Worthwhile Canadian Initiative

Teaching Mundell Fleming

The Mundell Fleming model is usually taught in second year macroeconomics. It's the open economy version of the ISLM model.

This post is me disagreeing with Simon Wren-Lewis about teaching open economy macro (in textbooks and in the classroom). It is not a disagreement about open economy macroeconomics.

Simon says that the textbook Mundell Fleming model, in some circumstances (like a temporary increase in government spending), violates Uncovered Interest Parity.

I say that the textbook Mundell Fleming model always preserves Uncovered Interest Parity, but in some circumstances (like a temporary increase in government spending), violates model-consistent ("rational") expectations.

Big disagreement? Not really. But I think my way of looking at it is more intuitive.

Exchange controls, barter, and Cunning Plans

It was sometime in the 1960's. My uncle was teaching in Bulgaria. He wanted to buy stuff in Britain, but wasn't allowed to take much money out of Bulgaria. My father was farming in Britain. He wanted to buy stuff in Bulgaria, but wasn't allowed to take much money out of Britain.

My uncle and father thought up a Cunning Plan. My father went to Bulgaria, where my uncle gave him money, and my father bought stuff. My uncle went to Britain, where my father gave him money, and my uncle bought stuff.

Good Luck Balancing the Federal Budget by 2015-16

Budgets are political and aspirational documents as they lay out a future course for the economy and government revenues and expenditures much as the government of the day would like them to be.  Well, the 2013 federal budget is no exception as a bit of additional study of the budget numbers suggests that balancing the budget by 2015-16 and generating surpluses thereafter is probably wishful thinking.

What does the federal budget mean for the post-secondary sector?

Reforming universities is difficult. Cures tried elsewhere, like the UK Research Assessment Exercise, have induced people to publish more. Yet, to the extent that research comes at the cost of time spent teaching or engaging with students, "incentivizing" research could actually decrease the social value of universities.  

University reform is doubly difficult in Canada, where universities are a provincial responsibility, and coordinated action is problematic. I suspect that Prime Minister Stephen Harper would like to pull a Margaret Thatcher, and end tenure, or whip academics into shape with frequent assessments. But the federal government has no jurisdiction to act in this area.

Hence the government is pursuing a multi-level strategy.

Crime and Police

Statistics Canada has released its most recent report on police personnel and expenditures and notes that police strength measured as officers per capita declined in 2012 by 1 percent.   Moreover, there has been a slight decline in police expenditures overall with spending in 2011 totaling 12.9 billion – a decline of 0.7 percent from the previous year.  However, spending and officers per capita have generally grown over the last decade and police forces and police spending are higher than they used to be.  What is of more interest to me are the numbers at the CMA level and their relationship with crime rates.

Fiscal policy with Old and New Keynesian IS curves

With the Old Keyensian IS curve, the natural rate of interest is a positive function of the level of government expenditure. High G means high r*.

With the New Keynesian IS curve, the natural rate of interest is a negative function of the rate of change of government expenditure over time. High Gdot means low r*.

That's because:

In the Old Keynesian IS curve, the levels of desired C and I are negative functions of the level of r.

In the New Keynesian IS curve, the rates of change of desired C and I are positive functions of the level of r.

Please don't make me do the math. I'm not very good at math.

I have a very strong hunch that this is at the root of the disagreement between Paul Krugman and John Taylor.

I did a post on this, about a year or so back. Somewhere.

If you are a dyed-in-the-wool New Keynesian, and you want an expansionary Aggregate Demand policy, to get the economy up off the ZLB, and if you don't agree with Scott Sumner and other "monetary policy optimists", and so you want to use fiscal policy, you will want to increase the natural rate of interest, and you do that by ensuring that G will be expected to be falling over time from now on. And there are two ways to do that: either raise current G holding expected future G constant; or else cut expected future G holding current G constant. Probably: Paul Krugman wants to do the first; John Taylor wants to do the second.

John Taylor: "In contrast, in our Wall Street Journal article and our research on fiscal consolidation we consider the effect of permanent changes [presumably reductions NR] in government spending which are phased in over time to bring the budget deficit down."

Whether the New Keynesian or Old Keynesian IS curve is right, is another question.

Federal Budget Forecasting

What a difference just a few months can make in the world of federal government finance.  Apparently, weak commodity prices and a slowing economy are playing such havoc with government finances that Thursday’s federal budget will show a downward revision of economic growth forecasts as well as a shortfall in revenue that will be addressed by extra savings that will come from limiting the growth of federal discretionary spending – direct spending on programs and services as opposed to transfers.

Deposit insurance, bank runs, international currencies, and the inflation tax

Just a short post on one point about the recent Cyprus business. (It looks like Cyprus will impose a "one-time tax" on bank deposits rather than honour its deposit insurance.)

Was Canada ever the best place in the world?

A revised and updated version of this post is on the Globe and Mail website here. Thanks to all of the WCI commentators who helped me get my head around the HDI calculations.

For much of the 1990s, Canada topped the United Nations' Human Development Index (HDI). Newspaper headlines and politicians declared we were the best place in the world to live. This year, Canada slipped again in the HDI rankings, from 10th (tie) to 11th. What has happened? Why aren't we the best place in the world to live any more? 

