by Zhuge Liang
Types of Generals
There are nine types of generals.
Those who guide with virtue, who treat all equally with courtesy, who know when the troops are cold and hungry, and who notice when they are weary and pained, are called humanistic generals.
Those who do not try to avoid any task, who are not influenced by profit, who would die with honor before living in disgrace, are called dutiful generals.
Those who are not arrogant because of their high status, who do not make much of their victories, who are wise but can humble themselves, who are strong but can be tolerant, are called courteous generals.
Those whose extraordinary shifts are unfathomable, whose movements and responses are multifaceted, who turn disaster into fortune and seize victory from the jaws of danger, are called clever generals.
Those who give rich rewards for going ahead and have strict penalties for retreating, whose rewards are given right away and whose penalties are the same for all ranks, even the highest, are called trustworthy generals.
Those who go on foot or on a warhorse, with the mettle to take on a hundred men, who are skilled in the use of close-range weapons, swords, and spears are called infantry generals.
Those who face the dizzying heights and cross the dangerous defiles, who can shoot at a gallop as if in flight, who are in the vanguard when advancing and in the rear guard when withdrawing, are called cavalry generals.
Those who mettle makes the armies tremble and whose determination makes light of powerful enemies, who are hesitant to engage in petty fights while courageous in the midst of major battles, are called fierce generals.
Those who consider themselves lacking when they see the wise, who go along with good advice like following a current, who are magnanimous yet able to be firm, who are uncomplicated yet have many strategies, are called great generals.
Capacities of Commanders
The capacities of commanders are not the same; some are greater, some are lesser.
One who spies out treachery and disaster, who wins the allegiance of others, is the leader of ten men.
One who rises early in the morning and retires late at night, and whose words are discreet yet perceptive, is the leader of a hundred men.
One who is direct yet circumspect, who is brave and can fight, is the leader of a thousand men.
One of martial bearing and fierceness of heart, who knows the hardships of others and spares people from hunger and cold, is the leader of ten thousand men.
One who associates with the wise and promotes the able, who is careful of how he spends each day, who is sincere, trustworthy, and magnanimous, and who is guarded in times of order as well as times of disturbance, is the leader of a hundred thousand men.
One whose humanitarian care extends to all under his command, whose trustworthiness and justice win the allegiance of neighboring nations, who understands the signs of the sky above, the patterns of the earth below, and the affairs of humanity in between, and who regards all people as his family, is a world-class leader, one who cannot be opposed.
In Memory of Eva Cassidy
This month marked the 13th year since Eva Cassidy passed away.
Here are the rare video recordings of Eva Cassidy live at the Blues Alley in 1996.
The Blues Alley, present day.
The interior still looks pretty much the same.
Eva Marie Cassidy (February 2, 1963 – November 2, 1996) was an American vocalist known for her interpretations of jazz, blues, folk, gospel, country and pop classics. In 1992 she released her first album, The Other Side, a set of duets with go-go musician Chuck Brown, followed by a live solo album, Live at Blues Alley in 1996. Although she had been honored by the Washington Area Music Association, she was virtually unknown outside her native Washington, DC when she died of melanoma in 1996.
Four years later, Cassidy's music was brought to the attention of British audiences when her version of "Over the Rainbow" was played by Terry Wogan on BBC Radio 2. Following the overwhelming response, a camcorder recording of "Over the Rainbow", taken at the Blues Alley, was shown on BBC Two's Top of the Pops 2. Shortly afterwards, the compilation album Songbird climbed to the top of the UK Albums Charts, almost three years after its initial release. The chart success in the United Kingdom led to increased recognition worldwide; as of 2008 her posthumously released recordings, including three UK #1s, have sold around eight million copies. Her music has also charted top 10 positions in Australia, Germany, Sweden, Norway and Switzerland.
from wikipedia
Here are the rare video recordings of Eva Cassidy live at the Blues Alley in 1996.
What a Wonderful World
Somewhere Over the Rainbow
The Blues Alley, present day.
The interior still looks pretty much the same.
At the End of the World
An American scientist announces that the world will end...what do you think would be the effects on people between the announcement and the moment of cataclysm? What would you do in this last hour? ***
These were the questions printed in the French newspaper L'Intransigeant in 1922 where they invited replies from celebrities of the day. Answers from readers ranged from last act of religious worship to predictions of social mayhem.
Marcel Proust, author of the monumental In Search of Lost Time, had this to say...
I think that life would suddenly seem wonderful to us if we were threatened to die as you say. Just think of how many projects, travels, love affairs, studies our life hides from us, made invisible by our laziness which, certain of a future, delays them incessantly.
But let all this threaten to become impossible for ever, how beautiful it would become again! Ah! if only the cataclysm doesn't happen this time, we won't miss visiting the new galleries of the Lourve, throwing ourselves at the feet of Miss X., making a trip to India.
The cataclysm doesn't happen, we don't do any of it, because we find ourselves back in the heart of normal life, where negligence deadens desire. And yet we shouldn't have needed the cataclysm to love life today. It would have been enough to think that we are humans, and that death may come this evening.
Indeed, it should have been enough. Why are we all acting like myopic ants, labouring and hoarding away as if there'll be time to savour life after death? Feel free to take that as either a rhetorical question or a genuine logical problem...the former if you are miserable (like Proust always was), and the latter if you are an economist.
If nothing else, this would make a good dinner conversation.
*** The newspaper article and Proust's quote are drawn from 'How Proust Can Change Your Life' by Alain De Botton, Picador, 7.99 pounds (though available at the Strands, NY, for about that figure but in dollars)
State of Macro
- Paul Krugman's 'seminal' NYT article and subsequent thoughts [1] [2] on his blogs
- John Cochrane's reply
- Robert Gordon's paper-length article re-examines the DSGE framework
- Nalayana Kocherlakota's thought : a voice from the 'front line' economist
- Jeff Frankel
- Robert Lucas' piece on the Economist
- Barry Eichengreen
- Phillip Lane
- David Levine's open letter to Krugman
- Martin Bailey
- Robert Shiller says economists must take bubbles seriously
- Dani Rodrik thinks economist become overconfident with their models
- Gilles Saint-Paul says status quo economics is still better than multidisciplinary melting pot
- Brad DeLong: 'Shichinin no Economusutai'
ลับแล, แก่งคอย
...หนึ่งนั้นให้เป็นพี่ชายของความหลับ
อีกหนึ่งนั้นจงเป็นน้องชายของคำลวง...
อีกหนึ่งนั้นจงเป็นน้องชายของคำลวง...
