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Nick- In part my model was to explain why seemingly poorer people, past-xwesterners and Chinese households of today have a higher savings rate. Borrowing constraints are certainly part of that, consumer credit is still tiny and novel in China, for example. But, I think you miss something with the 'Cool' frame, think of it more as 'Not a Loser.' It is not a continous variable but a dummy variable. You only have to display enough wealth to be certified as 'Not a Loser.' There is actually some research that supports this, and it's certainly not hard to come across negative stereotypes of those who are poor, which would make it worthwhile to counter signal against.
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Interesting post, though in an odd and kind of cranky way. So, Nick's contention is that PIH superseded the marginal propensity to spend? Shouldn't savings, at the very least equal something like this: Savings = (.1 * (Income - Minimum Income)) + Transitory Income It makes little sense to save while starving, but in addition the conception of Minimum Income may be technologically influenced or culturally influenced (ie signalling). For example, if perceived social status affects one's earning prospects then in some cases not spending, for example, allowing oneself or children to appear in public with 'sub-standard clothing', may be detirmental to one's permanent income. In this simple Veblenesque two-good model, consumers are identical in all but their exogenous, and only privately known, income y. Consumers allocate their income between two types of expenditures: v, which is visible to society, and w, which is not. Since neither an individual’s income y nor consumption of w is visible, the only observable difference between two individuals from the point of view of a third one—or of society as a whole—is their consumption of v. This setup opens the door for conspicuous consumption behavior: individuals may manipulate their expenditure on v in their attempt to inform (or misinform) society regarding their income type y (or equivalently, regarding their non-visible consumption w). For this to happen, the public’s perceptions regarding one’s y (or w) should somehow affect one’s utility. Denoting by g (v) society’s beliefs concerning one’s unobservable w based on the observable v, Ireland’s utility function is specified as follows: U = (1 − a) f (v,w) + af (v, g (v)) . (0 < a < 1) It is a convex combination (or weighted average) of two terms. The first, f (v,w), denotes fundamental utility: the utility resulting from consumption of v and w. This is just the familiar notion of utility from the standard textbook model. The second term, f (v, g (v)), denotes spectators’ view: what others believe one’s fundamental utility is. The weight a can be thought of as a measure of one’s sensitivity to society’s view, or to social status. With a = 0 the model reduces to the standard model where social effects are assumed away. At the other extreme, with a = 1, consumers consume with the sole purpose of being seen consuming—not too far from Veblen’s (1899) idea of consumption by the Leisure Class. With a in the interval (0, 1), consumers maximize U considering both terms. To the extent that the resulting allocation differs from what it would have been with a = 0, consumption is used as a signal.
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Francis- It's a limit on the total levy capacity, in Mass it goes up 2.5 per year plus new construction growth. It would be better if the levy increase was tied to the PPI or something, but apparently the framers of the referendum feared voters might suffer from money illusion. The politician's only vote on a budget, which equals levy + other revenue where levy is less than or levy capacity, and that is adopted before the assessments are calculated. So the rate is just more or less determined via algebra. A particular owner's bill can vary if their market value deviates from the change in the average value. Just as, according to Young Man, it does in Ontario
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Nick- Thanks for the answer to my question. It seems both more understandable and plausible to claim that it is the desire of people to 'hoard' a store of value in the face of future scarcity and the dual role of money as a store of value and MOE contributes to demand short falls. One other question that I think I get from your writing, but want be sure. Is it not only the MOE role of money but price 'stickiness' that is necessary to cause rescessions? Or are those possible in your model even if with perfectly flexible prices as long as there is an MOE (that also serves as a store of value) both necessary and sufficient? And as a follow up, does your model assume flexible pricing under a barter system? I am not sure that completely makes sense if it does. If the source of price stickiness is search costs or coordination problems, real barter economies might have higher stickiness issues.
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Woolsey: The puzzle, again, is when the demands for some things shrink and nothing grows. Or the growth in demand is less than the decrease. Or, most incredibily, the demand for everything falls. And all of this in a world of scarcity. What is the answer? Monetary disequilibrium. Again, we not only live in a world of scarcity in this time period, but lived in one in previous time periods and will continue to live in a world of scarcity in the future. People know this, of course, and so borrow and lend to each other to smooth that out based on uncertain estimates of wants, needs and capacity. It seems to me, that in this case it should not be terribly surprising that during particular time periods demand for somethings shrink and this is not offset. Problems arise when some people have sold too many of their present claims on resources in the past, while others then find out that their future and present claims are not as valuable as previously thought. The recalcuation is then the recalculation of conflicting claims on present and future resources.
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Nick- Great post. I am still in the DeLong corner on this one. As I see it, a big group of safe assets MBS, for example, were suddenly considered unsafe and became illiquid. They went from being decent substitutes for money to being very poor ones. Consequently, demand for money and other close substitutes went up. Let me also ask this, for clarification, if money is only a medium of exchange and never a store of value is your contention that general gluts could happen? It seems *obvious* that it is the desire of people to move demand from time period to time period that make general gluts possible.
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Mar 15, 2010