texts: Strict preference relations and utility representations

texts:
Suppose I have a rational preference relation $\succsim$ on some consumption set $X$.

Suppose also that there is a utility function $u:X \to \mathbb{R}$ representing $\succsim$.

Definition: A function $u: X \to \mathbb{R}$ is a utility function representing preference relation $\succsim$ if, for all $x, y  \in X$, $$x \succsim y \iff u(x) \geq u(y)$$

Is it possible to prove that $x \succ y \iff u(x) > u(y)$ without a continuity condition on $\succsim$?

My intuition says no, but am having difficult finding a suitable counter example. Any help is appreciated.


texts: Prove that $h(p,u) = \nabla_p e(p,u)$ is implied by Roy's identity

texts:
I am struggling a bit with the math in my first graduate microeconomics course. I'm not sure if this belongs here. If it doesn't, please direct me to a more appropriate place.

Below is one question along the with provided solution. The red part is the part I don't follow.

I don't understand how the derivative of $v(p, e(p,\overline{u}))$ w.r.t. the price vector can evaluate to the LHS of the given equation.

Perhaps I'm confused by the vector notation, so any step explaining this equation would be very much appreciated.


texts: After how many years will loan be paid with constant payment

texts:
I'm solving the following problem:

  A young couple took a loan 100 000 USD. For the first 5 years they pay
  5000 USD yearly. After 5 years they pay 10 000 USD yearly. The
  interest rate is 5%.

  After how many years will the debt be fully paid?

After 5 years I got:

$78352,61655 = 5000 * \frac{1-(1+0,05)^{-5}}{0,05}$

Then I calculated how many years do they need to pay with constant payment of 10 000 USD:

$n = \frac{ln(\frac{78352,61655*0,05}{10000}+1)}{ln(1+0,05)}$

$n=6,78$ years

Are my steps correct?

Thanks!


texts: Canonical set of books covering Bachelors and Masters in Economics?

texts:
I am a Physics student and would like to learn some Economics in my spare time. Preferably, I would chronologically go through textbooks which cover entire Bachelors and Masters degrees. For instance, in Physics there is a fixed set of topics that is covered within a Bachelor and Master degree. If you happen to know German, you could take the book series by Wolfgang Nolting (seven or eight books, numbered consecutively) and read them. When you're through, you will have covered an entire Bachelors and Masters in Physics (and more, actually). So I wonder if there is such a canonical series of books (maybe from different authors) in Economics that you could recommend to me? Thanks for any suggestion.

PS:
It should be textbooks and not courses or videos, since textbooks usually have a higher information density and transmission rate. Also, preferably it should be a canonical series, to ensure seamless transition from one book to another (no information gaps).


texts: If price increases and quantity remains the same can we infer that demand is perfectly inelastic?

texts: My college tutor told me that demand for college admission at our institute is price inelastic. She says so, because, in the past 20 years, price of college education at our institute has increased, but the number of students hasn't decreased. Does this really mean that college admission at our institute is price inelastic? Or is there a way I can counter that?


texts: Are there any situations where the elasticity version of the Slutsky equation can only be used compared with the regular Slutsky equation?

texts:
Regular Slutsky Equation:
$$\frac{\partial x_M}{\partial p_x} = \frac{\partial x_H}{\partial p_x} - \frac{\partial x_M}{\partial m} x _M$$
Elasticity Slutsky Equation:
\begin{align*}\varepsilon_{x,p_x}^M &= \varepsilon_{x,p_x}^H - \varepsilon_{x,m}^M s_x \\&=- s_y \sigma- \varepsilon_{x,m}^M s_x \end{align*}
Note: $\sigma$ is the elasticity of substitution. Informal proof $\varepsilon_{x,p_x}^H = -s_y \sigma$.

I have always preferred to use the regular Slutsky equation. But as I was preparing for my midterm last week, I came across the following problem:

  Margarine is an inferior good, yet consumption of margarine has increased over the last several decades as has real per capita income. Can you explain the apparent contradiction?

My study buddy and I struggled and struggled and eventually decided the elasticity version of the Slutsky equation was a better way to think about the problem. It was the first example I encountered where the regular Slutsky equation didn't seem sufficient and that I really needed the elasticity version.

My Question:

Are there any (other) situations where the elasticity version of the Slutsky equation can only be used compared with the regular Slutsky equation?


texts:
Is there a trade group, government, or other publication providing data on aggregate venture capital investment?

Specifically, I'm interested in how overall venture capital funding has changed over time, how it is divided by sector, and how it is divided by funding stage.

I'm specifically interested in data for the US.


texts: How to get hang of mathematical language that is so extensively used in economics?

texts: For last couple of weeks I am trying to read "Game Theory" from Fudenberg and Tirole and "Microeconomics" from Jehle and Reny. But the kind of maths they use for their theorem-proof-theorem analysis, is just not getting into my head. What book can I use to easily master such kind of Real Analysis that can help me to understand these books?


texts: Uncovered set versus top cycle set (voting theory)

texts:
I am struggling to see when, given a policy set  $X = {x_{1}, … , x_{m}} $ , with $m > 1$, its uncovered set and top cycle set may not coincide (i.e. when the top cycle set has policies that are not in the uncovered set).

The uncovered set is defined as follows. Policy $x$ covers $y$ if (1) it is majority-preferred to $y$, and (2) all policies that are majority-preferred to $x$ are likewise preferred to $y$. If there is no $x$ that satisfies criteria (1) and (2), then we say that $y$ is uncovered.

Next to this, the top cycle set is defined by partitioning the policy set into k disjoint subsets, $${L_{1}, … , L_{k}}, \text{where} \; 1 \leq k \leq m $$ by iteratively applying the idea of the top cycle set, where
$$(L_{1} = {x ∈ X | \; ∄ \; y ∈ X / L_{1} \; s.t. \; y \succ x})$$

We call these subsets of $X$ levels to suggest a mental picture: one can see the electoral environment as a series of levels or plateaus (if $k > 1$). Each plateau electorally dominates those below it: each policy at a given level is majority-preferred to all policies at lower levels. Further, every policy at a level covers all policies at lower elevations. This implies that $X$’s uncovered set is a subset of $L_{1}$, the uncovered set of $X / L_{1}$ is a subset of $L_{2}$, and so forth.

Defined constructively in this setting, a policy is in the top cycle set ($L_{1}$)  if and only if it is reachable from every other policy by a chain of straight majority preference.

Specifically, given the above definition I cannot understand why the above definition of the top cycle set implies that $X$’s uncovered set is a subset of $L_{1}$.

If anyone could think of an example or some other explanation/input for this I would greatly appreciate it. Thanks in advance!


texts:
Consider the following version of the Ak model:$$V^*(A_0,K_0)=max\sum\beta^t\sum P(A^t)\frac{c_t(A^t)^{1-\sigma}}{1-\sigma}$$ st$$ k_{t+1}(A^t)+c_t(A^t)\leq Ak_t(A^{t+1})$$ and non-negativities
$A_t$ is an i.i.d. process with mean $1$ and $P(A_t)$ denotes the probability of a sequence $(A_0,A_1, ...,A_t)$. We assume that σ > 0 and β ∈ (0,1). Output is defined as $y_t = A_tk_t$.
This might seem dumb but why is the Euler equation written as this: $$c_t(A^t)^{-\sigma}=\beta E_t[A_{t+1}c_{t+1}{(A^{t+1})}^{-\sigma}]$$
Then there is put another assumption that $k_{t+1}(A^t)=sA_tk_t(A^{t-1})$ Derive the savings rate $s$ in terms of the parameters of the model. The answer given is $s=[\beta E_t(A_{t+1}^{1-\sigma})]^\frac{1}{\sigma}$. Which again, I'm not getting how it came to that :\


texts: Is there a reproducibility crisis in Economics?

texts:
I am an undergraduate economics student, and came across this paper by John Ionnadis on 'The Power of Bias in Economics Research'. the findings are quite bleak.

https://academic.oup.com/ej/article/127/605/F236/5069452

Some examples I have come across which worry me.
From my studying of econometrics, this really doesn't surprise me. I don't think I've seen a paper, for instance, with test and training data, and an advanced undergraduate who did research for an academic over the summer told me that he basically messed around with parameters until he got the result he wanted. In fact, this undergraduate will be going to an extremely prestigious university for his PhD next year.

In economic history, which was the first area we read into the literature in first year, justifying the assumptions of OLS was always saying 'this should be plausible', for instance in a famous paper about settler mortality as an instrument for institutional quality. This sort of claim is hard to justify (e.g. settler mortality was probably influenced by prevalence of diseases like malaria, and who knows the broader implications of that).

Is there a strong case that Ionnadis is wrong?


texts: How does demand curve for labor change when there is a proportional payroll tax on employer

texts:
In the textbook "Borjas, G.J. Labor economics." (Boston, Mass.; London: Irwin/McGraw-Hill, 2009)
fifth edition [ISBN 9780070172708]. Below is a screenshot of the example of payroll tax of 1 dollar on the employer. And the labor demand curve shifts down by 1. What happens if the tax is not 1 dollar but, say, 10% of wage? I know that the labor demand curve will shift downward. But does it also rotates in a way that it has a steeper slope?


texts: How does your dominant strategy change in a second price auction if there are two items?

texts: Suppose there are 4 individuals and two items in this particular(?) auction. I understand that the dominant strategy in second price auction is to bid your true value if there is a single item but I'm having a hard time understanding why that would change at all if there were two items.


texts:
Suppose I have two variables - $y_t$ and $x_t$ - which are cointegrated. I believe that (i) $y_t$ responds to deviations from the long-run equilibrium, (ii) the long-run elasticity of $y_t$ with respect to $x_t$ is 1, and (iii) $y_t$ has no contemporaneous effect on $x_t$. I specify the following model:

$$ \Delta y_t = \alpha_0 + \gamma (y_{t-1} - x_{t-1}) + \alpha_1 \Delta x_t + \epsilon_t. $$

Estimating this model gives a negative and significant value for $\gamma$, which seems to confirm (i).

I then test whether past values of $x_t$ Granger-cause $y_t$ as by estimating the following model:

$$ \Delta y_t = \alpha_0 + \gamma (y_{t-1} - x_{t-1}) + \sum_{i=1}^k \alpha_i \Delta y_t + \sum_{i=1}^k \beta_i \Delta x_t + \epsilon_t $$

and testing the hypothesis:

$$ H_0: \gamma=0, \, \beta_i = 0 \quad \text{for all} \quad  i. $$

I am unable to reject this hypothesis. Is this a contradiction? Given $x_t$ and $y_t$ are cointegrated, and $\gamma$ in first equation is significant, does that not imply that $x_t$ Granger-causes $y_t$?

Flipping the Granger-causality test, I estimate

$$ \Delta x_t = \alpha_0 + \gamma (x_{t-1} - y_{t-1}) + \sum_{i=1}^k \alpha_i \Delta x_t + \sum_{i=1}^k \beta_i \Delta y_t + \epsilon_t $$

and test the same hypothesis. I find that $y_t$ does Granger-cause $x_t$, but $\gamma$ is very small and insignificant - i.e. $\Delta y_{t-1}$ seems to be the variable with the predictive power. This result is consistent with my prior intuition. It is the result in the other direction that I find confusing.

Thanks!


texts:
From what I understand, we have our OLS estimator in matrix form which is,

$$\beta_{OLS} = (X'X)^{-1}X'Y$$

What we want to do is transform this, as the assumption that we have constant variance is not met. So we take a vector, p, for which,

$$\Omega = pp'$$

$$\Omega= \begin{bmatrix}\sigma_1^2&0&...&0\\0&\sigma_2^2&...&\vdots\\\vdots&\vdots&\ddots&0\\0&...&0&\sigma_n^2\end{bmatrix}$$

The we use this to transform $\beta_{OLS}$ to get $\beta_{GLS}$ :

$$\beta_{GLS} = (X'P^{-1}P^{-1}X)^{-1}X'P'^{-1}P'^{-1}P'y$$

My question is one to do with understanding, I don't get what p intrisically is, I get that it is being used to transform our estimate to obtain a variance term which meets the GM assumptions, but how would one actually go about finding what p is in a paractical sense?

Is the point of the $\Omega$ matrix to show what we are working to find, i.e. the actual variances?

Thank you.


texts: Derive marginal productivity conditions in DW Jorgenson paper

texts:
I'm reading Jorgenson, Dale W. (1963), "Capital Theory and Investment Behavior", American Economic Review. Vol 53, No. 2, pp. 247-259. http://www.jstor.org/stable/pdfplus/1823868.pdf

I would like to know how to derive the marginal productivity conditions given in pg 4.


texts: CV, EV for additive utility; confirm or deny

texts:
I'm currently a TA for a class and recently graded a midterm. I gave the answer key back to the teacher, after going over part of the exam in a study hall. I was going to go over the rest of it tomorrow, but while making my own answer key in office hours, I seem to have come to a different answer than the teacher.

We maximize
$$u = 2x_1^{1/2} + 4x_2^{1/2}$$
with a normal budget constraint where $p \cdot x \leq w$. We arrive at the Walrasian demand:

$$x^*(p, w) = \left(\frac{p_2 w}{p_1(4p_1 + p_2)} , \frac{4p_1 w}{p_2(4p_1 + p_2)}\right)$$

Suppose $w = 10, \vec p = (1, 4), \vec p' = (3, 2)$.

Thus, $x(p', w) = (\frac{10}{21}, \frac{30}{7})$, and $x(p, w) = (5, \frac{5}{4})$ for our new and old bundles respectively.

So to find compensating variation we find the original utility:

$2 \cdot 5^{1/2} + 4 \cdot (5/4)^{1/2} = 4 \sqrt 5$

and find $w'$ that would get old utility and new prices:

$4 \sqrt 5 = 2(\frac{w'}{21})^{1/2} + 4(\frac{3w'}{7})^{1/2} = 2(\frac{w'}{21})^{1/2} + 12(\frac{w'}{21})^{1/2} = 14(\frac{w'}{21})^{1/2} \implies \\
4 \sqrt 5 = 14(\frac{w'}{21})^{1/2} \\
80 = 14^2 \cdot \frac{w'}{21} \\
\boxed{w' = \frac{60}{7}}$

Thus $\boxed{CV = w - w' = 10 - \frac{60}{7} = \frac{10}{7}}$

To find equivalent variation we find the new utility:

$2 \cdot (10/21)^{1/2} + 4 \cdot (30/7)^{1/2} = 2 \cdot (10/21)^{1/2} + 12 \cdot (10/21)^{1/2} = 14 \sqrt {\frac{10}{21}}$

and find $\hat w$ that would get new utility at old prices:

$14 \sqrt {\frac{10}{21}} = 2(\frac{\hat w}{2})^{1/2} + 4(\frac{\hat w}{8})^{1/2} = 4(\frac{\hat w}{2})^{1/2} \\
14^2 \cdot \frac{10}{21} = 16 \cdot \frac{\hat w}{2} \\
\boxed{\hat w = \frac{70}{6}}$

Thus $\boxed{EV = \hat w - w = \frac{70}{6} - 10 = \frac{5}{3}}$

The problem is if I recall correctly, the CV and EV are supposed to have the opposite sign so that the change in welfare is ambiguous. Where have I gone wrong, if anywhere? (Worth noting that if you do Slutsky decomposition for this question, you find that good 2 is inferior.)


texts: In Supply and Demand is Quantity the Amount of Inventory of the Amount of Units Sold?

texts: I am new to economics in school and we are going over supply and demand.  This may sound like a very simple question, but I just need one thing clarified.  When quantity is mentioned in the graphs is that referring to our total inventory or just the number of units sold?  Thanks.


texts: Applications of Optimal Transport in Economics

texts:
The 1975 Nobel Prize winner in Economics was Kantorovich who reformulated the optimal transportation theory of Monge and applied it to optimal resource allocation. The Wasserstein distance is central to this optimization model.
Can anyone familiar with optimal transport give an overview of some of its applications to economics? maybe beyond just moving mass/products to separate destination points. It's hard to understand how production, consumption and pricing comes into the picture compared to non-economics optimal transport.
If they even are still in use, how have these methods been developed and improved for economists in recent publications?


