Category: Economics

Books: J. Bradford DeLong: Intermediate Macroeconomics, and Paul Blustein, And the Money Kept Rolling in (and Out)

Real Business Cycles

Stadler, George. “Real Business Cycles,” Journal of Economic Literature, December 1994, 1750-1783.

Long, John B. and Plosser, Charles. “Real Business Cycles,” Journal of Political Economy, 1983, 39-69.

Barsky, Robert and Miron, Jeffrey. “The Seasonal Cycle and the Business Cycle,” Journal of Political Economy, 1989, 503-534.

Prescott-Summers debate, Quarterly Review, Minneapolis Fed., “Theory Ahead of Business Cycle Measurement,” “Some Skeptical Observations on Real Business Cycle Theory,” and “Response to a Skeptic.”

Bils, Mark. “The Cyclical Behavior of Marginal Cost and Price,” American Economic Review, 1987, 838-55.

Romer, Christina. “Changes in Business Cycles,” Journal of Economic Perspectives, Spring 1999, 23-45.

Black, Fischer. “Noise,” Journal of Finance, 1986.

Mehrling, Perry. “Understanding Fischer Black,” you can find this paper at: http://www.econ.barnard.columbia.edu/faculty/mehrling/understanding_fischer_black.pdf

Finance and interest rates

Ross, Stephen. “Finance,” In The New Palgrave, pp.322-336.

Chapters six and seven, “Objects of Choice,” and “Market Equilibrium”.

Jagannathan, Ravi  and McGrattan, Ellen. “The CAPM Debate.” Federal Reserve Bank of Minneapolis,  Fall 1995, 2-17.

Campbell,  John Y. and Vuolteenaho, Tuomo, “Bad Beta, Good Beta,” American Economic Review, December 2004, 1249-1275.

Campbell, John, “Some Lessons for the Yield Curve,” Journal of Economic Perspectives, Summer 1995, 129-152.

Siegel, Jeremy and Thaler, Richard. “The Equity Premium Puzzle,” Journal of Economic Perspectives, Winter 1997, 191-200.

Kocherlakota, Narayana R. “The Equity Premium: It’s Still a Puzzle,” Journal of Economic Literature, March 1996, 42-71.

Lee, Charles, Shleifer, Andrei, and Thaler, Richard. “Anomalies: Closed End Mutual Funds,” Journal of Economic Perspectives, Fall 1990, 153-164.

Keynesian Economics

Cowen, Tyler. “Why Keynesianism Triumphed Or, Could So Many Keynesians Have Been Wrong?”, Critical Review, Summer/Fall 1989, 518-530.

“Symposium: Keynesian Economics Today,” Journal of Economic Perspectives, Winter 1993, 3-82.

“Is There a Core of Practical Macroeconomics That We Should All Believe?” American Economic Review, symposium, May 1997, 230-246.

Taylor, John. “Reassessing Discretionary Fiscal Policy,” Journal of Economic Perspectives, Summer 2000, 21-36.

Bernheim, B. Douglas. “A Neoclassical Perspective on Budget Deficits,” Journal of Economic Perspectives, Spring 1989, 55-72.

Eisner, Robert. “Budget Deficits: Rhetoric and Reality,” Journal of Economic Perspectives, Spring 1989.

Stiglitz, Joseph E. “The Causes and Consequences of the Dependence of Quality on Price.” Journal of Economic Literature, March 1987, 1-48.

Hall, Robert E. “Employment Fluctuations with Equilibrium Wage Stickiness,” American Economic Review, March 2005, 50-65.

Summers, Lawrence. “The Scientific Illusion in Empirical Macroeconomics,” Scandinavian Journal of Economics, 1991, 129-148.

Monetary Policy

Blinder, Alan. “What Central Bankers Can Learn From Academics – and Vice Versa,” Journal of Economic Perspectives, Spring 1997, 3-20.

Bernanke, Ben and Mishkin, F. “Inflation Targeting,” Journal of Economic Perspectives, Spring 1997, 97-117.

Aiyagari, S. Rao, “Deflating the Case for Zero Inflation,” Federal Reserve Bank of Minneapolis, Quarterly Review, Summer 1990, 2-11.

“Symposium on the Monetary Transmission Mechanism,” Journal of Economic Perspectives, Fall 1995, 3-96.

Roberds, William. “What Hath the Fed Wrought? Interest Rate Smoothing in Theory and Practice,” Federal Reserve Bank of Atlanta, Economic Review, January/February 1992.

