2011 Nobel Laureates in Economic Science

This year, the award goes to

for their contribution to the research of macroeconomics!

Correlation vs. Causality

From Calculated Risk:

"Residential investment (RI) is the best leading indicator for the economy. This isn't perfect - nothing is - but RI is usually a strong leading indicator for the business cycle. The slump in RI helped me call the 2007 recession correctly, and the lack of a recovery in residential investment is a key reason the recovery has been sluggish and choppy so far."

What is the correlation stated? What is the causality stated? Explain how the causality is established? Does it base on a solid reasoning (theory?) or just come out of the middle of nowhere?

Assuming the statement is correct, what is the most likely policy recommendation? Is that going to work or is that going to hurt?

Philosophical Economics

Just a (few) piece(s) of cake.

Neither full understanding nor agreement necessary. 'Inspiration' ranks first.

Uhlig on economics and reality

Caballero on macro

Hamilton -> Bunnies on QE

I like what Uhlig says, " ... ... but in science, either put up or you shut up ... ... ". Unfortunately, this does not necessarily apply to other fields, e.g. politics (you bug up, don't shut up, and don't put up), relationship (either you or your partner shut up), arts (you put up and shut up) ... ...

Boom and Bust in Housing Market

今年頭 9個月，持貨一年內轉手的單位較去年同期激增 1.1倍，其中 84%單位屬 300萬元以下，顯示炒風已蔓延至中下價樓，「炒家利用亢奮氣氛，吸引市民入市」。

The quoted text reminds me of a paper of Burnside and et. al (2010).

http://www.econ.upenn.edu/system/files/moneymacro11102010.pdf

Burnside and et. al develop a model of boom and bust in house prices. To cut a long story short (as I always do), the model consists of the following features:-

- there are 3 types of agents, namely, infected, cured, and vulnerable, which correspond closely to "speculator", "intelligent investor", and "speculator-lured-to-be"

- in period t, t+1, t+2 ... ..., social interaction is allowed so that the infected, the cured, and the vulnerable, after interacting with each others randomly, may convert from status to status with some probabilities

- the infected has a belief that the property market will boom to state H (high state) with the timing of the boom not known

- agents with stronger beliefs are more likely to convert other agents to their beliefs

- agents take action (buy or rent property) after each round of interaction

- the market state (H or L) realized subsequently

Burnside and et. al. shows that the social dynamics would "produce a rise and fall in housing price" and they claim that the model can account for key features of the boom-bust cycle in US housing market (price booms are associated with the influx of new buyers).

Mulligan (2010) (see my previous post) proposes an alternative boom and bust story, but with reasoning differs from that of Burnside and et al. Nevertheless, there is at least one common feature between the two stories and that is "EXPECTATION MATTERS"!

By the way, why call the agents infected, cured, and vulnerable? Well, according to Rebelo, the paper's co-author, they are so named because the evolution of the fraction of population with different views is similar to that in Bernoulli's study of infectious desease spread in Europe.

I nearly laughed to death when I were told of the reason.

QE2

This is to those who want to know a little more about QE2.

James Hamilton gives a very detailed and comprehensive description of what he believes QE2 is at here, here, here, here, here, here, here, here, here, and here.

To cut the long story short, Hamilton addressed the following:-

1. why the FED, not the Treasury (in theory, the proposed objective(s) of QE2 can also be achieved through Treasury operation)

2. the mechanism of QE2 (if you are really interested in QE2, you can read Hamilton and Wu's paper here)

3. QE2 is not the one and only one policy tool the FED has

4. the main objective of QE2 is to avoid deflation (ibid)

5. in endorsing QE2, the FED should keep watching commodity prices changes closely

For ordinary people like you and me, 2 and 4 are areas where we "should" pay our limited and scarce efforts on as they have strong implication(s) on portfolio management. In case you still have time after struggling on 2 and 4, you may wish to learn a little more about 3 and/or 5. 1 is for nerds.

A digress: what I think is "missing" in Hamilton's series of posts are

1) a normative fiscal policy recommendation and/or

2) a discussion of the (short/long term) effect of government expenditure under QE2 on the overall economy.

Economic Analysis

I don't like the idea of dividing the study of economics into microeconomics and macroeconomics. For me, what matters are:-

1) what are the "all other things remaining the same" in models on which economists keep drudging; and

2) the reasons behind the assumptions

It is not a "crime" to hold quantity supplied constant or to have prices remain unchanged, but it is a "crime" to "assume" such for pure analytical purpose(s) / convenience.

Mankiw's Choice

From Statistical Modeling, Causal Inference, and Social Science.

Mankiw's original article.

Mankiw's "partial"/"incomplete" response to some of the "diatribes"

What's "wrong", if any, with Gelman's reasoning?

Is little knowledge dangerous?

To write (blog) or not to write (blog), that's your question. ("Obviously", I prefer to be paid to write (or paid not to write); after all I am not live-to-work type of person.)

Perhaps, Ed has a good "answer" to "blog or no blog".