Results for “model this” 3165 found
Modeling Vladimir Putin
Here are some options:
1. Putin is a crazy hothead who is not even procedurally rational. Merkel received that impression from one of her phone calls with him.
2. Putin is rational, in the Mises-Robbins sense of instrumental means-ends rationality, namely that he has some reason for what he does. He simply wills evil ends, namely the extension of Russian state power and his own power as well.
3. Putin is fully rational in the procedural sense, namely that he calculates very well and pursues his evil ends effectively. In #2 he is Austrian but in #3 he is neoclassical and Lucasian too. He knows the true structure of the underlying model of global geopolitics.
4. Putin lives in a world where power is so much the calculus — instrumentally, emotionally and otherwise — that traditional means-ends relationships are not easy to define. Power very often is the exercise of means for their own sake and means and ends thus meld and merge. Our rational choice constructs may mislead us and cause us to see pointless irrationality when in fact power is being consumed as both means and end. It is hard for we peons to grasp the emotional resonance that power has for Putin and for some of his Russian cronies. They grew up in the KGB, watched their world collapse, tyrannized to rise to top power, while we sit on pillows and watch ESPN.
Here is a former CIA chief arguing Putin has a zero-sum mentality, though I would not make that my primary framing. Here is Alexander J. Motyl considering whether Putin is rational (Foreign Affairs, possibly gated for you). Here is an interesting and useful discussion of differing White House views of Putin. This account of a several-hour dinner with Putin says he is prideful, resentful of domination, and hardly ever laughs. Here is Eric Posner on Putin’s legal astuteness.
My views are a mix of #2 and #4. He is rational, far from perfect in his decision-making, and has a calculus which we find hard to emotionally internalize. His resentments make him powerful, and give him precommitment technologies, but also blind him to the true Lucasian model of global geopolitics, which suggests among other things that a Eurasian empire for Russia is still a pathetic idea.
Putin is also paranoid, and rationally so. We have surrounded him with NATO. China gets stronger every year. Many other Russians seek to kill him, overthrow him, or put him in prison.
Assumptions about Putin’s rationality will shape prediction. Under #1 you should worry about major wars. With my mix of #2 and #4, I do not expect a massive conflagration, but neither do I think he will stop. I expect he keep the West distracted and seek to turn resource-rich neighbors into vassal states, for the purpose of constructing a power-intensive, emotionally resonant new Russian/Soviet empire, to counter the growing weight of China and to (partially) reverse the fall of the Soviet Union. Even if he does not grok the true model of the global world order, he does know that Europe is weak and the United States has few good cards it is willing to play.
Developing…
Addendum: Whatever your theory of Russians in general may be, watch this one-minute video of a Russian baby conducting and give it a rethink.
The Dutch experiment with an iTunes model for journalism
The Netherlands’ biggest newspaper and magazine publishers have agreed to start selling individual articles for as little as €0.10 through a start-up called Blendle that aims to be the “iTunes of journalism”.
The Dutch initiative highlights how publishers are searching for new ways to make money from online content as their print businesses face declining readership and advertising revenues.
Blendle was founded in 2012 by Marten Blankesteijn and Alexander Klöpping, both aged 27.
It plans to launch in the Netherlands in April and has signed up the vast majority of publishers that produce newspapers and magazines in the country, including De Persgroep, Sanoma, Hearst and Reed Elsevier.
From the FT there is more here.
A model of Catalonian independence
There is a September 2013 paper (pdf) on this topic by Ryan D. Griffiths, Pablo Guillen, and Ferran Martinez i Coma:
We propose a game theoretical model to assess the capacity of Catalonia to become a recognized, independent country with at least a de facto European Union (EU) membership. Support for Catalan independence is increasing for reasons pertaining to identity and economics. Spain can avoid a vote for independence by effectively ‘buying-out’ a proportion of the Catalan electorate with a funding agreement favorable to Catalonia. If, given the current economic circumstances, the buying-out strategy is too expensive, a pro-independence vote is likely to pass. Our model predicts an agreement in which Spain and the European Union accommodate Catalan independence in exchange for Catalonia taking a share of the Spanish debt. If Spain and the EU do not accommodate, Spain becomes insolvent, which in turn destabilizes the EU. The current economic woes of Spain and the EU both contribute to the desire for Catalan independence and make it possible.
My worry however is this. If Catalan took away its share of the Spanish debt, or even more than its share, I don’t think this would help the Spanish fiscal situation. For similar reasons, I have never been convinced that the debt-to-gdp ratio is such an important variable. I myself put greater stress on the ability of a government to rule its territory, command the wealth and allegiance of its subjects, and continue to generate a more or less stable political equilibrium. Every developed country has the wealth to pay off its debts, if at least it has the political willingness to do so. If you view fiscal stability in this kind of macro public choice framework, the unwilling loss of a major piece of wealthy, high status territory is a much, much bigger fiscal blow than can be offset by a marginal improvement in the debt-to-gdp ratio. Besides, which part of Spain might be then next in line with demands for greater autonomy?
I am entirely fine with the idea of a Catalonian independence referendum in normal economic times, however, as I do not in general wish to maintain nation-states on those who are truly unwilling. I am very happy for instance that Estonia is no longer part of Russia/USSR, and in turn one can see that an Estonian independence referendum would pass in either good economic states or bad. If the same is true for Catalonia, we should all be willing to wait.
The “devalue and dismiss” fallacy, methodological pluralism, and DSGE models
One of the most common fallacies in the economics blogosphere — and elsewhere — is what I call “devalue and dismiss.” That is, a writer will come up with some critique of another argument, let us call that argument X, and then dismiss that argument altogether. Afterwards, the thought processes of the dismisser run unencumbered by any consideration of X, which after all is what dismissal means. Sometimes “X” will be a person or a source rather than an argument, of course.
The “devalue” part of this chain may well be justified. But it should lead to “devalue and downgrade,” rather than “devalue and dismiss.”
“Devalue and dismiss” is much easier of course, because there then will be fewer constraints on what one can believe and with what level of certainty. “Devalue and downgrade” keeps a lot of balls in the air and that can be tiresome and also unsatisfying, especially for those of us trained to look for neat, intuitive explanations.
Enter DSGE models. There are plenty of good arguments against them. Still, they provide a useful discipline and they pinpoint rather ruthlessly what it is they we still do not understand. We can and should devalue them in a variety of ways, and for a variety of reasons, but still we should not dismiss them. Better yet than “devalue and downgrade” might be “devalue, downgrade, and…yet…de-dogmatize,” because these models usually point out the limits of our understanding. Those models defeat us, and thus it is odd when we attempt to portray the situation as us defeating them.
Note that very smart people are often good at “devalue and dismiss” because they can come up with a lot of good reasons to devalue the arguments or frameworks of others. But still they should not leap so quickly to the “dismiss.”
I would mention that Alex, while he did criticize DSGE models yesterday, also appreciates their uses.
Addendum: Here is Chris House, defending DSGE models.
Earth orbit debris: an economic model
That is a 2013 paper by Adilov, Alexander, and Cunningham, here is the abstract:
Space debris, an externality generated by expended launch vehicles and damaged satellites, reduces the expected value of space activities by increasing the probability of damaging existing satellites or other space vehicles. Unlike terrestrial pollution, debris created in the production process interacts with firms’ final products, and is, moreover, self-propagating. Collisions between debris or extant satellites creates additional debris. We construct an economic model to explore private incentives to launch satellites and to mitigate space debris. The model predicts that, relative to the social optimum, firms launch too many satellites and under-invest in debris mitigation technologies. We discuss remediation strategies and policies, and calculate a socially optimal Pigovian tax.
