Worthwhile Canadian Initiative

The inverse function theorem and the monetary policy instrument

I'm not very good at math. So treat this post accordingly.

[Ooops! As Kevin points out. I meant the *inverse* function theorem. I did say I was no good at math. I've edited it now. Can't find the strikeout function.].

The basic idea here seems rather obvious. But I don't remember anyone making this connection before. Between the inverse function theorem and the choice of monetary policy instrument.

There's something in math called the Inverse Function Theorem. It says that if Y is a function of X then, under certain conditions, there must exist some inverse function such that X is a function of Y. If Y=F(X), then X=F^-1(Y).

Ontario's Recession Battered Families

Recessions generate many statistics but in the end its all about the people and their families.  Statistics Canada today released family income data for sub-provincial areas for 2009 taken from the 2009 personal income tax returns. 

The macroeconomics of doing nothing

Suppose there is an increase in desired saving, and the monetary and fiscal authorities do nothing. What happens?

That's the most important practical question in macroeconomics over the last few years. And it's also a really stupid question. And understanding why it's a really stupid question, and changing the way that question is asked -- not just in academia, but in the real world -- is the most important practical task of macroeconomic theory today.

Wife jokes as an indicator of marital discord

Last night I was watching a Best of Dave Allen DVD.  I like the funny wordplay, but some of the wife jokes are lame.

A wife joke is a joke like this one:

"First guy (proudly): "My wife's an angel!" Second guy: "You're lucky, mine's still alive."

NHL: Would You Rather Have the 24th Overall Pick or the 35th and 48th?

Similar to yesterday's question, but this one involving a trade where the Red Wings sent the 24th pick overall to the Senators in exchange for the 35th and 48th pick.  The Senators would seem to do better with this trade than the Leafs, as the pick they receive is 2 picks lower (24 vs. 22) but the ones they give up are 5 picks and 9 picks lower respectively.

Same subjective methodology as yesterday:

NHL: Would You Rather Have the 22nd Overall Pick or the 30th and 39th?

I didn't get a chance to watch the draft yesterday, but I was getting updates via text message, including the following:

Leafs acquire 22nd overall pick in 2011 from Ducks for 30th and 39th overall picks in 2011...

It wasn't immediately obvious to me who got the better deal - the Leafs or the Ducks.  Clearly with the 22nd overall pick you have a better chance of drafting a very good player than you do with either the 30th or 39th.  But both combined? I'm not sure. There have been detailed studies on the draft, but I decided to simply look at what would have happened if that trade had been made in the past.

Economics, History and the Shrinking Middle

As an economic historian by training, I’m always aware of the unique ground straddled by practitioners of the cliometric craft. We are economists by training and in terms of many of the questions we are interested in, but much of our research focuses on collection and analysis of primary sources. 

Headline and Core, again. And the ECB.

They are still at it! (Making totally irrelevant arguments about headline vs core.) How to kill this zombie?

Here is a very simple model of inflation. Don't take it too literally. It's just for illustration.

1. H(t) = aH(t-1) + bC(t-1) - cR(t-1) + e(t)

H(t) is headline inflation at time t; C(t) is core inflation; R(t) is the rate of interest set by the central bank; and e(t) is a serially uncorrelated error. Headline inflation depends on lagged headline inflation, lagged core inflation, the lagged interest rate, and an unforecastable shock. (Everything is in deviations from the mean, so I can ignore the constant term.)

Thomas K Rymes, 1932 - 2011.

TK Rymes' publication list begins with a disclaimer "Those marked with an asterisk I consider to be worth reading." That line is typical TK - direct, honest, and self-deprecating. After all, how many academics would suggest, even by implication, that much of their work is not worth reading?

One of the first asterisked publications on the list is On the Concepts of Capital and Technical Change, the book that came out of TK's PhD thesis at McGill University, revised during time spent at Cambridge University, working with Joan Robinson.

Debt and bi-modal demographics

Young people borrow, to finance school, house, car, and kids. Their debt reaches a maximum, somewhere around age 35. Then they start to pay off their debt, and save for retirement, and so reach a maximum stock of savings somewhere around age 65.

So, if there were a big bulge in the population at around age 35, and very few people around age 65, the average level of debt would be highest, right?

Wrong.

This is what a balance-sheet recession looks like, and it's not pretty

I had never heard the expression "balance-sheet recession" before this recent episode, and it's time I got around to a comparison of the household balance sheets of the US and Canada. Of all my "Canada is not the US" posts, this is the one that makes me most grateful.

Republican profs give out less egalitarian grades. So what?

A number of bloggers (for example Mark Perry, Catherine Rampell, Greg Mankiw)  have picked up Bar and Zussman's recent paper on Partisan Grading. (Downloadable here, forthcoming here)

Bar and Zussman take data on student grades, student SAT scores, and professor political affiliation, and find that:

...student grades are linked to the political orientation of professors: relative to their Democratic colleagues, Republican professors are associated with a less egalitarian distribution of grades and with lower grades

Foreign ownership and foreign control

Friday's release of Canada's international investment position for 2011Q1 shows that Canada is a net debtor nation, as it has been for its entire history - with the notable exception of a fleeting moment that was subsequently revised away. But we're not net debtors in all asset classes: Canadian direct holding of assets abroad are greater than foreign direct investment (FDI) in Canada.

Some graphs below the fold:

Transfer Dependency's New Friends

Well, I decided to finish off my postings on provincial revenues and go to the Federal Fiscal Reference Tables which provide a federal transfer revenue variable for each province from 1987/87 to 2009/10 as well as provincial revenues.  I have a plot of nominal per capita transfer revenues and not surprisingly it shows an upward trend.  More importantly, I then construct a share of provincial revenue accounted for by federal transfers. 

The Future of Manufacturing - Reading and Watching List

At 1PM today I am doing a chat on "The Future of Manufacturing in Canada", which my former students know is a favourite issue of mine.  You can access the chat here. Hope you all can make it!

I am certain I'll be referencing a number of reports and resources in the chat.  In the interest of having them all in one place, I have decided to link to them here.  I will be adding to this list from time to time.

Population aging and labour's share of income

There aren't many statistical regularities in macroeconomics, and very few of them are as important as the apparent long-term stability of the shares of income that go to capital and labour. This 'stylized fact' was first noted by Nicholas Kaldor back in 1957, and his list of stylized facts shows up in every macroeconomics sequence. Or at least, it should. Among other things, it's the reason why the Cobb-Douglas functional form is so widely used for production functions.

One thing that occurred to me as I was putting together my recent posts on population aging is that if this stylized fact continues to be as robust in the future as it has been in the past, then demographic change is going to bring up some important distributional questions.

Canadian mortgage debt

I feel bad about writing too many abstruse theory posts. How many angels can dance on the head of a monetary pin?

Here's something more practical. Think of it as a companion to Livio's post about Canadian house prices. Why would we worry if Canadian house prices are overvalued? One important reason (though not the only one) is that if house prices are overvalued that is one reason (again, not the only one) to expect they might fall. And if house prices fall, people with large mortgages might have negative equity, and this might lead to defaults, and problems in financial markets.

The monetary transmission mechanism

The reason that New Keynesians don't like talking about the supply of money and velocity has nothing to do with problems in defining the supply of money, the instability of velocity, or the instability of the money supply multiplier. As I argued in my last two posts, similar criticisms would apply equally to the New Keynesians' actual and natural rates of interest.

The real reason is the New Keynesian view of the monetary policy transmission mechanism. They see it as working through interest rates. Given sticky prices, an exogenous decrease in the supply of money causes interest rates to rise which causes aggregate demand to fall, which causes a recession. So why not just cut out the irrelevant cr*p about money, and just say the central bank raises interest rates which causes aggregate demand to fall? Money and velocity play no role in the story. You can talk about them if you like, but they don't help you understand what's going on, and are merely a distraction.

New Keynesians have this precisely backward. Interest rates are neither necessary nor sufficient for the monetary policy transmission mechanism. Money/velocity is both necessary and sufficient.

Are Canada's Housing Markets Overvalued?

Bank of Canada Governor Mark Carney is going to be in Vancouver on Wednesday June 15^th to deliver a speech on the country’s housing market.  There is a lot of interest as to whether or not the housing market is overvalued so I thought I would take a look at housing prices and markets using the most recent CMHC annual report (2010 Housing Observer) I was able to dig up, which has average housing prices by major urban centre as well as an assortment of other data for the period up to 2009.

Are Quebec-born NHL coaches more likely to win the cup?

 Historically French Canadians have been underrepresented on English Canadian NHL teams, relative to their representation on U.S.-based teams.

The underrepresentation of people from Quebec is particularly dramatic behind the bench, in the coaching staff.