Shafir, Eldar, Diamond, Peter, and Tversky, Amos. “Money Illusion,” Quarterly Journal of Economics, May 1997, 341-374.

Caplin, Andrew and Spulber, Daniel. “Menu Costs and the Neutrality of Money,” Quarterly Journal of Economics, November 1987, 703-725.

Sargent, Thomas and Wallace, Neil. “Some Unpleasant Monetarist Arithmetic,” Federal Reserve Bank of Minneapolis, Quarterly Review, 1985, 1-17.

Wallace, Neil. “A Legal Restrictions Theory of the Demand for “Money” and the Role of Monetary Policy,” Federal Reserve Bank of Minneapolis Quarterly Review, Winter 1983.

Posen, Adam. “Why Central Bank

Independence Does Not Cause Low Inflation: There is No Institutional Fix for Politics,” in Finance and the International Economy, edited by Richard O’Brien, 1993.

Garrison, Roger, “The Austrian Theory of the Business Cycle,” At  href="http://www.auburn.edu/~garriro/a1abc.htm"

Krugman, Paul. “The Hangover Theory,” at http://www.slate.com/id/9593

Cowen, Tyler. Risk and Business Cycles, chapter three.

Savings and social security

Hubbard, R. Glenn and Skinner, Jonathan. “Assessing the Effectiveness of Savings Incentives.” Journal of Economic Perspectives, Fall 1996, 73-90.

Choi, Laibson, Madrian, and Metrick, “Optimal Defaults,” American Economic Review, May 2003, also at ttp://post.economics.harvard.edu/faculty/laibson/papers/optimaldefaults.pdf

Samwick, Andrew. Voxbaby weblog, read the entries on social security.

International Economics

Current issues: http://www.roubiniglobal.com/archives/2005/05/global_imbalanc.html

“If I Believed in Austrian Business Cycle Theory,” by

Tyler  Cowen, on MarginalRevolution.com.

Brad Setser’s WebLog.

Dornbusch, Rudiger. “Purchasing Power Parity,” in The New Palgrave.

Friedman, Milton. “The Case for Flexible Exchange Rates.” In Essays in Positive Economics, 1953, University Chicago Press.

Mundell-Fleming model, see Brad’s book.

The World

Japan

Krugman, Paul R. “It’s Baaack:

Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity, 1998, 29, 2, 137-87.

Kashyap, Anil K. “Sorting out Japan’s Financial Crisis,” Federal Reserve Bank of Chicago Economic Perspectives, 2002, 26, 4, 42-55.

China

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Europe

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Developing Nations

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History

Bordo, Michael D. “Essays in Exploration: A Survey of the Literature,” Explorations in Economic History, 1986, 339-415.

“Symposium: The Great Depression,” Journal of Economic Perspectives, Spring 1993, 3-102.

Romer, Christina H “What Ended the Great Depression?” Journal of Economic History, 1992, 52, 4, 757-84.

Here is a searchable link to Brad DeLong’s website: http://www.j-bradford-delong.net/movable_type/2005-3_archives/000084.html

Krugman parries and Okrent responds, along with Brad DeLong’s commentary.  Here is DeLong on Samwick on Okrent on Krugman, and, not surprisingly, Donald Luskin has some commentary as well, and here is more from an anti-Krugman source.  I haven’t worked my way through these debates (right now I am reading about the history of the clambake, and tonight I am going to hear Kraftwerk), but I am happy to pass along the links.

Earlier I wrote that when house prices increase real estate commissions don’t fall very much but instead we get increased entry and wasteful competition.  A recent article from the LA Times (reg. required) describes the process:

One of the few things increasing faster than house prices in California is the supply of agents licensed to sell them.

More than 22,000 applicants took the state’s real estate exam in April, nearly three times as many as in April 2003, according to the Department of Real Estate. To handle the surge, the department has rented six test centers around the state to supplement the five it already has.

The last time so many people wanted to sell real estate in California was in 1990. In what might be an ominous sign for the current boom, that year marked a peak in the housing market.

and get this:

There are 437,000 agents in California, enough to form the state’s eighth-largest city. With only 680,000 home sales a year, competition for listings can be savage.

Thanks to Paul N. for the pointer.

Black’s economic thought is centered around the view that all profit opportunities will be exploited.  So what happens if the central bank decides to add zeros to the accounts held at the Fed?