While we are on this topic, I very much liked the movie Gravity, which although it has some dialogue hearkens back to the silent classics of the past. It has spectacular visuals, a “great stagnation” element, a don’t try to be Icarus, live in the mud, and be reborn and baptized in the water element, a reinterpretation of The Book of Job, and a “who builds the best infrastructure anyway?” theme. On top of all that, it is subtle running commentary on the 1969 film *Marooned* and how much the world has, and hasn’t, changed since then.
Unemployment and Business Cycles (and a rehabilitation of matching models)
That is a new and important paper by Christiano, Eichenbaum, and Trabandt which strengthens and rehabilitates matching models of the labor market. The abstract is this:
We develop and estimate a general equilibrium model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, wages are not subject to exogenous nominal rigidities. Instead we derive wage inertia from our specification of how firms and workers interact when negotiating wages. Our model outperforms the standard Diamond-Mortensen-Pissarides model both statistically and in terms of the plausibility of the estimated structural parameter values. Our model also outperforms an estimated sticky wage model.
A few points:
1. This model overcomes the empirical problems with matching models stressed by Shimer (2005).
2. In this model the distinction between structural and cyclical unemployment is ill-defined. To insist that today’s unemployment is one rather than the other is to commit a category mistake.
3. This model very naturally handles the distinction between “sticky wages for workers who already have jobs” and the situation of workers who do not have a job at all. For most traditional sticky wage theories this is an embarrassment, as quite good theories of incumbent theories cannot be stretched easily to cover sticky reservation wages for the unemployed.
4. This model does not require that any openly available, good for both sides wage bargain is left sitting on the table.
5. In this model money has a positive effect on output and employment, but only by lowering real interest rates and inducing more consumer spending. It does not in general appear to be a large effect, but there is a real positive effect. You will note that the underlying parameters of the labor matching model are defined in real terms.
6. This model derives wage inertia and thus matches observed data on “stickiness,” noting that “stickiness” now seems to be a misleading word.
7. It would be a mistake to think that this model (or any) captures the entirety of the U.S. labor market. Yet if the model reflects a big chunk of our labor market, at the expense of the standard nominal wage stickiness model, that would have significant implications for how we think about monetary and fiscal policies.
8. Unlike in the Keynesian model, I believe in this model it is possible for effective stimulus policy to both improve employment and boost real wages (possibly small amounts). That is a very common claim (“let’s get some stimulus to boost wages”), yet few people making it realize how much it conflicts with their underlying Keynesian foundations. Perhaps this is a new way forward. Please note, however, that is my intuition based upon reading the paper and not a result which the authors have proven formally.
It is oddly fashionable in the economics blogosphere to insist that microfoundations do not matter or are not a worthy matter of study. Papers like this show that in fact they matter a great deal.
An (earlier?) ungated version of the paper is here.
A new model for media paywalls?
The famous political science blog Monkey Cage will be joining The Washington Post (congratulations!) and apparently this will be the arrangement:
Actually, we negotiated a one year exemption from the paywall. So for first 12 months, not at all. After that, will continue to be open to anyone with .edu, .mil, and .gov accounts.
What is the implied model behind assortative mating?
In a fascinating new paper by Brant, et.al. on IQ, I read the following bit:
…we found that higher-IQ parents actually showed less assortative mating: the difference between parental IQ scores was positively correlated with mean parental IQ score.
My questions are numerous but I will start with two.
First, is this the correct metric for “less” assortative mating?
Second, do “straightforward” models predict such a result as a matter of course? For instance, higher-IQ individuals may have greater scope to choose mates on the basis of complementary skills. That may imply higher IQ gaps. Furthermore higher-IQ individuals may marry later in life, put more effort into choosing, and encounter a wider variety of potential partners. That may also imply wider gaps in IQ across partners, even if assortative mating (as defined in an all things considered way) remains strong.
Very often there is more variability at the tops of distributions rather than at the bottoms or in the middles. Yet “pull away” forces may continue to operate.
To present a simple analogy, income gaps between marrying couples are probably higher at the upper end of the distribution than at the lower end. Yet assortative mating with respect to income still may reenforce income inequality.