ข่าวประกาศรางวัล S.E.A. Write จาก Thaipost
นายอุทิศ เหมะมูล หนุ่มจิตรกร ชาวสระบุรี คว้ารางวัลซีไรต์ปี 2552 ประเภทนวนิยายเรื่อง "ลับแล,แก่งคอย" นับว่าเป็นครั้งแรกที่คณะกรรมการตัดสินมีมติเป็น เอกฉันท์ ชี้เป็นนวนิยายที่เสนอมิติอันซับซ้อนของตัวตนมนุษย์ ใช้กลวิธีเล่าเรื่องได้แยบยล ภาษาสวยและทรงพลัง แสดงจินตนาการผู้เขียนสุดลึกซึ้ง
ม.ร.ว.สุขุมพันธุ์อ่านคำประกาศของคณะกรรมการตัดสินว่า นวนิยายเรื่อง ลับแล,แก่งคอย ของนายอุทิศ เหมะมูล เสนอมิติที่ซับซ้อนของตัวตนมนุษย์ที่แยกไม่ออกจากรากเหง้า ชาติพันธุ์ ชุมชน ความเชื่อ และเรื่องเล่า โดยผู้เขียนเล่าเรื่องชีวิตมนุษย์ที่ต้องเผชิญความคาดหวัง ซึ่งไม่อาจต้านทานได้และพยายามดิ้นรนหาทางออก ซึ่งผู้เขียนใช้กลวิธีการเล่าเรื่องอันแยบยล สร้างตัวละครที่มีเลือดเนื้อและอารมณ์ราวกับมีตัวตนจริง สร้างฉากและบรรยากาศได้อย่างมีชีวิตชีวา และใช้ภาษาเรียบง่ายแต่ทรงพลัง แสดงจินตภาพกระจ่างและงดงาม
ส่วนหนึ่งจากคำวิจารณ์ของคุณสกุล บุณยทัต (อ่านบทวิจารณ์ฉบับเต็ม)
ในความทรงจำของชีวิต เราต่างมีบาดแผลทางจิตวิญญาณเกาะติดกันอยู่อย่างติดตรึงและลึกเร้น บางขณะมันมักจะลงโทษเราจนป่วยไข้...และหลายๆขณะมันมักจะผลักดันให้เราต้องตก อยู่ในอาการหม่นมืดคลุมเครือหลับๆตื่นๆ เป็นจริตแห่งมายาคติที่ตามติด...คอยหลอกหลอนหัวใจอันบริสุทธิ์ของเราให้ต้อง ตกอยู่กับความน่าสะพรึงกลัวในสิ่งที่บ่มเพาะวิถีแห่งตัวตนอันแตกซ่าน และไร้เกาะป้องกันในการควบคุมบริบทแห่งการมีชีวิตอยู่ให้ดำรงอยู่ได้อย่าง ถาวรและสงบนิ่ง ซึ่งยิ่งยาวนานสิ่งอันเป็นปรากฏการณ์แห่งความเหลื่อมซ้อนในท่าทีเบื้องต้นก็ จะค่อยๆกลับกลายเป็นความลับแห่งจิต และค่อยๆสะสมจนกลายสภาพเป็นความเหินห่างแห่งการรอคอยที่ไกลออกไปจากความดี งามของชีวิต...มากยิ่งขึ้นทุกที..
สาระแห่งเรื่องราวเบื้องต้นคือปฐมบทแห่งสำนึกคิดของการหยั่งรู้อันเป็น ผลลัพธ์แห่งผัสสะในการเล่าเรื่อง..ผ่านนวนิยายที่ทั้งปลอกเปลือกและเฉือน คว้านเข้าไปในเนื้อในของวิถีแห่งจิตวิญญาณที่สับสนและสั่นสะท้านอันเนื่องมา แต่ความจริงอันบาดลึกจากประสบการณ์ที่ถูกกระทำย่ำยีซึ่งสั่งสมอยู่ในจุดแตก ดับแห่งมุมมืดภายใต้หัวใจและตัวตนของความลวงหลอก
ลับแล , แก่งคอย โดย อุทิศ เหมะมูล นักเขียนหนุ่มผู้สร้างสรรค์เนื้องานด้วยลีลาอันแยบยลแห่งจิตรศิลป์และจินต ศิลป์สื่อสะท้อนถึงอุบัติการณ์แห่งการถูกจองจำอย่างโหดร้ายภายใต้การบีบกด จากสัญชาตญาณที่ถูกทุบทำลายอย่างไร้หวัง...ด้วยภาพแสดงที่พลิกกลับไปมาทาง กลไกของการรับรู้และเข้าใจ
บทสัมภาษณ์อุทิศ เหมะมูล (ถ้ายังไม่ได้อ่าน ไม่แนะนำให้ดูนะครับ มี spoiler ตอนท้าย)
Youtube Collection Vol. 2
Fragments from some of my favourite movies...
Chungking Express
'On every flight, there's a stewardess you want to seduce. This time last year, at 25000 feet, I seduced one.'
Swallowtail Butterfly
'Once upon a time, when the Yen was the most powerful force in the world...the city overflowed with immigrants, like a gold rush boom town.'
Lost in Translation
'The more you know who you are and what you want, the less you let things upset you.'
Hot Fuzz
'Seen any murderings, Nicholarse?'
Hana and Alice
'What's your philosophy at 15?'
Infernal Affairs
'Sorry...I'm a cop.'
Chungking Express
'On every flight, there's a stewardess you want to seduce. This time last year, at 25000 feet, I seduced one.'
Swallowtail Butterfly
'Once upon a time, when the Yen was the most powerful force in the world...the city overflowed with immigrants, like a gold rush boom town.'
Lost in Translation
'The more you know who you are and what you want, the less you let things upset you.'
Hot Fuzz
'Seen any murderings, Nicholarse?'
Hana and Alice
'What's your philosophy at 15?'
Infernal Affairs
'Sorry...I'm a cop.'
Defence is the Last Thing the Dismal Science Needs Right Now
After publishing a parade of articles branding economics as useless for most practical purposes, the Economist finally got a rebuttal out of Robert Lucas. I think he took the hint that the complaint was mainly aimed at Chicago macro rather than macro proper (although the difference between the two can be more or less clear-cut, depending on where you are taught). Lucas said:
Now that conclusion sounds pretty dark, even for a dark age. I still struggle to understand the argument though. Prof Lucas's contention is that if there exists a tool that can correctly forecast recession/crisis, then there cannot be a crisis in the first place (the price would have fallen earlier). Hence, proof by contradiction...the fact that Lehman does happen and will happen again, must imply that such a tool cannot exist, ever.
There lies the Achilles heal of the argument. Must Lehman happen again? If there was a tool predicting its calamity, its price would have dropped before Sep 2008. Foreseeing this, Lehman probably would have avoided buying toxic securities. The originators seeing no profit, would have been more careful making subprime loans. And the crisis would never happen. The EMH, conditional on the economists delivering a good set of tool in detecting the eventual crisis, would imply no crisis. And that's what we want!
Whilst private businesses are very good at making money for themselves, they are not too preoccupied with the bigger picture of how their interactions could lead to systemic demise for everyone. After all, that is the job of the economists! To concede that if the market doesn't see it, it is hopeless for economists to work on it, is irresponsible and would indeed push the profession deeper into the dark territory.
One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier...
The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.
Now that conclusion sounds pretty dark, even for a dark age. I still struggle to understand the argument though. Prof Lucas's contention is that if there exists a tool that can correctly forecast recession/crisis, then there cannot be a crisis in the first place (the price would have fallen earlier). Hence, proof by contradiction...the fact that Lehman does happen and will happen again, must imply that such a tool cannot exist, ever.
There lies the Achilles heal of the argument. Must Lehman happen again? If there was a tool predicting its calamity, its price would have dropped before Sep 2008. Foreseeing this, Lehman probably would have avoided buying toxic securities. The originators seeing no profit, would have been more careful making subprime loans. And the crisis would never happen. The EMH, conditional on the economists delivering a good set of tool in detecting the eventual crisis, would imply no crisis. And that's what we want!
Whilst private businesses are very good at making money for themselves, they are not too preoccupied with the bigger picture of how their interactions could lead to systemic demise for everyone. After all, that is the job of the economists! To concede that if the market doesn't see it, it is hopeless for economists to work on it, is irresponsible and would indeed push the profession deeper into the dark territory.
Economists' Raison D'etre
At a November visit to the LSE the Queen asked Luis Garicano, an LSE expert on economics and management: “Why did no one see it [the crisis] coming?”
All the Fellows of British Academy who were economists felt compelled to reply. Tim Besley and others thus wrote a letter to the Queen, the essence of which said
Failure of collective imagination! ... lucky for us all the engineers don't have the same problem, or we'll end up with lots of beautiful nuts and bolts that don't quite fit each other.
Samuel Brittan, who's among the FBAs that signed the letter, observed...