Boys, retention, and multiple regression

A followup to my previous post on university retention and males.

Assume boys and girls are identical, except: there's something in the water at high schools that causes boys to do worse than girls; and there's something in the water at universities that causes boys to do worse than girls.

Suppose you had a data set for all university students, that told you for each student i: that student's performance at university Ui; that student's performance at high school Hi; and that student's sex Si (Si=1 for male, Si=0 for female).

Suppose you ran a multiple regression of Ui on Hi and Si:

Ui = a + bHi + cSi + ei

What would you expect to find?

Son Spots: The merits of dynasties

Politics seems to run in families. The question is: why? Why would electors choose the son, daughter or spouse of a successful politician over other candidates who are, on paper at least, equally or more qualified? 

An economist is in no position to answer this question, but is ably equipped to theorize about it.

Frivolous Fees and Serious Money

Over on Ramblings and Musings, University of Toronto professor Victor Ivrii is thinking about frivolous fees. His article is prompted by a National Post piece on "Sanctioned sex club events and Israeli Apartheid Week". The National Post article asks:

Why is their money going to support controversial events, such as Israeli Apartheid Week or the “Epic Sex Club Adventure” recently hosted by the student-funded Sexual Education Centre at the University of Toronto? While the possibility exists to opt-out of student funded groups, critics argue the process is not well advertised and even discouraged.

Professor Ivrii wisely takes no stand on the merits or demerits on Israeli Apartheid or Epic Sex. He argues more generally:

There should be no opt-out process, only opt-in. Unless student specifically indicates his/her willingness to pay a levy for a certain cause, this levy should not be imposed.

The intercept is negotiable, the slope is fixed

A new hire only gets one chance to negotiate: a brief window between the time that an offer is made and the time when that offer is accepted. Those initial terms and conditions determine the employee's salary for years to come - possibly the entire the duration of his or her time at the institution. 

Think of a graph with job tenure (years of service) on the horizontal axis, salary on the vertical, and a curve showing the evolution of a person's salary over time. Roughly speaking, the intercept of that curve is negotiable, and the slope is, if not entirely fixed, at least largely independent of a person's initial starting salary (for references, see here). 

An extra $100 in starting salary means an extra $100 in salary each and every year - until one jumps to a different pay scale, gets a salary-boosting outside offer, or hits a salary ceiling - none of which may ever happen. Hence, If one is offered a job, it is critically important to negotiate. 

The fantasy world of retirement planning

For complicated historical reasons, I hold $13,000 in a locked-in RRSP with Great West Life. A few days ago, I received a "Year-End Retirement Illustration", shown over the fold. I read it and thought "That's so bad, it's bloggable."

Measuring Popes

With the Conclave of Cardinals about to convene to choose a successor to Benedict XVI, it is worth taking a look at some statistics regarding the line of popes over the course of 2000 years.  Based on the list in the Catholic Encyclopedia, Benedict XVI was the 267^th pope in a line stretching back to Peter and his eight year reign was actually slightly above the average tenure for all popes but below average for those who have served more recently.  Indeed, the reign of popes probably provides an interesting long-term perspective on longevity and the standard of living given that since popes usually served until death, the length of reign is likely correlated with longevity.

Collegiality as a positive externality

Yesterday my contact at the Globe asked me to write something about Yahoo CEO Marissa Mayer's decision to scrap the company's teleworking policy. The final product is here. 

Why don't we have disinflation (until now)?

Just a quickie, between meetings.

Paul Krugman asks "Why don't we have deflation?" His answer is: downward nominal wage rigidity. And he shows that graph of frequency distribution of nominal wage changes with a big spike at zero.

I don't think that's quite the right question. So I don't think that's quite the right answer. (Even though, sure, that graph is almost certainly telling us something important.)

"Deflation" means falling prices (a negative inflation rate). "Disinflation" means a falling rate of inflation, so prices rise less quickly than they did before. My question is: why don't we have disinflation (until now)?

Can evolution save the elephant?

For centuries, elephants with large tusks have been targetted by hunters and poachers. The "unnatural selection" in favour of smaller-tusked elephants has resulted in a dramatic decrease in average tusk sizes right across Africa.

Smaller tusks increase an individual elephant's probability of survival, by making him or her a less attractive target for poachers. But what if all elephants' tusks decrease in size? Can evolution save the elephant?

Government Spending and Crime

I’ve been doing some data exploration on public sector spending and societal outcomes and have some preliminary results that have caused me to puzzle about what they might mean.  I’ve been looking at annual data for OECD countries (33 countries) over the period 2000 to 2010 and the relationship between public sector size and crime rates.  Public sector size is defined as total government expenditure as a share of GDP.  The crime variables were the number of homicides per 100,000 of population and the number of burglaries per 100,000 of population.  The data is from the OECD and is essentially unbalanced panel data.  The results for homicides did not surprise me but that for burglaries did.

Financial Literacy Quiz

Today I'm trying to do some work with the Canadian Financial Capability Survey. This survey contains a test of financial literacy/knowledge, which I have reproduced below the fold: