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st rates real or nominal vs the quantity of some monetary aggregates short notes on some of the cells follow 1 ricardo as schumpeter notes in his monumental history of economic analysis book iii chapter 7 pp 657 719 the contemporary history of monetary theory goes back to the bullionist controversy in the early 19th century and david ricardo was the leading flag bearer for the currency school broadly speaking a ricardian monetary intuition involves a commitment to the quantity theory of money in some form or the other a belief that outside or central bank money is special and that what is truly special about cb money is currency as of today scott sumner best represents ricardianism in monetary thought 2 old monetarists old monetarists would broadly be people who focus on monetary aggregates albeit both on base money currency reserves and broad money bank deposits etc aggregates a classic tendency would be to focus purely on the liabilities of the banking system as exemplified by milton friedman s contention that banks also have assets and that that s not quite important and to infuse the central bank with a lot of control over the banking system nick rowe would probably be a good example of a current theorist who is an old style monetarist 3 real bills doctrine this was the opposite side to ricardo thornton in the bullionist controversy and this position has been revived a few times since the basic contention is that money liquid media of exchange is basically to be issued by pvt banks against high quality short term collateral in old school jargon this went by the name of discounting against self liquidating real bills though this seems more like practical advice than monetary theory the implied theory is easy to spot central banks are only supposed to respond to accommodate endogenous demand against specific limited collateral so that the primary monetary actors are private banks and financiers also the restrictions on the quality and maturity of collateral to be admitted restricts interest rates to a rather narrow band it is clear that quantities of collateral and exchange media issued are the main mechanisms here as perry mehrling notes in his book on fischer black milton friedman blamed this view for demanding that the central bank act in a pro cyclical fashion and thus exacerbating business cycles 4 fisher irving fisher created the first neoclassical macro model and brought monetarist thought to the united states he revived the quantity theory but also brought to notice the monetarist paradox in interest rates the observation that inflationary policies were associated with higher interest rates rather than lower he conducted deep research into the construction of price indices and proposed that a monetary regime attempt to maintain price stability it is clear that fisher thought it was firmly within the remit and capability of central banks to maintain macroeconomic stability through quantity mechanisms or rates mechanisms descriptions of the other cells and some quadrant level aggregations will follow in the next post posted by ritwik at 4 38 am 5 comments on reinhart and rogoff if you follow macroeconomics or global economic policy by now you d be familiar with the recent blow up over the so called reinhart rogoff r r results carmen reinhart and kenneth rogoff r r have compiled and conducted some extensive research into the experience of countries following financial crises which led to their book this time is different the central thesis of book was that financial crises have certain common hence perhaps predictable patterns and among the biggest challenges in mitigating their occurrence or ensuing damage has been the tendency to believe that this time is different the book received plaudits when it was released many have gone on to say that it s been their bible in the current global financial crisis a subset of the themes that r r covered in their book was the dynamics between growing public debt and growth this evolved into an independent line of published research from which the headline take away was that countries with public debt gdp ratios of over 90 experience strikingly slow growth and thus the 90 level might be an intuitive tipping point beyond which may lie treacherous territory for sovereign borrowing this argument though made with suitable academic precaution has been used or at least invoked by several influential policy makers in developed economies with debt gdp ratios exceeding the 90 level as reason to impose a cutback in fiscal spending immediately it is obviously at the centre of some of the most important global policy debates of our debates now two days ago rortybomb mike konczal posted research from three university of massachusetts economists herndon ash pollin that tried to replicate the rogoff reinhart results but could not they found that the r r results resulted from a rather messy combination of an excel code error choosing to exclude certain data points and devising a schema of weighting that seemed to skew the results and did not seem intuitively defensible unsurprisingly the microcosm of the online world that cares about these things more or less exploded first with schadenfreude then with appeals to subtle readings and very quickly as is the wont of online discourse to more systemic and meta things like the central lessons to be learned from the debacle the incentives facing economists etc for a quick update on what has been happening felix salmon has a good round up and tyler cowen continues to act as a conscientious and indispensable clearing house a short summary of just what has happened may be useful first of all though the schadenfreude is directed mostly at the excel error that error itself does not drive the biggest magnitude change in the result at hand it pushes the growth experienced by countries with debt in excess of 90 of gdp from 0 1 to merely 0 2 but removing the asymmetric weights and including all episodes changes it further to 2 2 and that s really where the meat and juice of the debate lies rortybomb has further posted analysis by u mass economist arin dube that shows that the debt slow growth correlation actually shows reverse causality i e it s the slow growth that causes high debt ratios rather than vice versa the economists themselves responded remarkably fast and were forthcoming about accepting the code error however they insisted that firstly they had only claimed association not causation and secondly at 2 growth for countries with public debt more than 90 of gdp was still a full 1 lower than that of countries with public debt less than 90 the first is the plausible deniability of every sophist s argument after all who gets global fame for simply showing that a high ratio is associated with a low denominator it was always the potential causation hinted at which mattered and the op eds that rogoff and reinhart wrote for popular audiences seemed to unambiguously hint at implied causation the second may still be relevant but 2 vs 3 simply lacks the jaw drop value of less than 0 vs 3 and is actually not even statistically significant but the r r defence wholly skipped over the deeper issues around including and excluding data points and arbitrary weighing schemata on this others have risen not to their defence per se but to shift focus and draw attention to the larger issues at hand i have now seen a bunch of these arguments and none of them are very convincing first up let s get the any data analysis exercise will have to make these choices bit out of the way this is true and for precisely this reason data analysis exercises offer or should offer at the very least footnotes or explanatory pieces detailing these choices and a short note on why they were preferred to other choices investment banking analysts are routinely laughed at for having plucked out of the air assumptions about projections of growth industry growth market share etc and yet any half decent analyst would not dare offer his or her work without detailing qualitative reasons for the quantitative assumptions being made and a list of sensitivities arguably the former is more important and should be dealt with at depth by an academic especially if the choices being made are not prime facie intuitive like say removing a 10 sigma outlier it is worth pointing out that the main reason r r come up with the 90 figure is because their intervals are of 30 i e they split the data into buckets of 0 30 30 60 and so on this is purely a modelling choice artifact and the actual tipping point assuming any exists may be 80 or 110 or 93 7 here a good way of going about it might be to to set up a graph and see if there are any natural inflection points and if the simple graph between the two variables won t do consider natural transformations like time derivatives or logarithms until you get a graph with an inflection point ultimately your data range choices have to make intuitive sense to numerate people if you have to torture the data too much it s quite possible you re looking at a very banal reality another set of defences underscores the point that the episode mostly shows the pitfalls of macro analysis owing to the small data sets available while true this is inapplicable to the issue at hand this is a problem with all data sets that show structural transformation even if they go back a long time and so with all data sets that concern themselves with the socio commercial reality of our society r r stand questioned not because they made a prediction using analysis that came unhinged because the original analysis suffered from a small data set given the small data set they chose to transform it in such a manner that very different conclusions were reached than if those transformations were eschewed these transformations are reminiscent of the sham that passes off for the concept of risk weighted assets when calculating capital ratios for banks i contend that the fineness achieved was outweighed by the robustness lost due to it and that this would have been true even ex ante finally some have made the point that r r are simply reacting to the incentive system in academic economics and popular commentary economics it turns out is a discipline that does not prize replication of results the way hard sciences do and prizes novel insight more so that the errors of the type of r r are rife through the profession r r might actually be ahead of the curve by engaging with the criticism so openly further popular commentary obviously rewards strong claims more than agnostic and possibly sterile data inference exercises ergo the choices that r r made follow even if these arguments are true one is forced to ask should we then resist the urge to trash r r or simply add the urge to trash the entire economics profession to the mix moreover is it alright to apply the leeway in standards that we may be able to afford an up and coming popular essayist or a graduate student seeking a job and tenure to kenneth rogoff and carmen reinhart rogoff has been the chief economist of the imf is a member of the super elite group of 30 and was a student of rudiger dornbusch who advised several latam governments in the 80s and stanley fischer possibly the macroeconomist with the most star studded policy experience ever during the phase at mit which has produced some of the most prominent international macroeconomists of our era bernanke obstfeld krugman frankel he is a plausible contender for the topmost policy jobs in a republican administration reinhart is somewhat less entrenched but is also a tenured professor at harvard a top 10 authority on sovereign debt and default especially in emerging nations and brought the term financial repression into the modern macro lexicon by any stretch they are as about as elite as the academic macropolicy elite gets and remember that these are days when macroeconomists are disproportionately at the centre of the global policy elite no this defence from diminished expectations won t cut it to check how diminished our expectations may have become see this otherwise brilliant neil irwin piece where he seems thankful to r r for simply compiling and collating the data that backed their broader research reinhart and rogoff did a shoddy job and deserve most of the ridicule coming their way posted by ritwik at 2 42 am 1 comment saturday february 02 2013 reductio ad absurdum an inefficient technique reductio ad absurdum is the latin term for a common device of rhetorical debate the proof by contradiction in high school mathematics proof by contradiction was one of top few tools or methods employed to prove theorems as a younger man less comfortable with ambiguity and less familiar with probabilistic reasoning i was absolutely in love with the device you assumed that what had to be proved was not in fact true deduced from it a result that was clearly absurd since the absurdity could not be true the initial assumption must have been flawed and the proof inexorably followed the result was clear simple strong elegant and inescapable marvellous platonic beauty proof by contradiction at its core relies on a simple but powerful element of formal logic that students of philosophy or computer science should instantly recognise the equivalence of the contrapositive formally this is stated as a b b a or if the truth of a implies the truth of b then not b the falsehood of b implies not a the falsehood of a where a and b are both statements which could be true or false perhaps all that sounds excessively jargon y or convoluted but the chain of reasoning is simple and essentially the same as that employed in high school math 1 assume that statement a is true 2 from that deduce that statement b must be true 3 show or it is perhaps common knowledge that statement b is false 4 hence statement a is false but reductio ad absurdum isn t just about high school math we often hear the distinction between necessary and sufficient arguments being made in less formal verbal debate well a b is the same as saying that the truth of a is sufficient but not necessary to show the truth of b and the corollary that the truth of b is necessary but not sufficient to show the truth of a and knowingly or unknowingly we make a number of arguments and critiques that rely on embedded reductio ad absurdums a couple of recent examples have made me wonder if this is indeed a good way to make a point my hypothesis is reductio ad absurdums are likely to be misinterpreted even by intelligent people who are not sympathetic to your stand of course that s plausibly true for all arguments but the trouble with reductio ad absurdums is that you can be mis interpreted to be saying the exact opposite of what you set out to say let me illustrate using the two examples from opposite sides of a rather contentious issue in india that are currently on my mind example 1 rajdeep sardesai vs swapan dasgupta first we have rajdeep sardesai rs editor in chief of cn...
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