For original articles, check out
All the Fellows of British Academy who were economists felt compelled to reply. Tim Besley and others thus wrote a letter to the Queen, the essence of which said
Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction. This, combined with the psychology of herding and the mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast.
So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.
Failure of collective imagination! ... lucky for us all the engineers don't have the same problem, or we'll end up with lots of beautiful nuts and bolts that don't quite fit each other.
Samuel Brittan, who's among the FBAs that signed the letter, observed...
It is fruitful to enquire who economists are and what they actually do. This was attempted by the Royal Economic Society in a survey summarised by Ruth Towse and Mark Blaug in an Economic Journal article in March 1990. They came up against the problem that, in contrast to, say, engineers or accountants, “there is no precise way to define the economics profession”. They settled for “someone with at least a second degree in economics” (which thankfully lets me off the hook). Only 8 per cent of economics undergraduates went on to higher degrees but “this has never been allowed to undermine the perception of most academic teachers” that “all their pupils must be trained as if they were going to be professional economists”.
On this definition they estimated that in the UK there were then 3,500 practising economists of whom 2,500 were academics, 600 in private business and 400 in the government. The high salaries paid to some City economists were “atypical”. My own observation is that their repute declined so much after events such as the UK’s forced departure from the exchange rate mechanism in 1992 that some practitioners redefined themselves as “strategists”.
For original articles, check out
Amor Fati
From wikipedia ...
Amor fati is a Latin phrase that loosely translates to "love of fate" or "love of one's fate". It is used to describe an attitude in which one sees everything that happens in one's life, including suffering and loss, as good. That is, one feels that everything that happens is destiny's way of reaching its ultimate purpose, and so should be considered good. Moreover, it is characterized by an acceptance of the events that occur in one's life. It is almost identical to the Jewish concept of Gam Zu Letovah (this too is for the best).
The phrase is used repeatedly in Nietzsche's writings and is representative of the general outlook on life he articulates in section 276 of The Gay Science, which reads,
I want to learn more and more to see as beautiful what is necessary in things; then I shall be one of those who make things beautiful. Amor fati: let that be my love henceforth! I do not want to wage war against what is ugly. I do not want to accuse; I do not even want to accuse those who accuse. Looking away shall be my only negation. And all in all and on the whole: some day I wish to be only a Yes-sayer.
Quote from "Why I Am So Clever" in Ecce Homo, section 10[1]:
My formula for greatness in a human being is amor fati: that one wants nothing to be different, not forward, not backward, not in all eternity. Not merely bear what is necessary, still less conceal it—all idealism is mendaciousness in the face of what is necessary—but love it.
MABE 2009: Revision Questions
In this post, I will answer questions that some of you sent me while revising for exams.
1. As, Price stability suggests that inflation should be "low and stable", should we set inflation close to zero as possible? Is the result of setting inflation close zero mean that we will be at risk of deflation? And what is the appropriate rate of inflation (inflation Targeting) or it depend on each in country forecast as New Keynesian suggested?
This is a good question, and one that I didn't get to address properly in lectures. If price stability is so important, why don't we aim for zero inflation? After all, our ultimate aim is price stability rather than inflation stability. There are at least 2 reasons why, in practice, targeting a low but positive inflation may be a good idea.
First, as you stated, there is a danger of deflation, which can make monetary policy ineffective and thus can be very costly (Japan's lost decade is the prime example here). So, even if zero inflation may be desirable in principles, the upside and downside costs of missing your target is highly asymmetric: you are much happier to end up with 1% inflation, rather than -1%. Just to be on the safe side, targeting a small but positive inflation reduces the deflation risk.
Secondly, it is well-known that our measurement of inflation is imperfect, especially because we cannot account for the quality improvement of goods. For example, the cars' prices may rise every year, but does that mean we have a higher inflation, or simply that cars this year are better than last year model? Due to this unseen quality adjustment, economists are aware that our measured inflation is probably subject to upward bias: it tends to overstates the true inflation. Hence, while we may aim for close to zero inflation, in practice we target a slightly positive number.
What inflation number precisely? I think most central banks would agree that somewhere around 1-2% represents price stability. Countries with higher targets may be those whose inflation targets are still 'converging' towards their long-run ultimate objective.
1. As, Price stability suggests that inflation should be "low and stable", should we set inflation close to zero as possible? Is the result of setting inflation close zero mean that we will be at risk of deflation? And what is the appropriate rate of inflation (inflation Targeting) or it depend on each in country forecast as New Keynesian suggested?
This is a good question, and one that I didn't get to address properly in lectures. If price stability is so important, why don't we aim for zero inflation? After all, our ultimate aim is price stability rather than inflation stability. There are at least 2 reasons why, in practice, targeting a low but positive inflation may be a good idea.
First, as you stated, there is a danger of deflation, which can make monetary policy ineffective and thus can be very costly (Japan's lost decade is the prime example here). So, even if zero inflation may be desirable in principles, the upside and downside costs of missing your target is highly asymmetric: you are much happier to end up with 1% inflation, rather than -1%. Just to be on the safe side, targeting a small but positive inflation reduces the deflation risk.
Secondly, it is well-known that our measurement of inflation is imperfect, especially because we cannot account for the quality improvement of goods. For example, the cars' prices may rise every year, but does that mean we have a higher inflation, or simply that cars this year are better than last year model? Due to this unseen quality adjustment, economists are aware that our measured inflation is probably subject to upward bias: it tends to overstates the true inflation. Hence, while we may aim for close to zero inflation, in practice we target a slightly positive number.
What inflation number precisely? I think most central banks would agree that somewhere around 1-2% represents price stability. Countries with higher targets may be those whose inflation targets are still 'converging' towards their long-run ultimate objective.
MABE 2009: Lectures 7,8,9,10 and Exams Prep
Long-overdue presentations for the rest of the course have been uploaded.
If you have any questions/problems during your revision, please let me know!
If you have any questions/problems during your revision, please let me know!
Why PPIP flopped
A good and lucid case against using market to help uncovering unknown asset values.
Adverse Selection 101: The Real Reason Why Balance Sheet Detoxification Has Failed by Kenneth Kuttner
When you have problems due to severe market failures, it seems pointless to rely on market for solutions.
Adverse Selection 101: The Real Reason Why Balance Sheet Detoxification Has Failed by Kenneth Kuttner
When you have problems due to severe market failures, it seems pointless to rely on market for solutions.
MABE 2009: Lectures 3 and 4 Materials
Lecture materials for download...
You may also find the following extra readings useful
You may also find the following extra readings useful
MABE 2009: Lectures 1 and 2 Materials
Lecture materials can be downloaded here...
I've told the class what the password was, but if you forget what it is, please send me an email.
I've included the excel files and other reference materials in the lecture pack as well, in case you find them useful.
I've told the class what the password was, but if you forget what it is, please send me an email.
I've included the excel files and other reference materials in the lecture pack as well, in case you find them useful.
EE432 2009: Revision series - Misc
Here are some questions from some of you.
1) Can u explain more in details on " Impulse responses in the Inflation-Unemployment-Interest rate Recursive VAR"(details on each graph) ie. Inflation shock to unemployment- how inflation causes higher unemployment, Unemployment shock to unemployment- why it go up and down(below 0) then up again ?
Remember that VAR gives you a statistical fact...so it doesn't have to agree with any theory necessarily (in the case of disagreement, you could either blame the theory, or VAR itself). The job of interpreting the result and checking if it makes sense lies with us, the economists. I encourage you to try and interpret these, using what you know from the course and elsewhere. In this example, why should inflation raise unemployment? We learn from various topics that inflation shock is an AS (or Phillips curve shock). What happens when there is a positive inflation shock? The equilibrium output will be reduced! (Revise topic 5 again if you don't follow this step.) So it's no surprise that unemployment rises. As for unemployment on itself, you may interpret it as a 'pendulum effect'...the economy is trying to settle to a new equilibrium after the shock, and the adjustment process involves overshooting in unemployment in the medium term.
2) For the supply of bank reserves (last lecture page10) I dont understand the graphes
and what is the shape for supply of bank reserves(horizontal,vertical or upward sloping?)
The supplier of bank reserves in this case is not motivated by profit, so there's no reason for the supply curve to have any slope. The supply is motivated by the central bank's objective of meeting it's operating target - the overnight interest rate, as set by the monetary policy committee. In this case, you may think the idealised supply should be perfectly elastic at the targeted overnight rate...i.e. the central bank stands ready to supply whatever reserves to meet its target. This would in principle be correct. In practice, it is more complicated, because the central bank is only one among many participants in the market for reserves. The central bank in practice calculates how the supply of reserves is changing in quantity in the absence of its action (i.e. conduct liquidity forecasting), and then decides on the amount of open market operation needed to bring reserves supply in line with te reserves demand. In view of this practical implementation, it would be closer to the truth that the supply for reserves is vertical, i.e. just in line with the demand. But then the central bank quickly communicates to the market it's intention to meet the target interest rate. The vertical supply collapses to a point...on which the interest rate is as announced, and the quantity equals reserves demand.
3)In topic 5 what would be the optimal rule for commitment?
What whould be the level of pi that CB should commit to? Is it the same as problem set's answer: plug in y=y_star and pi=pi_star in AS function and find expected pi?
do we have to saperate into cheat case(y_star>y_bar) and no cheat case(y_star=y_bar)?
The upshot of this model is, if the public holds rational expectations, there is never any gain in terms of output that the central bank can enjoy. Output will always equal the natural rate in the rational expectations equilibrium (check the maths to see that you agree with me in this). So the best that the central bank can achieve is in meeting its inflation target. Committing to this particular inflation is the optimal strategy.
In topic 6, from the journal "The Science of Monetary Policy:..." by Richard Clarida, Gali, Gertler,
On Page 1680, on the right hand side paragraph
"... As the future comes to pass, the central bank has the incentive to renege on its planned toughness and, instead, promise again to undertake contractionary policy down the road. To see this, ......If the central bank is free to deviate from the rule, it will always choose the optimal policy under discretion,...."
So under this paragraph, does it mean that the central bank will choose to cheat from its commitment to fix the shock? which means it will fall into the case of time inconsistency? Would taking the limit to infinity into the model prove this statement?
At last, someone asks questions related to papers!
Yes, this is very similar to time inconsistency issue, as the problem arises because of the inability of the central bank to achieve an outcome that it deems optimal ex ante, but wishes to deviate ex post. Clarida et al mentions down the paragraph that they think this is different from the traditional time inconsistency however, because the incentive to cheat has nothing to do with the desire to push output beyond the natural rate (note that Clarida et al associates the concept of time inconsistency with k>0). Instead, the incentive to cheat here arises because the 'tough' act, which has a long-term benefit in taming inflation expectations but painful for output in the short-run, is not carried out under discretion. Hence the benefit in terms of low inflation expectations is never realised, because the people expect that the touch act is not optimal ex post. This leaves room for the commitment regime to add value.
1) Can u explain more in details on " Impulse responses in the Inflation-Unemployment-Interest rate Recursive VAR"(details on each graph) ie. Inflation shock to unemployment- how inflation causes higher unemployment, Unemployment shock to unemployment- why it go up and down(below 0) then up again ?
Remember that VAR gives you a statistical fact...so it doesn't have to agree with any theory necessarily (in the case of disagreement, you could either blame the theory, or VAR itself). The job of interpreting the result and checking if it makes sense lies with us, the economists. I encourage you to try and interpret these, using what you know from the course and elsewhere. In this example, why should inflation raise unemployment? We learn from various topics that inflation shock is an AS (or Phillips curve shock). What happens when there is a positive inflation shock? The equilibrium output will be reduced! (Revise topic 5 again if you don't follow this step.) So it's no surprise that unemployment rises. As for unemployment on itself, you may interpret it as a 'pendulum effect'...the economy is trying to settle to a new equilibrium after the shock, and the adjustment process involves overshooting in unemployment in the medium term.
2) For the supply of bank reserves (last lecture page10) I dont understand the graphes
and what is the shape for supply of bank reserves(horizontal,vertical or upward sloping?)
The supplier of bank reserves in this case is not motivated by profit, so there's no reason for the supply curve to have any slope. The supply is motivated by the central bank's objective of meeting it's operating target - the overnight interest rate, as set by the monetary policy committee. In this case, you may think the idealised supply should be perfectly elastic at the targeted overnight rate...i.e. the central bank stands ready to supply whatever reserves to meet its target. This would in principle be correct. In practice, it is more complicated, because the central bank is only one among many participants in the market for reserves. The central bank in practice calculates how the supply of reserves is changing in quantity in the absence of its action (i.e. conduct liquidity forecasting), and then decides on the amount of open market operation needed to bring reserves supply in line with te reserves demand. In view of this practical implementation, it would be closer to the truth that the supply for reserves is vertical, i.e. just in line with the demand. But then the central bank quickly communicates to the market it's intention to meet the target interest rate. The vertical supply collapses to a point...on which the interest rate is as announced, and the quantity equals reserves demand.
3)In topic 5 what would be the optimal rule for commitment?
What whould be the level of pi that CB should commit to? Is it the same as problem set's answer: plug in y=y_star and pi=pi_star in AS function and find expected pi?
do we have to saperate into cheat case(y_star>y_bar) and no cheat case(y_star=y_bar)?
The upshot of this model is, if the public holds rational expectations, there is never any gain in terms of output that the central bank can enjoy. Output will always equal the natural rate in the rational expectations equilibrium (check the maths to see that you agree with me in this). So the best that the central bank can achieve is in meeting its inflation target. Committing to this particular inflation is the optimal strategy.
In topic 6, from the journal "The Science of Monetary Policy:..." by Richard Clarida, Gali, Gertler,
On Page 1680, on the right hand side paragraph
"... As the future comes to pass, the central bank has the incentive to renege on its planned toughness and, instead, promise again to undertake contractionary policy down the road. To see this, ......If the central bank is free to deviate from the rule, it will always choose the optimal policy under discretion,...."
So under this paragraph, does it mean that the central bank will choose to cheat from its commitment to fix the shock? which means it will fall into the case of time inconsistency? Would taking the limit to infinity into the model prove this statement?
At last, someone asks questions related to papers!
Yes, this is very similar to time inconsistency issue, as the problem arises because of the inability of the central bank to achieve an outcome that it deems optimal ex ante, but wishes to deviate ex post. Clarida et al mentions down the paragraph that they think this is different from the traditional time inconsistency however, because the incentive to cheat has nothing to do with the desire to push output beyond the natural rate (note that Clarida et al associates the concept of time inconsistency with k>0). Instead, the incentive to cheat here arises because the 'tough' act, which has a long-term benefit in taming inflation expectations but painful for output in the short-run, is not carried out under discretion. Hence the benefit in terms of low inflation expectations is never realised, because the people expect that the touch act is not optimal ex post. This leaves room for the commitment regime to add value.
EE432 2009: Solution to Problem Set 4
Solution guide for the last problem set.
Download here.
For people having questions during their revisions, I encourage you to post them using the chat, so that your friends may read them and interact etc. If the space limit gets on your nerve, let me know, and I'll open up a new post, and we can use the comment space there instead.
Download here.
For people having questions during their revisions, I encourage you to post them using the chat, so that your friends may read them and interact etc. If the space limit gets on your nerve, let me know, and I'll open up a new post, and we can use the comment space there instead.