My model for how the Fed thinks about withdrawing QE
Bernanke believes QE works, but having been caught off-guard once before, in 2007-2008, he doesn’t fully trust his own judgment. He fears some risk of bubbles, or excess private disintermediation, in either case resulting from low interest rates. He lets Tarullo and Stein carry related messages to the markets to signal possible fears without having to endorse them.
Let’s say he assigns these risky scenarios a fairly small p = 0.05. Still, another financial collapse would be a disaster, all the more for political economy reasons. Bernanke has spent down his own political capital and these days Republicans are more likely to be obstructionists. Fear of that disaster leads him to withdraw QE sooner than his “most likely to be true” opinion thinks prudent. Economists respond by defending the “most likely to be true” opinion, and by arguing moralistically rather than probabilistically. That doesn’t convince Bernanke, because said economists can only convince him that they are likely right, not that he should obliterate his p = 0.05 fear of being wrong. The current policy course continues, early withdrawal from QE is contemplated, and economists complain all the more. Outside observers find it hard to understand the disconnect.
Here are some related probabilistic considerations from Brad DeLong.
Toward a model of the therapist
In working with neurotics, the therapist must always express a desire for patients to continue, even if he or she feels that these patients have completed their work. Such patients will break off when their own desire to move on has become strong enough and determined enough.
…This obviously implies that the analyst is an actor or actress who plays a part which does not necessarily convey his or her “true feelings.”…The analyst may find a patient unpleasant and annoying, but of what use is it to let the patient know this? The patient may very well react to an expression of the analyst’s antipathy by leaving analysis altogether, or by trying to make him- or herself pleasant and interesting to the analyst, censoring certain thoughts and feelings which he or she thinks might annoy the analyst, instead of getting down to true analytic work. Counterproductive reactions to say the least! The analyst must maintain a position of desire — desire for the patient to talk, dream, fantasize, associate, and interpret — regardless of any dislike he or she may have for the patient.
That is from Bruce Fink’s often quite interesting A Clinical Introduction to Lacanian Psychoanalysis Theory and Technique, which I suppose also doubles as management advice.
By the way, here is today’s (closely related) David Brooks column. Alex passes along this link.
The GMU/UVa wage disparity and the signalling model of education
It’s a well-known fact — well-known around GMU that is — that GMU graduates earn higher average salaries than do UVA grads (direct link here), that is for four year undergrads in their first year of employment.
It’s not just that UVa is in decline, or that some of them end up richer later in life. Or others may use their wealthier parents to live in Williamsburg, Brooklyn and avoid direct employment. A major reason for the wage discrepancy is simply that a disproportionate chunk of GMU students are likely to get jobs in the relatively high-paying Washington, D.C. area.
OK, so how does this relate to the broader ongoing debate over the signaling theory of education and wages?
It is widely accepted that UVa is a more exclusive school than GMU by the usual standards. Yet here we see labor markets “seeing through” those credentials, and paying more to the GMU graduates. In other words, labor markets are seeing that GMU students are, on average, “less exclusive by origin but will have a higher marginal product very quickly.”
The signaling model, in its simplest, most stripped down form, assumes that employers cannot judge the marginal products of individual new hires but instead pay them according to their credentials. Yet here we have a case where employers seem quite willing to make a judgment about marginal product and indeed that is a judgment which contradicts data on exclusivity of academic origins. Once you postulate that employers are willing to make estimates of individual marginal products which differ from the rankings that might be given by “raw ability,” the signaling model is less applicable. I don’t want to claim that the wages converge exactly on marginal products, but the credentials clearly are just one factor of many. Employer judgments of expected marginal products are not dominated by credentials, and you can imagine that after having a worker for a year or two the credentials are even less important as a means of judging prospective marginal product.
Another way to put this point is that the speed of employer learning is in fact fairly rapid, and some of it happens before the job even starts.