texts: Bayesian incentive compatibility for a general distribution

texts:
Suppose there are $n$ bidders and a seller. Bidder $i$ observes a private signal $v_i$ from $[a,b]$. Let $\mathcal{X} = \times_{i=1}^n[a,b]$ Each bidder is represented by a random variable, that has a joint distribution $F(\textbf{v})$, where $\textbf{v} = (v_1,v_2,...,v_n)$. Let $(\textbf{Q}(\textbf{v}),\textbf{M}(\textbf{v}))$ be the direct mechanism, where $\textbf{Q}(\textbf{v})$ is the allocation rule and $\textbf{M}(\textbf{v})$ is the payment rule, where $\textbf{Q}(\textbf{v}) = (Q_1(\textbf{v}),Q_2(\textbf{v}),...,Q_n(\textbf{v}))$ and $\textbf{M}(\textbf{v}) = (M_1(\textbf{v}),M_2(\textbf{v}),...,M_n(\textbf{v}))$

The ex-post utility for bidder $i$ is given as $U_i(v_i) = v_iQ_i(v_i,v_{-i}) - M_i(v_i,v_{-i})$. From this, we can find out the expected utility function as $$u_i(v_i) = \int_{\mathcal{X}_{-i}}(v_iQ_i(v_i,v_{-i}) - M_i(v_i,v_{-i}))\,f(v_{-i}|v_i)dv_{-i}$$ Writing $\int_{\mathcal{X}_{-i}}Q_i(v_i,v_{-i})f(v_{-i}|v_i)dv_{-i} = q_i(v_i)$ and $\int_{\mathcal{X}_{-i}}M_i(v_i,v_{-i})f(v_{-i}|v_i)dv_{-i} = m_i(v_i)$, the expected utility function can be re-written as $u_i(v_i) = v_iq(v_i)-m_i(v_i)$. $F(\textbf{v})$ can be any joint distribution,i.e, it is not necessary that the joint distribution can be written as the product of marginal distributions.

Incentive compatibility now dictates that $u_i(v_i) \equiv v_iq(v_i)-m_i(v_i) \geq u_i(v_i^{'}) \equiv v_iq(v_i^{'})-m_i(v_i^{'})$. From here, we get that

\begin{equation}
\begin{split}
u_i(v_i) & \geq v_iq(v_i^{'})-m_i(v_i^{'})\\ &=v_iq(v_i^{'})-m_i(v_i^{'}) + v_i^{'}q(v_i^{'}) - v_i^{'}q(v_i^{'}) \\ &= (v_i - v_i^{'})q(v_i^{'}) + (v_i^{'}q(v_i^{'})-m_i(v_i^{'}))\\ &= (v_i - v_i^{'})q(v_i^{'}) + u_i(v_i^{'}), \,\,\, or, \\ u_i(v_i)-u_i(v_i^{'}) & \geq (v_i - v_i^{'})q(v_i^{'})\,\,\,\,\,\,\,\, -(1)
\end{split}
\end{equation}
Similarly, we can get $$u_i(v_i^{'})-u_i(v_i)  \geq (v_i^{'} - v_i)q(v_i)\,\,\,\,\,\,\,\, -(2)$$
From $(1)$ and $(2)$, we get that $$(v_i - v_i^{'})q(v_i^{'}) \leq u_i(v_i)-u_i(v_i^{'}) \leq (v_i - v_i^{'})q(v_i)$$

Given the above expression, is it possible to write the expected utility function as $$u_i(v_i) = u_i(a) + \int_a^{v_i}q_i(t)\, dt,$$ for any distribution. Specifically, I know that this holds true for the IPV case. So, my question is that is it possible to write the utility function as the integral of $q_i(.)$ without the assumption of independence?


texts: Axiom of Minimal Liberalism & Sen's Theorem of Paretial Liberal

texts: Suppose that a person believes that all humans are guaranteed a set of rights that cannot be taken from them in any situation or circumstance (for example, the right to marry a person of your choice, the right to practice any religion...). Is this moral belief compatible with Harsanyi's axioms? (This is part of an essay prompt that I wanted some guidance on. Thanks!)


texts: Computing the core in a transferrable utility game

texts:
An allocation $x^{*}$ is said to have the core property in a game of $N$ players if there is no coalition $S \subseteq N$ that can improve upon $x^{*}$. The core of a game is the set of allocations with the core property.