EE432 2009: Topic 7 Materials
Our final topic, on the 'Mechanics of Monetary Policy', will be split into 2 parts.
1. The transmission mechanism
The reading pack can be downloaded here.
2. The implementation
The reading pack as well as the final presentation file can be downloaded here.
The articles included are mainly on how the open market operation works. For the unconventional policy measures, the details can be found on the fed's website here. For a macro overview of crisis management and the general philosophy of unconventional monetary policy, consult two very good speeches by Bernanke [1.@LSE][2.@National Press]. Also don't forget the Brunnermeier's article included in topic 4's reading pack, which describes the unfolding of subprime crisis.
1. The transmission mechanism
The reading pack can be downloaded here.
2. The implementation
The reading pack as well as the final presentation file can be downloaded here.
The articles included are mainly on how the open market operation works. For the unconventional policy measures, the details can be found on the fed's website here. For a macro overview of crisis management and the general philosophy of unconventional monetary policy, consult two very good speeches by Bernanke [1.@LSE][2.@National Press]. Also don't forget the Brunnermeier's article included in topic 4's reading pack, which describes the unfolding of subprime crisis.
EE432 2009: Problem Set 4
Probably the final one now...download here. This is due on Wednesday 29th April.
EE432 2009: Solution to Problem Set 3
Already available for download here.
Again think of it as a guide rather than a model solution. Don't let my suggested solutions stop your creativity!
Again think of it as a guide rather than a model solution. Don't let my suggested solutions stop your creativity!
Youtube Collection Vol. 1
My own blog is making me depressed, so I don't know what it's making you feel. Time for light stuff. Warning: some strong language.
Nash Equilibrium and Reality
I first saw the following clip from Mankiw's blog a few weeks back. Please watch it, and think of the following issues:
1. Is everyone playing the game rationally?
2. Does the talking before decision time matter?
3. What do you think will happen if the game is played repeatedly between these two people?
4. What would be your rational strategy, if you know you're playing this game with an irrational opponent?
I hope you will find a very close analogy of this clip to the time inconsistency issue.
1. Is everyone playing the game rationally?
2. Does the talking before decision time matter?
3. What do you think will happen if the game is played repeatedly between these two people?
4. What would be your rational strategy, if you know you're playing this game with an irrational opponent?
I hope you will find a very close analogy of this clip to the time inconsistency issue.
EE432 2009: Revision Series - Time Inconsistency
We have not quite finished the course yet, and are seriously behind the schedule thanks to the protest. Unfortunately, the exam cares not about politics and the final draws closer as we speak, so it's a good idea that we start the revision early. To start with, here are some questions from a student related to topic 5: Time inconsistency.
Q1: Phillips curve...is it a tradeoff between (1) inflation and unemployment, or (2) inflation and output? Does it mater?
Unemployment and output are both measures of the economic activity, so they are tightly correlated. The empirical relationship between the two is called the Okun's law. No surprise the correlation is negative, as in an economic expansion you'd expect unemployment to be low and output high, while in a recession the opposite happens. You can think of it in terms of production function - output is a function of labour input, so the correlation must be there.
So for me it is almost semantic whether we use unemployment or output in the Phillips curve...the choice doesn't really matter conceptually. What we're essentially doing is tracing a relationship between inflation and economic activity.
Q2: I don't understand abt the third solution in the term of Reputation Equilibrium and Subgame Perfect.
We say in the lecture that the Nash equilibrium in output and inflation is inefficient, as the Phillips curve allow the inflation to be closer to desired level while the output gap needs not change. Of course the problem is, the central bank cannot credibly commit to that desired inflation. We calculate this Nash equilibrium assuming that the game is played only once, or in the game theory term, it is a static game.
If we allow the game to be played many many times (i.e. we have a 'repeated game'), so that each player maximises the discounted sum of utility instead of just one single utility, then we can get all sorts of interesting Nash equilibria and a good Nash equilibrium may be achievable. The central idea is, cheating may only earn you a welfare gain in the short run, but cheating destroys the trust (or your reputation), and hence it can be bad for you in the long run. If the long-run loss is greater than the short-term gain, you will decide not to cheat. And we get a good equilibrium.
Let me sketch 2 examples.
Suppose the game is played for infinite number of times. The public may decide to adopt the following strategy: Expect low inflation to begin with, and continue to expect low inflation as long as the central bank implements low inflation. But as soon as the central bank chooses a high inflation even for one period, expect a high inflation forever. This is called a 'trigger strategy', i.e. I choose to be well-behaved as long as my opponent cooperates, and retaliate forever if my opponent cheats even only once. Under this strategy, the central bank may find that cheating only earns him one period gain (when he surprises the public), and loss of welfare in every period after that. Cheating to get short-term gain may not be worth it for the central bank, in which case, we can observe a low inflation every period. Good equilibrium rules.
In the 2nd example, suppose the game is played twice, and there are 2 types of central bank, one that is like in our lecture (i.e. wants to cheat), and the other who cares only about low inflation. The public doesn't know which type the central bank is. In this case, the outcome of the game in the 1st period tells the public something about the type of the central bank. If the central bank misbehaves in the 1st period, he gives away his type, and the public may expect a high inflation in the 2nd period, which is bad for him. Anticipating this, the central bank may implement a low inflation in the 1st period, to build a 'reputation' and pretends to be the 2nd type. This pretense allows the central bank to earn trust and manipulate the inflation expectation, and get a better inflation-output tradeoff in the 2nd period. You may find this line of reasoning and the model in Romer's book.
Q3: In solution 1, Can we derive other L preference to solve Time inconsistency Problem??
You certainly can. There is an infinite number of loss functions you can write down that will solve the problem just as well. Can you think of some?
Q4: In Policymaker Reaction function,if a=0 then this mean policymaker don't care inflation that made L=0 ?? I don't understand the economic intuitions behind this??
Yes, if a=0, that means the policy maker only cares about the output deviation from y_star. The loss then takes a parabola shape, with minimun point at y=y_star, at which point L=0 as you said. The exact value of L is of no importance...we're operating in ordinal utility world (and not cardinal), so we care only about the relative loss. When a=0, the minimum loss is L=0, which is the best that the central bank can hope for.
Q5: Policy maker must be let independent or discretion or commit the rule?? In my thought, CB should be independent to solve explosive inflation,but when CB commit the rule yield better solution than discretion.
When CB has no independence, the monetary policy is dictated by the elected government. In that case, you can safely assume the loss function will include the targeted output y_star term, as short-term growth brings votes. When CB has independence and retains discretion, you must ask what is the loss function. With the right loss function, efficient outcome may be achievable. Otherwise, committing to a rule (i.e. specifying a credible pre-commitment, which can take the form of legal commitment like a binding inflation-targeting regime), can improve the welfare.
Q6: In Journal, I found content is not the same in your lecture? I don;t understand so much so Need I understand this outside your lecture? Is Romer 9.4 is the same as we learn from you??
The Kydland-Prescott paper is a little hard, but the Barro one is easier. Romer's is the easiest one. The central idea is identical, whichever reading you consult.
To be continued.
Q7: We assume y*= natural rate output>th e reason is because Incentive Distortion- I don't understand this word. and its process and why CB must target y* > naturate output not eq output. Pleae example in term of income tax?
When you impose income tax, this distorts the people's incentives to work. They work less hard, and produce less. The resulted neutral rate of output is y-bar, the natural rate. But in an ideal world, give the technology and preferences for consumption/leisure etc, it is socially desirable for this economy to produce more output (optimal, without tax distortions, to sleep less and work m0re) at y_star. This is what the CB is after...the first-best solution.
Q8: I know that because y*> natural rate output that drive inflation bias (constant term right? May be I don't clear this word) this made CB to cheat but how?