Izabella Kaminska’s counterintuitive model of the modern world
1) Because of the safe asset problem there is a diminishing return — or even negative return — to QE at some point. In fact, rather than being inflationary, it becomes deflationary.
2) Interest on reserve policy is actually designed to counteract this deflationary — and negative rate inducing — effect. In fact, IOER, or the ability to hold reserves at the central bank for no negative interest cost, shows that central banks are effectively supporting short-term rates rather than depressing them. If not for the ability to hold reserves at the central bank, then rates could very well be negative.
3) The crisis is in many ways a deposit crisis not a debt crisis. There are simply too many deposits seeking principal protection and not enough safe assets to protect against capital destruction by negative rates.
4) Negative rates are a function of global abundance (brought on by technological advances), and a trend that cannot be stopped even by the strongest central bank — unless society regresses backwards (like many goldbugs would seemingly desire). For rates to stay positive we have to hoard almost everything in the world form the people that need it, if it is to have value. The artificial scarcity tactics that have been used through the ages to achieve this, are getting harder to execute because of technological liberation — which is enabling the emergence of collaborative economy which bypasses rates of return.
5) Central banks taking charge of digital money and issuing it directly to consumers is one way to ensure deposits can always be protected from negativity.
6) Value in the capital system, and our definition of growth, is very likely being transformed as a result.
7) Greater efficiency and abundance may also eventually lead to the end of arbitrage.
Here is more. You will find that differs from the perspectives usually expressed here (most of all #4), but it is always good to pass along contrasting points of view.
The hybrid educational model works
This is from the new William G. Bowen book, Higher Education in the Digital Age:
…we found no statistically significant differences in standard measures of learning outcomes (pass or completion rates, scores on common final exam questions, and results of a national test of statistical literacy) between students in the traditional classes and students in the hybrid-online format classes…This finding, in and of itself, is not different from the results of many other studies. But it is important to emphasize that the relevant effect coefficients in this study have very small standard errors…what we have here are “quite precisely estimated zeros.” That is, if there had in fact been pronounced differences in outcomes between traditional-format and hybrid-format groups, it is highly likely that we would have found them.
Note also that this finding holds across various subgroups of the basic student population, including students from families with incomes below 50k a year, first-generation college students, non-white students, and students with GPAs below 3.0.
The core report is here.
A Trapped Factors Model of Innovation
That is the new paper (pdf) by Nicholas Bloom, Paul Romer, Stephen Terry and John Van Reenen. Here is the abstract:
When will reducing trade barriers against a low wage country cause innovation to increase in high wage regions like the US or EU? We develop a model where factors of production have costs of adjustment and so are partially “trapped” in producing old goods. Trade liberalization with a low wage country reduces the profitability of old goods and so the opportunity cost of innovating falls. Interestingly, the “China shock” is more likely to induce innovation than liberalization with high wage countries. These implications are consistent with a range of recent empirical evidence on the impact of China and offers a new mechanism for positive welfare effects of trade liberalization over and above the standard benefits of specialization and market expansion. Calibrations of our model to the recent experience of the US with China suggests that there will be faster long-run growth through innovation in the US and that, in the short run, this is magnified by the trapped factor effect.
A simple macro model of collateral
Regulators are pushing for non-centrally cleared trades to be backed by high levels of collateral, such as cash or government bonds. This is where the $10tn figure comes in. It is the amount of extra collateral that could be required according to estimates by the International Swaps and Derivatives Association.
Here is the full FT article. It stresses that figure of ten trillion may be too high an estimate, but a separate lower estimate still runs at $2 to $4 trillion.
Let’s play out the scenario. In some future world, what if most savings is done by corporations and also by traders at the clearinghouse, in the form of collateral. Collateral, however, is not “smoothed” across assets but rather is an either/or decision. They won’t take your sheepdog as collateral, nor will they take shares in small tech companies. Most of the saving is done in the form of approved safe assets and the rest of the economy is somewhat starved for investment.
I call it the return of financial repression. Let’s see how far it is allowed to go.