This is Makroint's Typepad Profile.
Join Typepad and start following Makroint's activity
Join Now!
Already a member? Sign In
Makroint
Recent Activity
maybe it has to do with the way we calculate growth? If a bubble is inflating you will have prices and volumes of certain products grow (say housing), then when the bubble pops the weight of the bubblicous sector in the economy is biggest because prices and volumes are high. In case of a property bubble, volume will drop first with prices to follow. So the slump will be weighted with the high price at the bubble peak. This is in constrast to the bubble inflating which has been weighted with roughly an average price. To correct that and achieve pretrend nominal growth, above target inflation would have been necessary.
1 reply
I would slightly question the first result because thinking further ahead, is a permanently higher exchange rate even possible? That would be a country getting richer simply by permanently increasing government spending. I guess in case a deficit could occur forever this could be right, but assuming that the current account over the very long run has to be in equilibrium, the exchange rate might be unchanged. I would suspect that in this case one would switch to the temporary expansion case, as though G is expanded forever, other domestic demand has to be reduced in the future. Flawed thinking?
1 reply
Cochrane himself wrote a fairly well received paper (By force of habit: A consumption-based explanation of aggregate stock market behavior) about time varying risk premia which is going to great lengths trying to present the stock market pricing as rational. The whole model is reverse-engineered to find a habit formation that fits well with the market data. Consequently the test to the model should be wether the habit formation suggested is plausible or not. It clearly isn't. It e.g. implies that people are indifferent between 52000$ and a 50% chance of 50000$ + a 50% chance of 100000$. I find it amazing that such models receive a great deal of attention in academia despite being utterly implausible just because the authors show brilliant technical modelling skills in a way. People are wasting a lot of precious time there. ["Habit formation" is a Rube-Goldberg device to try to get people to ignore how ludicrously unrealistic the risk aversion they are imputing to their representative agent is... I would not say it was "well received" by anyone outside the Chicago Fundamentalists...]
1 reply
One thing unmentioned is that education in China is vastly superior to the likes of Chile or Brazil and more reminicient of Korea. Chinese pupils scored record values in Pisa tests and Chinese students are flooding Western universities. Historically China has once achieved the high gdp per capita levels of the Western countries for what it s worth. It is amazing this has been ruined for such a long time, would not rule out a comeback at all, maybe education trumps structures ultimately.
1 reply
I think it would be a matter of getting incentives for the bank right. Interest rate control alone could not be enough because the economic incentive would always be to set the conversion rate to 0 and thus transfer wealth from depositors to stock holders of the bank. A higher interest rate means you would promise to deliver more in the future of something potentially (or likely or surely) worth nothing. If the bank or the senior officials would be punished enough in someway when they set the conversion rate unfairly low, then the system could possibly work.
1 reply
"Thus we see a very large spread--because of the shortage of mobilized risk-bearing capacity on the one hand and the shortage of safe assets issued on the other--between the equilibrium risky real return on investments in capital (say 5%/year) and the equilibrium real return on safe assets (say -3%/year)." Sorry Brad, this just does not make sense. When the stock market is valued rather highly in historical context it seems very strange to attribute the new low real interest rate to a general lack of risk bearing capacity (that we always had). Also would a PE ratio of roughly 20 in the S&P 500 not rather imply a 5% nominal return on capital than 5% real return? It might be somewhere in the middle I guess.
1 reply
I think the plan B makes some sense as long as the banking system is closed. When the banking system is closed (even for domestic transactions), there will be demand for this medium of exchange. It should probably be backed somehow because whenever the banks reopen, demand for this medium of exchange will probably collapse. The anticipaton of this could otherwise severely impair the function of this alternative medium of exchange. I think in order to make it work you could credit every account with a certain amount which is supposed to be payed back later. Doing this, the state would assume credit risk to its own population. The payment system would at least initially be flawed because people in need of big amounts of money for transactions would struggle to get them quickly because no loans are available and the funds would have to be acquire from others over time.
Toggle Commented Jul 29, 2015 on Greece's Plan B at Worthwhile Canadian Initiative
1 reply
Thx for manually classifying my comments out of spam, Nick. :) Regarding ELA, I can understand stand that the central bank is not really willing to unconditionally stand behind Greek Banks when ELA is used to replace capital/deposit flight and Greece's euro membership is not certain. But I feel if a commitment would have been made by political authorities and the ECB that Greece would stay a member of the EZ as Greece undoubtedly wants to be (and treaties don't forsee and expulsion), then capital/deposit flight would have stopped. I think the Euro leaders have decided to lump together solvency and Euro membership to get more leverage towards Greece to make it repay its loans. This happens to be a bad thing as it allows the creditors to impose too much austerity on the country risking a complete mess.
1 reply
I think everything about this Neo-Fisherian stuff breaks down if you think about monetary policy in terms of the evolution of quantity of money (which is more intuitive anyway) and not interest rates.
1 reply
I think to get Drachma accepted you would first need to get rid of the Euro because this would be a much better means of exchange initially. I suspect currencies are sort of winner takes it all and if the new Drachma could just be another worthless altcoin. One idea to give it value would be to make tax payments in drachma mandatory. Ideally on one specific point of time for everyone because that would ensure maximum demand for drachma as they could not be double spent.
1 reply
Makroint is now following The Typepad Team
Jul 13, 2015