Q1: Phillips curve...is it a tradeoff between (1) inflation and unemployment, or (2) inflation and output? Does it mater?
Unemployment and output are both measures of the economic activity, so they are tightly correlated. The empirical relationship between the two is called the Okun's law. No surprise the correlation is negative, as in an economic expansion you'd expect unemployment to be low and output high, while in a recession the opposite happens. You can think of it in terms of production function - output is a function of labour input, so the correlation must be there.
So for me it is almost semantic whether we use unemployment or output in the Phillips curve...the choice doesn't really matter conceptually. What we're essentially doing is tracing a relationship between inflation and economic activity.
Q2: I don't understand abt the third solution in the term of Reputation Equilibrium and Subgame Perfect.
We say in the lecture that the Nash equilibrium in output and inflation is inefficient, as the Phillips curve allow the inflation to be closer to desired level while the output gap needs not change. Of course the problem is, the central bank cannot credibly commit to that desired inflation. We calculate this Nash equilibrium assuming that the game is played only once, or in the game theory term, it is a static game.
If we allow the game to be played many many times (i.e. we have a 'repeated game'), so that each player maximises the discounted sum of utility instead of just one single utility, then we can get all sorts of interesting Nash equilibria and a good Nash equilibrium may be achievable. The central idea is, cheating may only earn you a welfare gain in the short run, but cheating destroys the trust (or your reputation), and hence it can be bad for you in the long run. If the long-run loss is greater than the short-term gain, you will decide not to cheat. And we get a good equilibrium.
Let me sketch 2 examples.
Suppose the game is played for infinite number of times. The public may decide to adopt the following strategy: Expect low inflation to begin with, and continue to expect low inflation as long as the central bank implements low inflation. But as soon as the central bank chooses a high inflation even for one period, expect a high inflation forever. This is called a 'trigger strategy', i.e. I choose to be well-behaved as long as my opponent cooperates, and retaliate forever if my opponent cheats even only once. Under this strategy, the central bank may find that cheating only earns him one period gain (when he surprises the public), and loss of welfare in every period after that. Cheating to get short-term gain may not be worth it for the central bank, in which case, we can observe a low inflation every period. Good equilibrium rules.
In the 2nd example, suppose the game is played twice, and there are 2 types of central bank, one that is like in our lecture (i.e. wants to cheat), and the other who cares only about low inflation. The public doesn't know which type the central bank is. In this case, the outcome of the game in the 1st period tells the public something about the type of the central bank. If the central bank misbehaves in the 1st period, he gives away his type, and the public may expect a high inflation in the 2nd period, which is bad for him. Anticipating this, the central bank may implement a low inflation in the 1st period, to build a 'reputation' and pretends to be the 2nd type. This pretense allows the central bank to earn trust and manipulate the inflation expectation, and get a better inflation-output tradeoff in the 2nd period. You may find this line of reasoning and the model in Romer's book.
Q3: In solution 1, Can we derive other L preference to solve Time inconsistency Problem??
You certainly can. There is an infinite number of loss functions you can write down that will solve the problem just as well. Can you think of some?
Q4: In Policymaker Reaction function,if a=0 then this mean policymaker don't care inflation that made L=0 ?? I don't understand the economic intuitions behind this??
Yes, if a=0, that means the policy maker only cares about the output deviation from y_star. The loss then takes a parabola shape, with minimun point at y=y_star, at which point L=0 as you said. The exact value of L is of no importance...we're operating in ordinal utility world (and not cardinal), so we care only about the relative loss. When a=0, the minimum loss is L=0, which is the best that the central bank can hope for.
Q5: Policy maker must be let independent or discretion or commit the rule?? In my thought, CB should be independent to solve explosive inflation,but when CB commit the rule yield better solution than discretion.
When CB has no independence, the monetary policy is dictated by the elected government. In that case, you can safely assume the loss function will include the targeted output y_star term, as short-term growth brings votes. When CB has independence and retains discretion, you must ask what is the loss function. With the right loss function, efficient outcome may be achievable. Otherwise, committing to a rule (i.e. specifying a credible pre-commitment, which can take the form of legal commitment like a binding inflation-targeting regime), can improve the welfare.
Q6: In Journal, I found content is not the same in your lecture? I don;t understand so much so Need I understand this outside your lecture? Is Romer 9.4 is the same as we learn from you??
The Kydland-Prescott paper is a little hard, but the Barro one is easier. Romer's is the easiest one. The central idea is identical, whichever reading you consult.
To be continued.
Q7: We assume y*= natural rate output>th e reason is because Incentive Distortion- I don't understand this word. and its process and why CB must target y* > naturate output not eq output. Pleae example in term of income tax?
When you impose income tax, this distorts the people's incentives to work. They work less hard, and produce less. The resulted neutral rate of output is y-bar, the natural rate. But in an ideal world, give the technology and preferences for consumption/leisure etc, it is socially desirable for this economy to produce more output (optimal, without tax distortions, to sleep less and work m0re) at y_star. This is what the CB is after...the first-best solution.
Q8: I know that because y*> natural rate output that drive inflation bias (constant term right? May be I don't clear this word) this made CB to cheat but how?
Is there other factors that driving this inflaton bias?
The central bank wants to raise output up beyond the natural rate, but the Phillips curve forbids it from doing it for free...the CB must sacrifice some inflation. So to get a higher output, they must allow inflation to rise. But the public catches up with the CB, and hence the CB ends up getting a higher inflation with no gain in output. The Nash equilibrium is inefficient, and is a consequence of the CB's incentive to raise output up at bit at the margin. Please make sure you understand the mechanics of the model well...this is the key point of this topic.
The central bank wants to raise output up beyond the natural rate, but the Phillips curve forbids it from doing it for free...the CB must sacrifice some inflation. So to get a higher output, they must allow inflation to rise. But the public catches up with the CB, and hence the CB ends up getting a higher inflation with no gain in output. The Nash equilibrium is inefficient, and is a consequence of the CB's incentive to raise output up at bit at the margin. Please make sure you understand the mechanics of the model well...this is the key point of this topic.
Grand Cocktail of Fiscal Stimulus Debate Take 2: The Ricardian Equivalence
For complete beginners, the Ricardian equivalence is a hypothesis that says something along the following line. When the government spends more money without simultaneously raising tax, it must automatically be borrowing from the public (issuing more bonds). That borrowing will eventually have to be paid back to the public, and when that day comes, the government will either need to raise tax or cut spending or both. If the public is smart, they should see this coming and should not react to the initial increase in government spending, because they know that they will have to pay for it in the future. Tax now, or higher tax later (borrower must pay interest rate), the tax bill is the same in present value term. The conclusion is, fiscal stimulus cannot do anything to stimulate consumption.
The details for this is spelled out in Robert Barro's paper "Are Government Bonds Net Wealth?", probably in JPE some time in the 70's. I remember reading this some 10 years ago, thinking it's a very neat model but probably doesn't hold in reality. I've also been told that Ricardo himself didn't quite believe it, though I didn't get to read the original reference myself. In any case, the concept's gathering some momentum now, in the fiscal debate round two. Like in the first round, we're not even dealing with the assumptions of the original model (rationality, discount rate, agents' longevity etc), but rather the basic understanding of the model itself. What should we teach our undergrads when we can't have a consensus about anything these days?
Ricardian
The details for this is spelled out in Robert Barro's paper "Are Government Bonds Net Wealth?", probably in JPE some time in the 70's. I remember reading this some 10 years ago, thinking it's a very neat model but probably doesn't hold in reality. I've also been told that Ricardo himself didn't quite believe it, though I didn't get to read the original reference myself. In any case, the concept's gathering some momentum now, in the fiscal debate round two. Like in the first round, we're not even dealing with the assumptions of the original model (rationality, discount rate, agents' longevity etc), but rather the basic understanding of the model itself. What should we teach our undergrads when we can't have a consensus about anything these days?