Here is the standard account.  In Black’s view banks were already holding all the dollars they wished to.  One reaction is for banks to borrow less money at the discount window, or perhaps borrow less from each other.  Money will leave the system as quickly as it entered.  Another reaction is simply for banks to sit on the new money.  Prices will not go up.  Alternatively, it could be argued that an indifference relation holds, and whatever people expect to happen will happen.  Multiple equilibria obtain.  Prices might go up, fall, or stay constant.  Monetarism is then true only if people expect it to be true.

Can this be for real?  Won’t banks make more loans, thereby increasing the money supply?  Black was fond of an arbitrage argument.  If banks wanted to make more loans, such loans must be profitable.  Ex ante, banks already would have attracted more reserve dollars to make these profitable loans.  Black once told me that in such a world, banks would be willing to bid more than a dollar (in expected value terms, using future dollars) for a (current) dollar.  Since that would violate the no-arbitrage condition, banks must not want to make more loans.

How do interest rates enter the picture?  Perhaps banks didn’t want to make more loans at old interest rates, but now they would make some more loans at the new, lower interest rates.  But as I understand Black’s sometimes-murky writings and comments, it is begging the question to suppose that interest rates will change.  Why should they?  The Fed sopped up some pieces of paper — T-Bills — and replaced them with other pieces of paper (well, zeros in account books, in both cases).  Why should this have much if any influence on real interest rates?

My best shot is to postulate that banks have a downward-sloping demand curve to hold reserves, which they treat as differently from T-Bills (is this begging the question?).  Give them more reserves, and they — acting in conjunction with their borrowing agents — will push those reserves into other markets.  The effect on real rates of return will be small, but nominal variables will rise.  The MU curve of bank reserves slopes down ever so slightly, but the resulting adjustments make the Fed a mighty power indeed.

Can that be true?  Common sense — not to mention fear of embarrassment — forbids me from siding with Black.  But that doesn’t mean I am convinced he is wrong.

Soon we will look at his business cycle hypothesis.

Cyndi Lauper may be a pop-star who’s sold millions of albums, but that doesn’t mean
she wants to pay much more than $500 for her apartment on Manhattan’s
Upper West Side.

Yes, there is a lawsuit – read more here.  I guess she — dare I say it — just wants to have fun.  Thanks to John Chilton for the pointer, do check out his Emirates blog.  And Jeremiah Buckley recommends this song.

Economists like to study one relationship or one mechanism at a time.  We place that relationship under a kind of microscope, and examine the possible ins and outs.  At the same time we abstract from many — indeed most — other features of the real world.

The economic method therefore is frequently misunderstood.  The "collective wisdom" of economics is not found in any single model, article, or book.  All of these present very particular microscopic views.  Rather it is the body of economics, combined with the wisdom of the other social sciences, that represents the impressive achievement.

Sadly, the microscope method opens up economics for criticism.  It is easy to look at any single model or study and find much wanting.  Economics appears unrealistic, excessively abstract, ahistorical, or simply implausible, occasionally verging on the insane.

Yes, there is much wrong with contemporary economics.  I’ll grant plenty of concessions.  Anthropology is important, economists don’t read enough, there should be more economic ethnography, and Becker’s "rotten kid theorem" is not a good model of the family. 

But at the end of the day, about half of all criticisms of economics boil down to failing to understand the microscope method. 

For the microscope analogy, I am indebted to some comments by Ben Friedman.

Brad DeLong gives a nice overview of Austrian business cycle theory and points out (correctly) that in recent columns Paul Krugman has put forward a variant of the theory.  (Krugman has also done this before in explaining the recession of 2001.)  All of this is most puzzling since Krugman also wrote a famously nasty attack on Hayekian/Hangover business cycle theory calling it "about as worthy of serious study as the phlogiston theory of fire."

I can tell you only what people claim are the most prestigious jobs.  Here are the top five:

1. Scientist (really?)
2. Doctor
3. Firefighter
4. Teacher (really?)
5. Military officer

I have yet to cash in on the groupies.  Here is the full list and story. 

Being a lawyer, I suspect, is more prestigious than most people are willing to admit.  The same is true for politician, athlete, or entertainer.  Clergy comes in number eight, but I suspect its real prestige is lower.  But I can believe what comes in last — real estate agent.

…you ask why we Americans work more hours than do Europeans.  But perhaps we don’t.  While the data do show that Americans work more hours AT FORMAL JOBS, it doesn’t follow that Americans work more hours in total.  The reason is that, compared to Europeans, Americans have more time-saving household appliances, as well as greater access to other time-saving amenities such as prepared foods, child care, and housecleaning services.  As a result, we Americans work fewer hours taking care of our households and, hence, can work more hours earning income.

