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Simon Van Norden
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About MERs and the low-wealth investor.... Looking at my Big-5 Canadian bank, they offer their "house-brand" TSX index fund with a 0.33% MER that I can buy, hold and sell in my RRSP account without annual or transaction fees....and the RRSP account is about enough to buy a pretty nice car (but you really wouldn't want to retire on it.) At the risk of sounding like an out-of-touch academic ... is that really atypical?
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Sorry....thought I had deleted that last line...please ignore.
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Nitpick: Frances quoted them as saying "there is a 90 percent likelihood that you may receive an annual return of 4.45 percent" The wording they actually used is "...there is a 90 per cent likelihood that you may achieve an annual net rate of return of 4.45 per cent..." That's sounds a bit closer to idea of 10th percentile of the cdf. I think that's more precise and clearer than Frances'
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A great post, Frances! I'm horrified at those management fees. To understand how important they are, note that if you've invested for 25 years at 4.45% instead of (4.45% + 1.75%), your investment grows by about 200% instead of 350%; put another way, those MERs reduce your projected savings at retirement by just over 1/3. (If you want the math, (1+4.45%)^25=2.96969 while (1+4.45%+1.75%)^25 = 4.498968) For comparison, you can cheaply buy (and hold in your RRSP) an index fund which should have MERs half or less than that. To take one example, you can buy index funds in the form of ETFs with MERs of under 0.3%.
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I'm confused. I thought that bank profits (given a 2.5% fixed marginal cost) will be determined not by the level of interest rate but the spread between the loan and the deposit rate. Prof. Stein has an implicit argument about the relationship between between the Fed.'s level policy and those spreads. I do not know what the argument is. I do not know how those variables have behaved recently.
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Nick: in Varian's notation, y is just the netput *vector* (call it q if you find that less confusing.) Of course, it will contain all the components of GDP (ie. output) that you want as well as all the factors of production.
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Glancing through my (1977...okay, I'm old) copy of Varian, his notation is something along the lines of define vector y = [C,I,K,L] define set Y as the set of all feasable points in R4 for a given value of y. This is the first thing Varian does (pages 1-5.) Have a look.
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"Macroeconomists like to aggregate things." Any standard micro textbook will work you through production functions with "netput" vectors (Varian is the classic reference for our generation.) However, you should note that those who work seriously with data and production functions tend to use a KLEM or KLEMS framework ([K]apital, [L]abour, [E]nergy, [M]aterials and [S]ervices) because they think this better captures important features of the real economy.
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Hall and Sargent (2011 AEJ:Macro Vol 3, No. 3, p. 209) Table 3 looks at the post WWII US experience and shows that the current situation closely resembles the post-WWII average. They find annual real GDP growth outstrips the real interest rate on the debt by about one and one-half percentage points. They also discuss how this varies over time and find the Reagan-H.W.Bush period to be unusual in terms of the very high real interest paid on the debt. This broadly mirrors the earlier conclusions of Ball, Elmandorf and Mankiw (JMCB 1998) who look at data from 1871 onwards. They also provide simulations of the probability of a "Ponzi Gamble" failing, and estimate it to be quite low. My question for you is....why are we not teaching these facts to our students?
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"But we also lose something when we extend the range like that. Because we have to hope that all countries at all times respond the same way, at least qualitatively." I don't follow you. I had thought that, for identification, we want the opposite. Furthermore, if we're deriving our models from "first principles", they should be generally applicable, right?
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Nick, I think your argument ignores a fundamental and important problems with macroeconomics; macroeconomists frequently disagree about the facts. As a case in point, remember the arguments back in October about whether or not financial crises are typically followed by unusually deep recessions or unusually fast recoveries. This kind of question would not appear to be subject to the identification problems that you stress. However, when considerable attention was focused on the issue of US macroeconomic performance, prominent economists (e.g. John Taylor, Michael Bordo, Glenn Hubbard, Paul Krugman, Ken Rogoff and many others) were unable to agree whether the historical record showed the financial crises had a positive or a negative effect...but both camps felt that the empirical evidence was clear and that there was no significant identification problem.
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One wonders how the President was supposed to pass legislation to address those points without Republican support. A tactician might observe that the present deal does much to (1) preserve unity in Democratic ranks while (2) greatly increasing disunity in Republican ranks.
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"...there was a rising trend of NGDP during the 1970s, while during the Great Moderation, NGDP was stationary." Surely someone meant to write NGDP growth
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Most people thinking about fixed exchange rates (if that's not the same as Asymmetric Redeemability, please correct me, Nick!) got an important smack up-side the head after the Argentine crisis a decade ago. Argentina ran a currency board to protect its peg to the US dollar. (This meant that for every $1 worth of Argentine currency they issued, they had $1 USD in reserves.) Until their crisis, most economists believed that this arrangement was speculation-proof and provided an iron-clad link between the two currencies. However, it lasted only a few years before failing disastrously. One lesson that many drew from that experience is that provisions for behaviour in extreme and unlikely scenarios are surprisingly important in understanding how monetary systems will work and how likely they can last. So what if the Fed were to peg to the loonie? I'd argue that two factors would matter a lot to monetary conditions in the US. 1) BoC policy 2) The extent to which people think that the Fed will keep the peg. That depends both on (a) whether they have the means to do it, and (b) whether they have the will to do it.
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Nick and K: But the Bank of Canada doesn't guarantee bank deposits. The CDIC does. In the event of serious crises, making sure that the CDIC has the cash to reimburse depositors is the Fed's government's problem, not the BoC's. Note that during the crisis in 2008-2009, the FDIC (US counterpart of CDIC) basically burned through its entire reserve fund in a few quarters and started to be very vague on the state of its reserves fund and expected claims on it (all the while claiming that depositors had no reason to fear.) There's another important difference. Deposit insurance insures *small* deposits; not enough enough to meet the weekly payroll for a good-sized business, much less a financial firm. When things look dicey, large accounts still flee. (Reuters was reporting late last year that several major European corporations, fearful of a banking crisis, were taking cash out of the commercial banking system altogether and instead depositing directly with the ECB.) But as Nick says, deposit insurance is rarely tested.
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Apr 4, 2012