Ricardian
- Robert Lucas [Mar 30: speaking at the Council for Foreign Relations]
- Brad Delong [April 5: Appeal for Help][April 6: Great Misunderstanding]
- Paul Krugman [April 6: One more time]
EE432 2009: Topic 6 Materials
On the Science of Monetary Policy.
The materials can be downloaded here.
The key reading for this topic is the survey paper by Clarida, Gali and Gertler (1999) JEL, on which the lecture is based.
In real life, to what extent is monetary policy conducted scientifically? How serious is the time inconsistency problem in developed countries such as the US? Check out Blinder (1997) and Bernanke&Mishkin(1997), both from JEP, for insights. I also expect you to have a good understanding of why a policy framework such as inflation targeting might be a good idea after having read the last paper.
*New* [9 Apri 09] Please check out this thought-provoking post by Mankiw, which is very relevant to what we are doing.
The materials can be downloaded here.
The key reading for this topic is the survey paper by Clarida, Gali and Gertler (1999) JEL, on which the lecture is based.
In real life, to what extent is monetary policy conducted scientifically? How serious is the time inconsistency problem in developed countries such as the US? Check out Blinder (1997) and Bernanke&Mishkin(1997), both from JEP, for insights. I also expect you to have a good understanding of why a policy framework such as inflation targeting might be a good idea after having read the last paper.
*New* [9 Apri 09] Please check out this thought-provoking post by Mankiw, which is very relevant to what we are doing.
How Useful is Game Theory in Monetary Economics?
I get an interesting question from an ee432 student today, who asked about the application of game theory to monetary economics, or to any real-life problems for that matter. Given that I have more than a few things to say, I hope you don't mind me posting the answer up instead of replying to you privately.
The first thought that comes to my mind is a remark by one of my past teachers, that "Economics is really game theory". Of course it's no surprise that he IS a game theorist, but I can certainly relate to that view. Economics for the most part is really a study of how clever people get on with their lives in a tough world. And when you pitch more than 2 clever people to interact with each other, you have a game. It's no surprise then that game theoretical way of thinking has penetrated almost all fields in economics, in various disguises. And applications are not restricted to economics... biologists, diplomats, sociologists have all used the tool to a good measure of success.
Monetary economics is no exception. If you can recall, right from our first topic on the use of fiat money as a medium of exchange, we did employ the notion of Nash equilibrium, the good old concept in game theory. In that world, people are playing the game of 'let's coordinate our choice of money so that we can trade faster', and the result is that even an intrinsically worthless piece of paper can be regarded as money in Nash equilibrium...fiat money is born!
Or when we do rational expectations (either in Lucas or New Keynesian models), we are basically looking at agents who are strategically very smart and are reacting to any changes in aggregate demand pattern in a rational way. If you just add in another smart guy who's controlling the aggregate demand and reacting strategically to the public (a central bank!), then again you have a game! We will precisely do this in topic 6, the science of monetary policy. You will see then that the monetary policy in modern days is essentially a game between a mister Ben Bernanke and the public.
Or in our class tomorrow, when I will continue discussing the Diamond-Dybvig model of bank runs, you'll see that we use the Nash equilibrium concept again to describe the outcome under banking allocations. Whether or not there is a bank runs, it depends on your confidence of the bank. But your confidence depends on others confidence, so it's a strategic decision, and hence calls for a game theory as a framework. Or when we move on to topic 5, on time inconsistency, again we will look at a game played by the policy maker and the public. Game theory appears almost everywhere once you look closely.
And I can say that modern economic research in monetary economics has not had enough with game theory...in fact, it wants more! Examples of recent works which I like are by Susan Athey on the optimal degree of monetary policy discretion, Hyun Song Shin on the benefit/cost of policy transparency (social value of public info), Markus Brunnermeier on asset price bubbles formation for example. These works are probably too advanced for an undergrad project, but just to show you that the application is really endless. The challenge is really to master the skills and techniques, which may take time and patience. But I do believe the reward will be worth your while.
Also check out http://www.gametheory.net/ to get more ideas.
The first thought that comes to my mind is a remark by one of my past teachers, that "Economics is really game theory". Of course it's no surprise that he IS a game theorist, but I can certainly relate to that view. Economics for the most part is really a study of how clever people get on with their lives in a tough world. And when you pitch more than 2 clever people to interact with each other, you have a game. It's no surprise then that game theoretical way of thinking has penetrated almost all fields in economics, in various disguises. And applications are not restricted to economics... biologists, diplomats, sociologists have all used the tool to a good measure of success.
Monetary economics is no exception. If you can recall, right from our first topic on the use of fiat money as a medium of exchange, we did employ the notion of Nash equilibrium, the good old concept in game theory. In that world, people are playing the game of 'let's coordinate our choice of money so that we can trade faster', and the result is that even an intrinsically worthless piece of paper can be regarded as money in Nash equilibrium...fiat money is born!
Or when we do rational expectations (either in Lucas or New Keynesian models), we are basically looking at agents who are strategically very smart and are reacting to any changes in aggregate demand pattern in a rational way. If you just add in another smart guy who's controlling the aggregate demand and reacting strategically to the public (a central bank!), then again you have a game! We will precisely do this in topic 6, the science of monetary policy. You will see then that the monetary policy in modern days is essentially a game between a mister Ben Bernanke and the public.
Or in our class tomorrow, when I will continue discussing the Diamond-Dybvig model of bank runs, you'll see that we use the Nash equilibrium concept again to describe the outcome under banking allocations. Whether or not there is a bank runs, it depends on your confidence of the bank. But your confidence depends on others confidence, so it's a strategic decision, and hence calls for a game theory as a framework. Or when we move on to topic 5, on time inconsistency, again we will look at a game played by the policy maker and the public. Game theory appears almost everywhere once you look closely.
And I can say that modern economic research in monetary economics has not had enough with game theory...in fact, it wants more! Examples of recent works which I like are by Susan Athey on the optimal degree of monetary policy discretion, Hyun Song Shin on the benefit/cost of policy transparency (social value of public info), Markus Brunnermeier on asset price bubbles formation for example. These works are probably too advanced for an undergrad project, but just to show you that the application is really endless. The challenge is really to master the skills and techniques, which may take time and patience. But I do believe the reward will be worth your while.
Also check out http://www.gametheory.net/ to get more ideas.
EE432 2009: Topic 5 Materials
From this topic onwards, we will address the policy aspects of monetary economics, drawing on what we have learned about the working of the economy from the previous lectures.
We start with the issue of the time inconsistency of economic policy. Presentation will be relatively short and sweet, given the simplicity of the model, but the implication is pretty significant. Key first reading is the relevant chapter in Romer's Advanced Macro book, but I also attach the original 2 papers on the topic to the reading pack, which can be downloaded here.
To avoid the nightmarish scenario where you come up to me 1 day before (or worse, after) the exam to ask "what is time inconsistency really?", here's a good narrative exposition by Greg Mankiw.
We start with the issue of the time inconsistency of economic policy. Presentation will be relatively short and sweet, given the simplicity of the model, but the implication is pretty significant. Key first reading is the relevant chapter in Romer's Advanced Macro book, but I also attach the original 2 papers on the topic to the reading pack, which can be downloaded here.
To avoid the nightmarish scenario where you come up to me 1 day before (or worse, after) the exam to ask "what is time inconsistency really?", here's a good narrative exposition by Greg Mankiw.
EE432 2009: Topic 4 Materials
This topic covers credit and banking issues. I've decided to change the contents a bit from the course description, and leave out the 'depression economics' for later topic where it is more appropriate. Our focus will be mainly on 2 theoretical models, i.e. Bernanke and Blinder (1988: AER) and Diamond and Dybvig (1983: JPE), with an eye on the current subprime crisis as a 'case study'. Specific comments about the reading will be made in class.
The reading pack along with the lecture note is available here.
The reading pack along with the lecture note is available here.
EE432 2009: Solution to Problem Set 2
on Lucas's model and the staggered wage, can be downloaded here.
I have not included the solution to the optional question 4, but do let me know if you are interested.
I have not included the solution to the optional question 4, but do let me know if you are interested.
Banks' Solvency and Nationalisation
The idea sounds more plausible by the day. Or is there any other way to cure the cancer without replacing the organ? Time for a reading list.
- Buiter [Feb21: Create good banks]
- Caballero [Feb22: Promise to boost banks shares!]
- Greenspan [Feb18: @FT]
- Robert Hall [Feb 23: The right way to create good/bad banks]
- John Hempton [Feb16: Banks solvency and Geither plan]
- Simon Johnson [Jan27: Stand up to the bankers][Feb23]
- Krugman [Feb20][Feb22][Feb24: Mysterious Plans][Feb25]
- James Kwak [Feb24: TCE for beginners]
- Mankiw [Feb16: Pre-privatisation]
- Matthew Richardson [Feb26: The case for and against]
- Salvatore Rossi [Feb25@Vox]]
- Roubini [Feb10][Feb13: We're all swedes][Feb18][Feb25.1][Feb25.2]
- Mike Shedlock [Feb17][Feb19][Feb22][Feb25][Feb26: On CAP]
- Yves Smith [Feb18]
EE432 2009: Solution to Problem Set 1
...can be downloaded here.
These are rough solutions for you to cross-check your answers only. In real exams, you may be expected to develop your arguments more fully.
These are rough solutions for you to cross-check your answers only. In real exams, you may be expected to develop your arguments more fully.
Bookmark this week: Feb 16th 2009
- On Japan's Q4 GDP = -3.3% [Mish][Menzie Chinn]
- Frankel says $800bn stimulus is both too small and too big
- What are those smart people at CERN trying to discover? Higgs Boson! (Also see 'Race for God particl heats up' at the BBC)
EE432 2009: Topic 3 Materials
In this topic, we address the "New Keynesian Macro".
The reading pack can be downloaded here.
The reading priorities as specified in the course outline are now obsolete. I'll explain in the lecture which should be the top of your agenda.
The reading pack can be downloaded here.
The reading priorities as specified in the course outline are now obsolete. I'll explain in the lecture which should be the top of your agenda.
Bookmark This Week (Feb 10, 2009)
- John Taylor "How Government Created the Financial Crisis" (or what the Taylor rule said, but wasn't heeded)
- Jeff Frankel on the Spending Priorities
- Washington Post...dissecting the $819 billion package
- Fed, ECB and BoJ monetary policy frameworks @ Vox
- Roubini supports nationalisation of the banking sector
- Martin Wolf says TARP will fail
- Mendoza revisited Irving Fisher's view on depressions & cures (...Fisher's original piece here) (...The Economist on Irving Fisher)
- Bernanke's testimony on Fed's programs to strengthen the credit markets
Fed Press Release (My highlight)
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.
EE432 2009: Problem set 1
...to be handed in on Friday 30th (i.e. next week), at 8.00am.
Download here.
You may consult with each other, but it is a good idea to have a serious attempt yourself first.
Download here.
You may consult with each other, but it is a good idea to have a serious attempt yourself first.
EE432 2009: Topic 2 Materials
Materials for topic 2 are available here.
The file includes the reading pack as well as the soft copy of the lecture note. Also please download the following paper(s) that weren't included in the pack:
The first assignment will be posted soon.
The file includes the reading pack as well as the soft copy of the lecture note. Also please download the following paper(s) that weren't included in the pack:
- Friedman's 'A Theoretical Framework for Monetary Analysis', JPE 1970
- Friedman's 'Comments on Critics', JPE 1972
The first assignment will be posted soon.
Grand Cocktail of Fiscal Stimulus Debate
Pro:
Footnote:
- Alesina&Zingales [Jan21]
- Backus [Dec26]
- Chinn [Jan26: with model]
- DeLong [Jan10][Jan12][Jan14][Jan14][Jan14][Jan15][Jan16][Jan19][Jan26: thoughts on Cochrane's latest][Jan27][Jan27: J Cochrane2][Feb24: It will work][Mar03: Notes for students]
- Farmer [Dec30]
- Feldstein [Dec24][Jan29][Feb5]
- Krugman[Dec24] [Jan5][Jan10][Jan12][Jan13][Jan18][Jan19][Jan27:Dark Age][Jan29]
- Mankiw [Dec01][Dec22][Jan10]
- Summers [Dec28]
- Wolf [Feb3]
- Barro [Jan22]
- Becker [Jan18][Feb10 w.Murphy]
- Boldrin [Feb 24: Seven follies]
- Cochrane [Jan19][Jan25 updated]
- Fama [Jan13][Jan28]
- Lucas [Dec23][Feb5]
- Mulligan [Dec3][Jan21]
- Murphy [Jan16-slides][Feb10 w.Becker]
- Stiglitz [Dec11][Jan15]
Footnote:
Bookmark this week (Jan 19, 2009)
Jan 19
- Krugman on Spain and the not-so-optimal currency area
- Krugman's snap at stimulus critics & Mankiw's reply
- Mike Shedlock on sharing the blame
- Mike Shedlock on whether TIPS are cheap
- Barry Eichengreen "Was the Euro a Mistake?"
- Questions for Mr. Geithner from 7 Big Names
Bookmark This Week
Jan 11
Jan 12
Jan 13
Jan 12
Jan 13
- Bernanke's speech at LSE on 'Credit Easing' versus ' Quantitative Easing'
- Fama on the stimulus package
Also check out comments from DeLong and Waldmann
EE432 2009: Course descriptions and Topic 1 materials
Welcome to EE432 and happy new semester!
I use this weblog to upload course materials, as well as to communicate with you outside classes. In general, the materials can be found at ...
http://groups.google.com/group/economaru/files
This week I uploaded the course descriptions and the reading pack for topic 1, and you may download these files directly from here...
Although there is no strict prerequisite for this course, it is strongly encouraged that you spend the weekend (preferably *this* weekend) reading either one of the two 'refreshers' in the following pack, which should provide a very nice springboard for you to enjoy the first part of the course.
Throughout the course, comments/questions are welcomed. Either put in a comment, or leave a message in the chat box.
*New*
I use this weblog to upload course materials, as well as to communicate with you outside classes. In general, the materials can be found at ...
http://groups.google.com/group/economaru/files
This week I uploaded the course descriptions and the reading pack for topic 1, and you may download these files directly from here...
Although there is no strict prerequisite for this course, it is strongly encouraged that you spend the weekend (preferably *this* weekend) reading either one of the two 'refreshers' in the following pack, which should provide a very nice springboard for you to enjoy the first part of the course.
Throughout the course, comments/questions are welcomed. Either put in a comment, or leave a message in the chat box.
*New*
- Toxic assets in the 18th century: a nice introduction/motivation for our first topic
Tractatus Logico Philosophicus
...is the only book Ludwig Wittgenstein wrote in his career. Here's its abstract.
Abstract
1. The world is all that is the case.
2. What is the case--a fact--is the existence of states of affairs.
3. A logical picture of facts is a thought.
4. A thought is a proposition with a sense.
5. A proposition is a truth-function of elementary propositions. (An elementary proposition is a truth-function of itself.)
6. The general form of a truth-function is [p, E, N(E)]. This is the general form of a proposition.
7. What we cannot speak about we must pass over in silence.
For full text, check this out.
For a quick intro...
Subscribe to:
Posts (Atom)