Saturday, November 21, 2009

Golf, Graphs, and Government: a problem with using econometric studies as bases for policy development

On Friday, I sat in on an interesting seminar presentation by Pr. Renée Adams of UQ, on the potential consequences of bank representation on Federal Reserve bank boards in the US.

Her paper, which has been a continuing work over a decade or so, looks at how the market digests the news that a director of a particular bank gets voted to a Fed board (there are twelve in the States). Unsurprisingly, big banks, and those with more assets, are better represented on Fed boards, and the market digests the news favourably.

The two reasons she supposes explain this are (1) the election of a board member to a Fed board is a vote of confidence in the bank, and (2) board members may be privy to better information, improving the competitive position of the bank. The second, more malignant explanation is not without some appeal: Stephen Friedman was simultaneously on the boards of the FRB of NY and Goldman Sachs during a time when the TARP programme had AIG pay some $8B of debt back in full to Goldman Sachs (along with paying back other creditors in full), despite the fact it had been negotiating the principle down in the period before government involvement. While Friedman has not been shown to be in any way linked to this, it certainly raises questions about who is playing golf with whom.

A key problem with the kind of findings Prof. Adams has, is that they cannot distinguish between the permissible (reputation) and fishy (perceptions of insider information) causes for stock price movements. This in turn weakens any argument which could be generated from such work, detracting from its potential impact in terms of policy.

Economists are overly suspicious of ethnographic studies for being lacking in hard, testable data. There are plenty of situations, however, where such studies have plenty of merit. If 99 bank directors on FRB boards behave well, but 1 does not, an econometric study will not conclude that bank directors behave badly, which is good--in this case, they normally don´t. An ethnographic study, however, will focus on the poor behaviour of the one director.

For researchers, the decision on whether to use an ethnographic method---and I think this will certainly increase in the coming years---will really depend on how much faith they put in the precautionary principle. Is the studs-up behaviour of the one director cause enough for changing the rules?

Tuesday, November 17, 2009

Reasons I'm marrying the right woman #792

A few weeks ago, Susie sent me an email wanting to know how to write in LaTeX. She liked the look of my documents, and thought her papers would look better if they were properly typeset.

I wrote a little how-to-get-started guide for her, with a couple of screen-shots, explaining the basic stuff. I thought, if she was really keen, she'd read one of the real manuals. After that, I didn't hear much, and assumed she must have given up on the whole thing---she is, after all, researching security and strategy, and doesn't need to write any equations or tables. On top of that, she writes in Spanish, requiring plenty of áccénts, which are a little tricky to do in LaTeX.

She emailed me one of her documents yesterday, and I had the shock of my life. It was laid out better than anything I've done yet. I know I shouldn't be attracted to Susie because of her typesetting skills, but it's hard not to be...

Monday, November 16, 2009

Can Governments be Ponzi Lenders?

For a paper I'm writing, I've been doing a little reading up on the Fiscal Theory of the Price Level. This theory, depending on to whom you listen, is either a piece of logical brilliance, or lunacy.

The basic premise is that the real value of government debt must equal the discounted expected future primary surpluses of the government. Should the government acquire debt beyond its capacity to repay, bond holders will realise this, selling the bonds down, which drives up interest rates. As a sovereign cannot default on debt denominated in its own currency, the central bank is forced into buying these bonds, expanding the money supply, and boosting prices until the point where the nominal debt becomes repayable.

The big argument about this theory is whether the `fiscal limit', described above, is an equilibrium condition determining prices, or a limit on government behaviour. Roughly, Christopher Sims, Michael Woodford, and John Cochrane have argued the `equilibrium condition' line, while Willem Buiter has argued the fiscal limit is a `constraint'.

Both of these arguments are, though, difficult to logically justify.

The first---that the price level is implicitly determined by the stock of government debt relative to expected future budget balances---is easy to defeat. The problem with this thesis is that it requires all government savings to be made in the expectation of some future primary deficit. Should one government ever run a fiscal surplus despite having noexpectations of future primary deficits, then (without some further strong assumptions) the model fails.

The second---that the fiscal limit defines the maximum borrowing a government could make before provoking inflation---is more complicated to argue. Assuming the Buiter argument is true implies governments could lend money continually without ever expecting to run a primary deficit. This is irrational, and violates what is known as the "no-Ponzi-game" condition, which forbids actors from either holding positive or negative balances at the day of reckoning (which occurs into the infinite future). Therefore, the Buiter hypothesis necessitates assuming one of the main actors in models only behaves irrationally: a very strong assumption. Or is it?

This raises a question:
For any actor that has an infinite life and expects never to deplete their savings, are their savings irrational? Remember---infinity periods is a very long time. Can a government be a Ponzi-lender?

Monday, November 9, 2009

Reflections on finishing a thesis

I submitted my honours thesis yesterday, with a bit of relief. Now I have submitted it, I know there are a few things I should have done differently.

1) Go vanilla: there's nothing wrong with the basic formula of a thesis (lit review, model, regressions, conclusion). I began the year wanting to incorporate natural resource price shocks into a multisector DSGE model (of my own design), and finished the year building natural resources into a two sector growth model (of Uzawa's design).

2) Don't attempt a theoretical thesis. The fact is it takes a decade to get to the bleeding edge of economic theory, and once there, one's capacity to explain the world is diminished by the having depleted all social skills required to explain anything, due to the act of getting to the bleeding edge! There is nothing wrong with empiric studies.

3) Don't teach three subjects with 12 hours of teaching per week. I love my students, but I think they suffered from my less-than-perfect organisation over the semester.

and 4) Make your supervisor push you. My supervisor (who is also my boss) was excellent, and a brilliant help, though didn't want to stress me out. I think honours should be about stress. So when I get to the point of supervising people, I think I'll push a bit harder than I was pushed.

Friday, November 6, 2009

Congratulations, sister!

This morning, my younger sister was interviewed on Radio National, about her latest article in Eureka Street.

The central point of her article is that women, including those `liberated' in the sense they are allowed to show more skin, are really subjected to much the same kind of pressures women face in less `liberal' societies. The Brownlow medal ceremony is a great example: the wives and girlfriends are decoration, and there exists no equivalent institution where the "husbands and boyfriends" of prominent women are objectified in the same sense.

Given the fairly real content of Ellie's article, though, it was a bit disappointing that the discussion on RN focussed on the difference between dressing skankily and suavely, rather than the more meaty problems.

Congratulations, Ellie!

Thursday, November 5, 2009

Some clichés are less equal that others

Whenever I have difficulty throwing a sentence together, I find it helpful to go over Orwell's famous essay `Politics and the English language' (1946). Orwell hated phrases that have

lost all evocative power and are merely used because they save people the trouble of inventing phrases for themselves. Examples are: Ring the changes on, take up the cudgel for, toe the line, ride roughshod over, stand shoulder to shoulder with, play into the hands of, no axe to grind, grist to the mill, fishing in troubled waters, on the order of the day, Achilles' heel, swan song, hotbed.

Perhaps a few more people who quote Orwell should have read him: