Worthwhile Canadian Initiative

New Keynesian Macroeconomics, with and without barter.

[Update 4 December: after long arguments with Adam P., which finally started to bear fruit in the comments of December 4th, I'm now clearer on what's essential in this model about the difference between "monetary exchange" and "barter exchange". It's this: In monetary exchange, there is no restriction on what the seller can do with the proceeds of a sale. He can spend the proceeds on anything, or save them. In barter exchange, there is a restriction on what the seller can do with the proceeds of a sale; he must spend all the proceeds on the buyer's goods. That is what is driving the results in this model. I think that is one important distinction between monetary and barter exchange. I have left the rest of the post as is.]

Keynesian macroeconomics in general, including New Keynesian macroeconomics in particular, makes absolutely no sense whatsoever in a barter economy. If people could trade goods and labour directly at zero transactions costs, without having to use monetary exchange, all Keynesian macroeconomics would be total rubbish. All Keynesian macroeconomics, either explicitly or implicitly, assumes monetary exchange. It's not just sticky prices that generate Keynesian results. It's sticky prices plus monetary exchange.

I used to think that the above paragraph was totally uncontroversial. I thought everybody understood this. I have learned they don't. So I'm going to do my best to explain why it's true.

I show that if we introduce barter into an otherwise nearly standard New Keynesian model, the solution immediately reverts to the perfectly competitive equilibrium, regardless of the degree of imperfect competition in the original model, regardless of any mistake made by the central bank in setting the nominal rate of interest, and regardless of sticky prices.

Does monitoring charities make a difference?

The website charitynavigator.org rates US charities. Although it's now changing its rating system, a charity that spends a low percentage of its budget on fundraising and administration will usually get a high rating.

It's not clear how much influence sites like charitynavigator have. A recent article reported that only 10 percent of Americans consulted a site like charitynavigator before donating.

But that 10 percent probably includes major donors.

Beyond Magneto Trouble

Paul Krugman and Brad DeLong have both written very good and very depressing posts. The economy had magneto trouble. We failed to prevent it; and we failed to fix it. Their posts are about why we failed to prevent it and why we failed to fix it.

Suppose either of them are right in their diagnoses of what went wrong. Can we prevent it happening again? I don't think so. People are fallible. They screw things up, out of ignorance, forgetfulness, even malevolence sometimes. And I'm speaking of all people, both in the private and in the political spheres. It will happen again.

Monetarism: the hegemony that need not speak its name

Fish don't feel the water they swim in. (I've heard that's false, but it's too good to check). Paul Krugman does not feel the Monetarist hegemony he swims in. The only part of Monetarism that he does feel, and that he now identifies with Monetarism, is that one small part of Monetarism that failed to achieve hegemonic status. Milton Friedman in 1970's believed that M2 growth ought to be kept small and constant - the k% rule. Milton Friedman lost that battle. But he won every other battle. He won the war.

Conversations with a banker: ATMs and the Money Supply

I met a friend of mine last weekend who holds a regional manager-type position at a bank.  We got to talking about banking and economics (go figure) and she described a particularly interesting problem they were discussing at work: What is the optimal policy to refill an ATM with cash?

Can the EU survive?

Just for once, this is not a question best left to the Poli Sci. Because the main forces will be money/macro.

For nearly two years now, I've been worried that one or more of the Eurozone countries might do an Argentina. I've been asking whether the Eurozone could survive. I think it's time to change the question. Can the EU survive?

I don't know the answer. But I think there's a serious risk that it won't. And I think the EU would have a better chance of surviving if the Eurozone were killed off quickly.

The evolutionary value of cancer

A recent article in Nature Reviews documents the rarity of cancer in antiquity, and speculates that "carcinogenic environmental factors in modern societies" may explain today's much higher cancer rates. Without disputing the authors' basic premise or conclusions, I wish to posit an alternative explanation: old people are useless. 

Women typically finish child bearing by 40 and child raising by 60 - sometimes much earlier. Sure, every so often someone tries to make middle-aged ladies feel good by writing some nice paper about the evolutionary value of grandmothers, but basically living past middle age contributes minimally to the number of surviving children and grandchildren one has, and from an evolutionary point of view, that's all that matters.

And, lest male readers feel too smug about their continued reproductive capabilities:

Plastic and glass

It seems the Eurozone troubles are heating up again.

Debt is like glass. If you hit it with a small shock it stays rigid. But if you hit it with a big shock it breaks.

Equity is like plastic. If you hit it with a shock it bends. The bigger the shock the more it bends. But it doesn't break.

(OK, so the analogy isn't perfect, but it's good enough.)

We need a financial system that is more plastic and less glass.

The Basic Income: Go big, or go home

I used to blog fairly regularly about the Basic Income (aka Citizen's Income, aka Guaranteed Annual Income), but the passage of a decent interval of time, Kevin Milligan's recent Economy Lab columns ([1] , [2]) and Erin Anderssen's long article in Saturday's Globe and Mail gives me an excuse to revisit the issue and perhaps repeat myself. I had almost finished writing this before I saw Kevin's most recent column, so there's some overlap that I can't be bothered to edit out at this point.

Instrumentalism

It's amateur psychology hour. Sorry.

In economics there are two reasons for doing something: because we enjoy it (taking a holiday at the beach); or because it is a means to an end that we enjoy (working to pay for the holiday at the beach). It's an instrumentalist perspective.

Public Enemy and public goods

Once upon a time, musicians made money by selling albums. Now that people download music, this strategy doesn't work well. But what is the alternative?

In 2007, Radiohead  thrilled fans and economists alike with a new approach to music distribution. They distributed their album In Rainbows electronically, allowing fans to pay any price they chose - a penny, a dollar, or 100 dollars.

It worked for Radiohead - they garnered massive publicity, respectable sales, and a permanent place on public economics exams (download sample question here).

Some thoughts on the Gauti Eggertsson & Paul Krugman paper

It's an interesting paper (pdf). It's a very standard New Keynesian macro model with one twist. It's a twist worth doing. There are two types of people: the impatient, who borrow from; the patient. And there's an exogenous limit to the debt the impatient are allowed to accumulate.

It's a math model, of course. I'm not going to stick literally to the assumptions of the model, because many of those assumptions were made to make the math simple, and aren't really central. Here's my reading.

Why won't she just take a taxi?

Three years ago my mother- and father-in-law decided to sell their car. They worked out that they would save enough on maintenance and insurance to pay for a taxi at least once a week.

In three years, how many times has my mother-in-law taken a taxi? Excluding trips to the airport or train station - journeys she made by taxi even in her car owning days - none. Zero. Zip. She walks or takes the bus to the grocery store or up the town.

My mother-in-law is a pharmaceutical company's worst nightmare - fit, healthy, and medication free. But I think she'd be happier if she took a taxi once in a while to go out in the evening with friends. And I don't understand: why won't she?

But is it research?

At the back of every academic blogger's mind is a nagging question: does this count as research?

A new paper by Glen Ellison (ungated here) argues that the internet is changing the way that top academics publish: "More top economists may realize that the publication hassles they have been enduring are not necessary." Economists at universities such as Harvard, he argues, are publishing their research as (non peer reviewed) working papers. Unless their work is accepted into a top general journal such as the American Economic Review, they just side-step journal publication, and the accompanying  pain of rejection and tedious revisions, entirely.

How the quest for ratings distorts research

Imagine yourself in the position of a senior university administrator. Your university employs hundreds of academics, all of whom claim that their research is of vital, earth-shattering import. You have neither the time nor the expertise to evaluate the quality of the work done by individual faculty members. How do you sort out the good from the bad?

Four questions for the Bank of Canada

Three of those questions are questions the Bank of Canada is asking itself (and anyone else who cares to listen). I want to add a fourth.

The Bank held a workshop yesterday. Stephen and I attended, along with a few dozen other Canadian economists. It was about the Bank's inflation targeting framework, which comes up for renewal next year.

Out-sourcing your own job

The Radio-Canada news report sounded like an item from The Onion:  Postal worker contracts out his own job.

In economic terms, it makes perfect sense for a letter carrier to sub-contract. Say Postman Paul is earning $150 after tax per day for delivering the mail, but can make more money working in construction.  (Before taxes, Canadian postal workers make around $23 per hour plus benefits - more if they can complete their route in under the allotted time.)  Unemployed Al is willing to deliver the mail for $75 in cash. Imagine Postman Paul pays Unemployed Al $100.

Al is better off - he'd do the job for $75, and gets $100.  Paul is better off - he has $50 cash in his pocket, plus freedom to work his other job.  What's wrong with this arrangement?

Money Mischief - Green Party of Canada Edition

This is a non-partisan blog - when the NDP, Liberals or Conservatives make a policy proposal that doesn't make much sense, we call them on it.  I do not hide the fact that over the past few years, I have supported the Greens.  However, if I refuse to hold the Greens to the same standards I hold other parties, this is no longer a non-partisan blog.  So in the interest of non-partisanship, we'll discuss the Greens.

Yesterday I learned from Alice Funke of Pundits' Guide about a Green monetary policy proposal.  And, oh boy, is it a doozy.

Excess supply and monopolistic competition, once again

Why do firms so often seem to produce too much, or price too high, and have to sell off the excess at a reduced price?

You are a baker. You get up early and bake a batch of fresh bread. You set the price for the day. You aren't sure how much bread will be bought during the day. You can't bake more bread during the day, and you can't change the price either. At the end of the day, any unsold bread is no longer fresh, and has to be thrown (or given) away. What is the probability that you will have some bread left over?

The answer is surprisingly simple. The probability you will have some bread left over (an excess supply of bread?) is equal to: one divided by the elasticity of demand for your bread.

Oil prices, the Canadian dollar and the kink at parity

The Canadian dollar has been bouncing around parity with the US dollar recently, and the Fed's adoption of another round of quantitative easing plus the relaxing of the Chinese government's tightening policies has people (including me) thinking  that USD-denominated commodity prices will rise, and with it the Canadian dollar.

But will it? The last time we were in this situation, something odd happened when the CAD-USD exchange rate hit 1.0.