies that would reduce the income of affluent people.

2. But Krugman is an affluent person.

3. Therefore, Krugman is being dishonest....more>> ...more>> ... more>> ... more>> ...more>>

Greg Mankiw's Blog: Letter from Milton

2006-08-17T23:28:00.000-07:00

Greg Mankiw's Blog: Letter from Milton

Notes on the size of government

2006-08-15T19:10:00.000-07:00

I’m working on a summary of the evidence on economic effects of the size of government. I’ll probably cite the usual suspects such as Barro and DeLong in due course, but I’d be interested in comments, particularly pointing to evidence outside the usual pattern of growth regressions and so on...more>>

Competitiveness

2006-08-09T21:09:00.000-07:00

...We are experiencing another competitiveness panic. These occur every 15 or 20 years. There's an outpouring of worried reports and articles. After Sputnik in 1957 -- the first artificial earth satellite -- we were supposedly doomed to be overtaken by the Soviet Union. In the late 1970s and 1980s, it was Germany and then Japan. Lately, China and India have been the threats. ...

One problem with these debates is that competitiveness is a vague term. What does it mean? If it means keeping the lead in every industry where we once led, we're doomed. ... Similarly, if competitiveness requires the United States to maintain its present share of the world economy, we are also probably doomed. ...more>>