Worthwhile Canadian Initiative

Why would private-sector firms make their forecasts public?

Suppose you had invested a certain amount of resources into researching the geology of Northern Quebec and had identified a region where there was a near-certainty of finding gold. Would you tell everyone? Or would you keep your findings to yourself and quietly acquire the necessary mining rights?

The Bank of Montreal released a report the other day, forecasting a depreciation of the Canadian dollar to 0.93 USD by the end of the year. The question that comes to my mind isn't whether or not the forecast is a good one. My question is: why would the BMO tell us? More generally, why do private-sector firms make their forecasts public?

Research Project for Economics Student(s)

I don't have a comparative advantage in doing this, so why not see if I can find someone who does?

If you are interested in Canadian monetary policy, and have basic econometric skills, you should be able to do this. And the answer you come up with might be interesting.

The Lucasian map is not the Hayekian territory

In defence of Lucas '72.

Take any macroeconomic model of a market economy with inefficient aggregate fluctuations. In fact, take any economic model where something bad might happen.

Assume that model is literally true.

The people in that model are idiots.

How to take apart the Eurozone, without sovereign "default"

1. Canada prints up 17 batches of banknotes. The first batch is called "New Drachmas"; the second batch is called "New Liras"; etc.; and holds them till D-day.

2. Canada prints up one batch of very good counterfeits of Euro banknotes, and holds them till D-day+365.

Is and ought for the Eurozone

In a correctly specified economic model, the number of equations equals the number of unknowns, and the model tells you what will happen. If you think that the model is telling you something bad will happen, and you want something better to happen, you have to remove (at least) one of the equations, and replace it with a different equation, so that the model now tells you that something different will happen. And you try out different equations until the model tells you something will happen that you like a lot better than what the model originally told you will happen.

Then you say that the original equation ought to be replaced by the new equation. That's your advice.

Which is a bit strange, when you put it like that.

The history of economic research in pictures

When Adam Smith wrote the Wealth of Nations, the universe of ideas looked something like this:

Affirmative action for policy-relevant research?

The Social Sciences and Humanities Research Council of Canada (SSHRC) has replaced its old "standard research grants" with new "insight grants."

Both the old and new grants fund "investigator framed" research - that is, ideas and topics generated by researchers themselves. (SSHRC has other programs that target specific research areas, for example, the automotive industry)

Investigator framed research works best when researchers know more than politicians or bureaucrats about where there are opportunities for knowledge gains, and what the emerging issues that will matter in the future are. 

The disadvantage of investigator framed research is that some topics might end up being under-researched (see here and here). Canada-specific topics that are hard to publish in top-tier international journals. Topics that require detailed knowledge of Canadian policies or institutions. Topics with few fringe benefits attached. (Circumpolar conferences are rarely held in Rio.)

All money is helicopter money. Against the Law of Reflux.

Milton Friedman said (somewhere) that money is like a refrigerator. Both are consumer durables that yield a flow of services to their possessor.

But in one important way that is a very bad analogy. Money is a medium of exchange, and refrigerators aren't. The stock of money, and the stock of refrigerators, are determined in very different ways.

What determines the stock of refrigerators held by the public? The short answer is: supply and demand. What determines the stock of money held by the public? The short answer is: supply. The suppliers of money, whether those be central banks, commercial banks, or counterfeiters, can force people to hold more money than they wish to hold. The suppliers of refrigerators can't.

There is an important sense in which all increases in the stock of money are like helicopter operations. The helicopter increases the stock of money without first persuading us we want to hold more money. We pick up the money whether we want to hold it or not. We plan to exchange that unwanted money for something we do want to hold. Friedman's refrigerator metaphor conflicts with his helicopter metaphor.

The modern debate over Quantitative Easing is a rehash of the very old debate over the Law of Reflux.

Where's the put?

People used to talk about a Greenspan put. It was a put on stocks. Now there's a Bernanke put, but it's a put on bonds. More precisely, it's a put on US government bonds, not on all bonds. Greece doesn't have its own central bank, and there isn't much of a Trichet put on Greek government bonds.

(A "put" means you have the option to sell a stock at a predetermined "strike" price. It puts a floor on what the stock is worth to you. A "call" is the opposite: an option to buy a stock.)

A Lament for Public Policy

In New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart, Don Drummond reflects on the state of public policy analysis in Canada and whether the rigour of policy analysis that existed in the past still exists today though he wisely cautions that “tales of the good old days are often the product of bad memories.”   He comments particularly on the state of economic public policy analysis at the various sources: the local, provincial, and federal government levels as well as universities, think tanks, the private sector and the media and composes what could be termed a Canadian lament for economic public policy analysis. 

Why the Gini?

Stephen Gordon recently posted an excellent analysis of trends in income inequality in Canada and elsewhere. Stephen, like almost all of the other authors cited in his post and the subsequent discussion, measured inequality using the Gini coefficient.

The very next day, I saw a paper by Francesca Greselin arguing that the Gini is inferior to the new Zenga inequality index and should be replaced.

Talk about deja vu all over again. Various limitations of the Gini inequality index have been known for years. Tony Atkinson described some and proposed an alternative to back in 1970; other indices for measuring inequality are the Theil index, and the Hoover index. Greselin and co-authors set out new arguments, and make a convincing case for replacing the Gini. But I don't expect to see the Zenga index in wide use any time soon.

We keep on using the Gini because that's the way people have always done it. But why did people even start using the Gini in the first place?

Does Canada's Electoral System Under-Represent Minorities?

It is erroneously believed by some that the original U.S. constitution had a clause decreeing that a black man was "worth" only 60% of a white man.  The three-fifths compromise, rather, was a mechanism for determining how slaves (not blacks, though in the 1770s only 8% of the black population were 'free', so there was little difference) should be counted in determining how many representatives each state received in the House.

Canada's electoral system, however, does inadvertently make the votes from voters of some races worth less than others.

What's wrong with New Keynesian macroeconomics -- an MM perspective

There are many things right with New Keynesian macroeconomics. It is a very good synthesis of many strands in Monetarist, Keynesian, and New Classical macroeconomics. But this post is not about what's right with New Keynesian macroeconomics.

There are also many things wrong with current New Keynesian macroeconomics. New Keynesian macroeconomists are aware of many of those things. But this post is not about all the things that are wrong. It's about some of the things that are wrong. I'm coming at this from a "Market Monetarist" (aka Quasi Monetarist) perspective.

The Impact of Economics Blogs

I blog, therefore I am.  What if I blog about blogging? What kind of impact does blogging have?  Blogging is a flexible creative format that can present economic ideas at a fairly high level of analysis but without the formal process and format of a refereed journal article.   Moreover, blogs allow for a fairly quick feedback as well as interaction with the readers.  

Can demographics explain why the income shares of high earners have increased?

The increasing concentration of incomes among a small number of high earners has been documented at length here ([1], [2], [3]) and elsewhere. Any sensible response to this development has to be based on at least a partial understanding of how and why this trend began - and we still don't have a theory that seems strong enough to use as a basis for policy.

Here is a story that makes sense to me. Then again, I may be putting one and one together and getting eleven.

The Euro, "less competitive countries", and the neutrality of money

I'm not a great defender of the Euro. I think it was a mistake. But there's one argument against the Euro that I'm not happy with. It goes something like this:

"Some of the Eurozone countries are just permanently less productive than others. The less productive countries just can't compete if they all share a common currency. They need their own devalued currency to be able to compete."

(I have a memory like a sieve, but I don't think I'm making that up, am I? Anyone got good examples?)

The Excess (constrained) Demand for Money

I noticed something a bit strange about the responses to my last post.

For the last couple of years I have been writing lots posts saying (in various different ways) that recessions are always and everywhere a monetary phenomena. That Keynesian models do not make any sense except in a monetary exchange economy (which is not, I repeat, a criticism of Keynesian models, except insofar as they ought to make that assumption explicit and show exactly where money fits into the model). And that an excess of desired saving cannot create a recession unless it creates an excess demand for the medium of exchange. With loads of weird thought-experiments involving antique furniture, hairdressers, pro-usury parties, etc., trying to make my point.

And I've always felt that I was pushing against the mainstream view. And I've always gotten lots of pushback in the comments, saying I'm mistaken.

But in my last post I said the same thing, said that Paul Krugman agreed, and got almost no pushback at all (except for two, which I will come to later).

On trends in inequality in Canada, the United Kingdom and Sweden

The Conference Board released a study on trends in inequality, so I decided to update the data from this old post. Here's what I found: if you measure inequality using the Gini index, you'd conclude that after increasing during the 1980's, inequality levels had stabilised since 1995.

Net Worth, Wealth Effects and Recessions

According to a report by Bank of Nova Scotia economists Derek Holt and Karen Woods, Canadian businesses have begun to pull back on investment and accumulate inventories which may be a sign that the economy is about to head into another recession.  After the surprise second quarter drop in GDP, if there is another drop, it would mean that Canada has slipped into recession ahead of most other countries.

A response to Paul Krugman

Paul Krugman has a lot in common with quasi-monetarists like me. [Update: I'm going to re-emphasise this. On reading Paul's post, it is now much clearer to me than it was in the past that there is a helluva lot in common between Paul Krugman and quasi-monetarism. So many economists just don't get the central importance of monetary exchange and excess demand for money in understanding recessions. Paul does. Take as read a general rant about such economists.] To oversimplify just a little, we agree on the diagnosis, but disagree on the proposed cure. Which is a bit strange, though not impossible.