Let’s not forget that buying things is much easier in the U.S. as well.  Don Boudreaux just submitted the above in a letter to The Economist.

Here is a very recent interview.

On Karl Rove: "To the extent there was a political constraint, it wasn’t from Karl’s shop, it was from Congress."

On the Bush administration: "The policy process worked extremely well."

On the trade deficit and savings: "I don’t think we really have a good sense of what the limits are, especially since we’re growing so much faster than most of the world. This might sound glib, but it might be fruitful to think about immigration and the trade deficit as reflecting the same thing–capital and labor both want to flee here because we’re the most productive economy.

On the other hand, while the trade deficit isn’t a problem in itself, it may be a symptom of a problem. The problem is that Americans aren’t saving enough. I don’t think there’s a single magic bullet to increase national saving, but I do think a switch from an income tax to a consumption tax would help."

On Paul Krugman: No love lost, read for yourself.

Fascinating all around.

Whatever tenuous hold the joke had left by the 1990’s may have been broken by the Internet, Mr. Nilsen said. The torrent of e-mail jokes in the late 1990’s and joke Web sites made every joke available at once, essentially diluting the effect of what had been an spoken form. While getting up and telling a joke requires courage, forwarding a joke by e-mail takes hardly any effort at all. So everyone did it, until it wasn’t funny anymore.

Here is the full and fascinating story of how the joke has died as a dominant institution of humor.

Relative to other drugs, that is.  In a CrookedTimber symposium on Steve Levitt, I offer a few speculative and possibly false hypotheses:

1. Heroin and pot make you sleepy.  Crack gets you riled up.

2. Crack was a new drug when it hit the market.  Gangs were competing to hook new buyers.  This is a far more violent activity than serving established drug clientele.

3. In dollar terms crack was a "bigger" drug than ever before.  The gross and the profit margins were bigger.  The resulting turf wars over profits led to murders.  It is not worth killing people over a few marijuana sales.  (Yet still I find this puzzling.  Falling prices have taken profits out of the market; the gangs must either have had an extraordinarily high discount rate or they behaved irrationally in killing each other.  In the latter case we have no economic explanation at all for the hike in crime.)

4. Perhaps you buy other drugs from your friends, but you buy crack from dealers.  (Most people get Ecstasy from their friends, and this market is not very violent.)  The new question is then why this might be.  Could crack somehow require less personal certification from trusted acquaintances?

Here is my full post.  I have opened up comments for your ideas.  Contributions from economically literate and (previously) violent crackheads are especially welcome.

Jesse Shapiro.  Yes, he is a mere Youngling, having just finished his Ph.d. at Harvard (he was a Shleifer student, and now visiting at Chicago).  But he is likely to be one of the leading economists of the next generation.  He studies why and how large numbers of people can make, or appear to make, systematic errors.  This is perhaps the frontier question in contemporary economics.  Here is the abstract from Jesse’s paper on advertising:

I present a model of advertising in the presence of bounded memory and limited recall.  In the model, consumers’ memories record the quality of their experiences with a product.  Exposure to advertising leads to memories of good experiences.  Crucially, I assume that consumers cannot recall whether a memory orginates from a genuine consumption experience or from exposure to advertising.  The model yields several novel implications.  First, advertisers will concentrate their efforts on past customers, because experienced consumers will be more likely to trust that their positive feelings toward the brand are genuine.  The model may therefore help to explain why established, familiar brands continue to advertise extensively.  Second, the firm’s desire to "saturate" the consumer with positive memories can lead to the commonly observed phenomenon of "pulsing," in which a firm oscillates between no advertising and some positive amount.  Third, exaggeration is limited, in the sense that advertisers may not cause consumers to remember haivng extraordinary experiences with the brand.  Indeed, under some conditions an equilibrium in which advertising conveys the best possible impression of the brand can exist only when the total amount of advertising is small.

Another paper of Jesse’s challenges analytical egalitarianism — the entire foundation of economics.  Here is a previous installment of underappreciated economists.

The transcripts are now available on the web here.  Speakers include James Buchanan, Bob Tollison, Dwight Lee, Mancur Olson, Edgar Browning, and Thomas Willett, among other luminaries.  Bob Tollison discusses the economics of the medieval church.