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s is typically grounded on the unavoidable debt run up which implies that at some point in the future taxes will need to be raised at a level that is higher than before the stimulus would there be a way to pacify this opposition according to laurence seidman there is it involves the federal reserve or the corresponding central bank making a loan to the government treasury for the amount engaged in the stimulus and then the fed conveniently forgiving this debt that is a different way of putting what seidman proposes the fed makes simply a transfer to the treasury that satisfies the dual mandate of the fed full employment and stable prices despite what seidman claims this is monetizing the debt even if no debt is explicitly created the government is still financing its stimulus by virtually printing money and with the same effect on inflation which guarantees that the dual mandate will not be satisfied for stable prices and one can have doubts about full employment too seidman argues that there would be no inflation if aggregate demand gets back to the normal level with the stimulus but you still have increased the money supply for the same quantity of goods the price level needs to increase accordingly the only way to avoid the inflation is if the treasury returns the transfer to the fed the transfer is thus again a debt i find it really strange that a chaired professor at the university of delaware would write this the only way i can rationalize his writing is that he confuses real and nominal quantities he also seems to reason in partial equilibrium not thinking that prices adjust to such large changes in macroeconomic aggregates especially in the medium run we are used to seeing this from crackpots with little economics education but not with apparently well educated economists posted by economic logician at 6 58 am 8 comments labels bad research money thursday january 30 2014 capitalism s rapture economics is based on a small set of very powerful axioms that a the foundation of utility theory general equilibrium theory and more experiments have contradicted every one of these axioms one way or the other we still keep them because they seem to apply most of the time and the occasional violation does not invalidate the general picture but it is good to keep an eye on their validity and think about alternative scenarios especially if they bring us better theories egmont kakarot handtke decides to start afresh with a completely new set of axioms and instead of choosing some that have some subjectivity he takes some that are as objective as any axiom could be four accounting identities and definitions yes you read that right 1 definition of national product income approach 2 a linear production function in labor 3 definition of nominal consumption as the product of real consumption times a price and 4 the values of all economic variables this year are last year s variables times one plus their respective growth rate plus an independent and random component for each easy from this kakarot handtke builds an elaborate theory that demonstrates with a mathematical proof it is in the title so it must be true that capitalism is on the verge of collapsing to me it looks more like his readers could collapse from hyperventilating over this amazing pile of rubbish this bizarre scientist has trademarked his models i am afraid i cannot go into more details about this work without violating some law trademark law law of sanity so i leave it at this posted by economic logician at 7 59 am 8 comments labels bad research fundamentals wednesday january 29 2014 the best justification for is lm is lm models have always left me puzzled to me they are the equivalent to a reduced form regression with omitted variables and endogeneity issues through a lot of hand waving you can have any model fit the data but what i find the most bizarre is this strange obsession with justifying the is lm models from micro foundations somehow is lm is taken as an ultimate truth and one needs to reverse engineer it to find what can explain it the ultimate truth is the data not the model pascal michaillat and emmanuel saez bring us yet another paper that tries to explain the is lm model from some set of micro foundations the main ones this time are money in the utility function and wealth in the utility function and matching frictions on the labor market which are not objectionable i find it very hard to believe that by now anybody would consider this a valid starting point rarely does anybody enjoy simply having money the reason why people like having money is that they can buy things with it things that are already in the utility function or that money facilitates transactions something that you can easily model the same applies to wealth true some people may be obsessed with getting richer just for being rich but for the remainder of the citizen they like wealth for what it brings in future consumption for themselves and their heirs and for the security it brings in the face of future shocks all this easily modelled in standard models it seems to me this paper is a serious step back macroeconomists try to understand why there are frictions on markets so that one better determine the impact of policy on such markets simply sweeping everything in the utility function where in addition one has a lot of freedom in choosing its properties does not help us in any way and it is wrong because it is again some sort of reduced form that is not immune to policy changes suppose the economic environment becomes more uncertain are we now supposed to say that suddenly households like wealth more they could also like wealth more because of changes in estate taxation or because of longer lifetimes and these imply very different policy responses in better flushed out models i just do not get it maybe some is lm fanboys can enlighten me posted by economic logician at 7 45 am 4 comments labels bad research fundamentals macroeconomics tuesday january 28 2014 ageing and deflation in japan inflation rates across industrialized economies have been remarkably low in the past decades and at the same time these economies have been subject to considerable demographic ageing nowhere has this been more true than in japan what are the government s or the central bank s incentives to set policy that triggers lower inflation if the population gets older i do not see where monetary policy would matter but the fiscal theory of inflation may tell us something hideki konishi and kozo ueda study the latter in an overlapping generation model where the fiscal authority has a shorter lifespan than residents but takes into account the impact of its actions on future governments the fiscal theory of the price level tells us that inflation goes up when more debt is accumulated and that is certainly the case when the population gets older and requires more retirement benefits but the authors point out that this does not necessarily hold once you take into account the endogenous responses of income tax rates and public expenses then because of the policy response it matters why the ageing is happening lower mortality or lower fertility deflation is more likely in the former case now we just need someone to bring this to the data posted by economic logician at 7 49 am 0 comments labels demographics japan money retirement monday january 27 2014 tax refunds and myopia from anecdotal evidence it appears that many americans like to use the refund from their yearly tax filing for various home improvement projects that seems like a strange habit but could be explained by its timing spring season and the unexpected nature of this windfall that is large enough to allow some major purchase that would not happen during the rest of the year for perennially cash constrained households being forced to put a little aside for a one time cash out is the only way to do some capital purchase does this theory make any sense it does in developing countries where roscas are popular for this reason it looks like the same holds for us households brian baugh itzhak ben david and hoonsuk park look at purchase patterns when the tax forms are filed and when the tax refund check arrives the first finding is that consumption does not move at the filing even though uncertainty about the refund resolves in other words a change in the permanent income here does not matter presumably because there is some constraint when the refund check is cashed though consumption jumps up and returns to the previous levels within weeks it looks like households are cash constrained but the composition of the purchases indicates that there is a substantial amount of non durables in the basket showing also they are rather impatient in fact very little remains for savings i would have expected that at least credit card debt would be drawn down one can thus conclude that their myopia dominates the cash constraint sad posted by economic logician at 6 50 am 1 comments labels consumption friday january 24 2014 exchange rate commitment always beats capital controls the recent financial crisis has scared a lot of countries into adopting so called macro prudential policies that introduce frictions into capital market that can be best summarized as capital controls the idea is that you want to make sure that market participants are constrained in a way that makes them consider the consequences of their actions onto others the imf has encouraged a lot of countries to adopt such policies in stark contrast to previous stances and this is backed up by a recent literature that shows these policies are welfare enhancing gianluca benigno huigang cheng christopher otrok alessandro rebucci and eric young show this is right but suffers from the absence of other policy options specifically once you add a policy to the mix that would be to stabilize the real exchange rate of the local currency in times of crisis then macro prudential policies are dominated i suppose one could then even imagine better policies or policy combinations but the point is that you need to expand the set of policy options why is this exchange rate commitment better capital controls act like pigovian taxation that applies always and leads to a constraint efficient outcome a commitment to a real exchange rate applies only at particular times and leads to a conditionally efficient outcome that flexibility is key posted by economic logician at 7 08 am 1 comments labels financial markets regulation thursday january 23 2014 why firms do not like cutting wages nominal wage downward rigidity is a feature of many macro models that help justify positive optimal inflation rates in fact that is pretty much the only way to get a monetary monetary model not to conclude that the friedman rule and its deflation is optimal this rigidity is always assumed on the presumption that somehow employers and employees do not like to reduce nominal wages are they subject to a nominal fata morgana or is there more to it instead of pontificating from theory and limited data maybe asking market participants could help philip du caju theodora kosma martina lawless julian messina and tairi rõõm conducted a survey of firms across 14 european countries they conclude that issues with unions contracts or collective bargaining were of secondary importance to worker morale and staff retention this means that including renegotiation costs seems misguided this does however not explain why this is so important to staff morale after all what really matters is the real wage what is this psychological factor that makes us think foremost in nominal terms or is it that managers only have the impression that this matters what we need here is some experimental data where some employees are hit with a nominal wage decrease and others not and see whether it makes a difference good luck finding a manager willing to do that though and i wonder whether the surveys results would be different in economies where the social mission of employers is less developed posted by economic logician at 7 22 am 1 comments labels labor market money wednesday january 22 2014 taxing banks does not tame them during the last financial crisis it was quite obvious that at least some banks were taking excessive risks what do economists usually advocate when it comes to discouraging particular behaviors taxes and that is popular as the foolishness of banks has imposed costs on the taxpayers thus some countries such as germany the uk and the netherlands have imposed taxes on banks did that work not really tell us michael devereux niels johannesen and john vella they look back at the experience in various european countries and conclude that while this taxation on borrowed funds indeed reduced borrowed funds and therefore loans it turns out that it also increased the riskiness of the funding these are two bads first loans actually encourage the economy second the risk has increased is of course counter productive even worse it is the safest banks that reduced most borrowing the the unsafest ones that took on additional risk how could this happen as there were fewer borrowed funds and hence relatively more own assets regulations allowed banks to modify their risk weighted portfolio in other words regulation that was invariant to the introduction of the taxes made things worse posted by economic logician at 7 00 am 0 comments labels banking taxes tuesday january 21 2014 consumption taxation is not that regressive it is a fact of life that governments need revenue how to get this revenue without hurting the economy too much has been the topic of much research quite obviously you first want to tax activities that are optimally discouraged such as smoking and polluting but that is not sufficient you do not want to depress the labor supply and thus you want to avoid taking labor income the alternative is taxing consumption which you indeed want to discourage in favor of investment but a consumption tax is deemed regressive and unfair it hurts proportionally more the poor than the rich nico pestel and eric sommer claim that this perception may only hold in the short term indeed they find the standard result that a revenue neutral switching from labor income tax to value added tax is regressive in the short run this seems to reverse itself in the longer run though thanks to a shift in the labor supply using a model estimated on german data they highlight that the ones responding the most to the reduction in the wage taxation are indeed the poorest and their response overcomes the progressivity of the income tax the key here is also reducing payroll taxes which seem to be very discouraging for low income workers posted by economic logician at 7 45 am 1 comments labels taxes monday january 20 2014 uncertain times and price setting much has been written including here about how policy uncertainty is bad for business firms do not want to invest much when it is not clear what lies ah...
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