Now, a coalition $S$ will block an allocation $x$ if there exists a feasible $\widetilde{x}$ such that $\widetilde{x} \succ_{s} x$ for all $s \in S$.

As a practical matter, to determine the core of a cooperative game we usually must compute the allocations that any coalition $S$ will not block (i.e. the allocations that cannot be improved upon). If we denote this allocation as $A_{S}$ then we can write the core allocation $\mathcal{C}$ as $$\mathcal{C} = \bigcap_{S \in 2^{N}} A_{S}  $$

Now in any game with more than two players it can be tedious to compute the core.

I am wondering, if I knew the game was a transferable utility game, is there any way to compute the core more efficiently?

This is mostly a question about the consequences of a game being a transferable utility game, and whether this provides any information that is useful to computing the core. Although I am familiar with the definition of transferrable utility, I was never really comfortable with what it's practical implications were for the game.


texts: Reference for Jacob Viner research on colonies

texts: In this video at 6.02 Milton Friedman mentions some 'famous studies' on colonies from Jacob Viner. Does someone know exactly which studies these are?


texts: Where can I find data on income and social mobility over time? How far back is data available?

texts:
I'm interested in income and social mobility. I understand that Piketty's research deals with the the distribution of income over a long time period. I have also seen some of Chetty and Saez's research concerning income and social mobility in the US. I'm wondering, what data do Chetty and Saez work use? What other data is potentially available and how far back does it go?

It would be nice to see who could find the data that goes back the farthest. (Also, the data does not necessarily have to be US data.)


texts: Does the currency in circulation equal the annual production of goods and services?

texts:
I have learned that in a country currency is printed equal to production of goods and services in a year.

I want to know if in a year a country produces rice of 10000 rs. The government will print currency of up to rs 10000. In the next year the country again produce rice of 10000 rs. Will the government again print 10000 rs. more? If yes will it not lead to excess currency in circulation?


texts: Can setting bank's reserve requirement ratio in 100% simulate gold standard?

texts:
Statement:

  If you want a gold standard, it's easier to set bank's reserve requirement to 100%.

Context:
This was a comment in a video telling how government actions influence monetary inflation.

Question: Is the statement true?

P.S.: Please, give a source to the answer.


texts: Justification for my Random Effects estimation

texts:
I need to defend my use of the Random Effects (RE) estimator in my economics project. I've been told in cross validated that the proper place for the question is here.

The causal effect of the exchange rate on shopping in the neighbouring country, is estimated using the following equation:

\begin{eqnarray}
\ln(\text{Traffic})_{i,t} &=& \beta_0+ \beta_1 \ln(\text{Exchange rate})_t + \beta_2  \ln(\text{Distance})_i \\&& + \beta_3 \ln(\text{Exchange rate})\cdot\ln(\text{Distance})_{i,t}+ \text{Month}_t \\&& + \beta_4(\text{Consumer confidence})_t + \epsilon_{i,t}
\end{eqnarray}

-$i$= 16 roads, $t$= day (2010-14)

-Exchange rate: foreign currency per unit of domestic currency

-Distance: distance between road and border

-Month: month dummies

-Consumer confidence: consumer confidence indices

Here are the reasons I can think of so far to argue for the validity of my specification:

Fixed effects is not viable. I do not have the full population/large sample of roads. D-I-D is not possible either, as there is no control group. RE is an alternative.
RE’s allows me to exploit the spatial dimension i.e. distance, which is really important for causality. Distance would be wiped out by alternative specifications that include road dummies.
All roads are the same classification of major road, there are not large differences between roads e.g. different speed limits are not altering the volume of traffic flow.
I can’t think of any unobservable in the residual that is correlated with the explanatory variables. The only one is maybe that larger shopping areas attract more cross border shoppers, and so some roads are affected more than others by the exchange rate. But in my case I know that people go the nearest shopping area, not the biggest.
All shoppers/roads receive the same shock/exchange rate. And shoppers are affected by national factors e.g. those contained in consumer confidence. So there’s no reason to have controls for each road.

Random effects scares me, so any advice is greatly appreciated! Thank you.


texts: Economics of Health Textbook Recommendation

texts:
Was wondering if anyone who has taught a class on health economics could give some background on which textbook they used for their class and why.

It seems like "Healthy Economics" by Bhattacharya, Hyde and Tu or "The Economics of Health and Health Care" by Folland, Goodman and Stano are the two most popular texts, but I haven't read either. Thanks!


texts: Is the study of the volunteer sector inappropriate for a labour economist?

texts:
In the basics of labour economics the driving factor for increase in labour supply (for the workers in a given market) is increase in wages.

The volunteer sector consists of general and skilled labour that provide their services for free, meaning there is no wage incentive.

what I would like to suggest is that volunteer labour has to be exclusively viewed through the scope of consumer theory as income is not a driving factor for labour supply and volunteer labour must be viewed as another consumption good or service which faces utility maximising constraints.


texts: Is choosing an investment by a bank only due to its regulatory capital charge a form of moral hazard?

texts:
The main shortcoming of the first Basel Accord (Basel I) was that its capital requirements did not reflect the actual risk of the bank assets.

One way this nonsense influenced the asset choice of banks was: risk being equal, they chose to reduce the availability of credit to some categories of borrowers shifting towards other categories with lower capital charge, at the expense of more socially preferable investments.

Now, suppose a bank has to choose between granting a loan to Company A and another investment, B, both equally risky.

Suppose that, due to the regulation rules, the bank has to put aside 150\$ of capital if it grants the loan to A or 100\$ if it invests in B. Hence, it will invest in B.

The same reasoning is valid for all the A-like companies and B-like investments, therefore it creates a credit crunch towards the former.

According to https://dictionary.cambridge.org/dictionary/english/credit-crunch, credit crunch is defined as:

  economic conditions that make financial
  organizations less willing to lend money,
  often causing serious economic problems

and this is bad for the regulator (which is the Central Bank or a similar State Agency).

Is this behavior by the bank (the agent) with respect to the regulator (the principal) a sort of moral hazard, taking into account that the actual riskiness of the companies is known by the bank but not by the regulator?


texts:
I'm reading a book ( Macroeconomics - Institutions, Instability and the Financial System )  and on page 62, the authors define tax wedge as the "difference between the real consumption wage and  the real product wage". Should I understand this as a subtraction?

The real consumption wage is measured as $\frac{W}{P_c}$, where $W$ is the after-tax wage that employees receive, and $P_c=P(1+t_v)$ with $t_v$ being the indirect tax rate (VAT, etc).

The real product wage is the wage paid by firms to workers, and is measured by $W^{gross}/P$ where $W^{gross}=W(1+t_d)$ with $t_d$ being the direct tax rate(social securities contributions, etc).

Any help would be appreciated


texts: Continuum limit of a weighted mean of heterogeneous discount factors

texts:
I try to find the limit of the following expression of a weighted mean of a series of discount rate $\rho_{i}$

Here is the expression ;

$$\rho_{\eta}\left(t\right)=\frac{\sum_{i}^{N}\rho_{i}\left(\omega_{i}e^{-\rho_{i}t}\right)^{\frac{1}{\eta}}}{\sum_{i}^{N}\left(\omega_{i}e^{-\rho_{i}t}\right)^{\frac{1}{\eta}}}$$

where $\omega$ is the weight for each $\rho$ and $t$ stands for time and $\eta$ is intertemporal elasticity of substitiution

and let's say for $\omega_{i}\rightarrow\rho^{k-1}e^{-\frac{\rho}{\theta}}$ which is so-called Gamma distribution, where $k$ and $\omega$ are shape and scale parameters.

Conceptually, I have understood that continuum limit is the case where $N\rightarrow\infty$ and we should approximate the term by a continuum, which is probably an integral but I can not figure out how to find the continuum limit of this expression. Any suggestion or hint ?

PS. The question comes from the following paper (page 14, equation 37)

: http://www.nber.org/papers/w18999.pdf


texts:
The following graph from the world bank website shows the world wide military expenditure in percentage of the world GDP over time from 1988 to 2015

I am trying to find similar data over a much longer period of time. Over the last 3000 years would be ideal! Of course, I realize that such data might result from very rough estimations and might eventually be specific to a certain area of the world and arguably not representative.

Where could I find similar data over a much longer period of time?

This question has first been asked here on History.SE almost two years ago. It got a good reception but no answer. Following advice of the community, I asked the question to be migrated. The question has been judged on-topic for economics.SE by moderators. As the question is too old to be migrated, it has been closed on history.SE and I am reposting it here.


texts:
I'm wondering if anyone can give me some intuition about technical progress. I can buy the idea that factors improve in quality over time. So 5 workers and/or 5 machines in 1990 can produce more than the equivalent amount in 1970. But the idea of factor specific technical progress is more problematic.

For the production function
$Y = [\pi❨A^N N❩^\rho+❨1-\pi❩❨A^K K❩^\rho ]^{\rho^{-1}}$
what would be a technical improvement that just improves labor $A^N$ or just improved capital $A^K$? can anyone give a specific example of such a technology?

thanks


texts: One-step Binomial model's Radon-Nikodym derivative

texts:
In the one-step binomial model...

Question 1: What exactly is a '$\frac{d \mathbb Q}{d \mathbb P}$'?
I think it's $\frac{d \mathbb Q}{d \mathbb P} = \frac{q_u}{p_u}1_u + \frac{q_d}{p_d}1_d$, so it's some asset with payoffs $\frac{q_u}{p_u}$ and $\frac{q_d}{p_d}$, expected value of 1 and replicating portfolio $(x,y)$ of
$$x=\frac{1}{1+R}\frac{u(\frac{q_d}{p_d})-d(\frac{q_u}{p_u})}{u-d}$$
$$y=\frac{1}{S_0}\frac{\frac{q_u}{p_u}-\frac{q_d}{p_d}}{u-d}$$
This seems to be some replicating portfolio that is expected to payoff 1 at $t=1$.
Well, $(x,y)=(\frac{1}{1+R},0)$ seems to give the same payoff but with -100% lower risk

Question 2: What exactly is a/an '$X\frac{d \mathbb Q}{d \mathbb P}$'?
We could say that the price of X uses not
$$E[X] = X_up_u+X_dp_d$$
but rather
$$E^{\mathbb Q}[X] = E[X\frac{d \mathbb Q}{d \mathbb P}] = X_u\frac{q_u}{p_u}p_u + \frac{q_d}{p_d}p_d$$
I guess it's some asset that pays $X_u\frac{q_u}{p_u}$ or $X_d\frac{q_d}{p_d}$ then replicating portfolio is...then idk. Not sure we need one since we're using real world probabilities anyhoo


texts: Serial correlation and clustered correlation in FE and FD estimators

texts:
I'm running a regression on panel data, one time with Fixed Effects and one time with First Differences. The estimators are really different (the FE estimator is statistically significant and the FD isn't). While I'm running the regressions with the Clustered Standard Errors, it affects a lot the S.D of the FD estimator but not the S.D of the FE estimator. When I'm running Wooldridge test for serial correlation I get that there is no serial correlation. My questions:

Is it possible to be within clustered correlation for the FD model but not for the FE?
If there is no serial correlation, is it possible to be a within clustered correlation?


texts: Long run effect of decrease in savings on output per capita

texts:
Could you guys help me with this question:

What is the long run effect of a decrease in savings on output per capita ?

To me a decrease in savings will mainly increase increase consumtption and push the steady state  to the left. I don't really see the impact on output per capita in the long run


texts: interpretation: linear regressions with both unit dummies and time dummies

texts:
Suppose I have a panel data with N units and T time periods.

For model 1 with only unit dummies:
$$y_{it} = \text{intercept} + \beta_1 x_{it} + \sum_{j = 2}^{N}\delta_j I\left(i = j\right) + \text{error},$$
least squares estimation of $\beta_1$ only uses the within-unit across-time variation in $x$.
For model 2 with only time dummies:
$$y_{it} = \text{intercept} + \beta_2 x_{it} + \sum_{k = 2}^{T}\gamma_k I\left(t = k\right) + \text{error},$$
least squares estimation of $\beta_2$ only uses the within-time across-unit variation in $x$.
For model 3 with both unit and time dummies:
$$y_{it} = \text{intercept} + \beta_3 x_{it} + \sum_{j = 2}^{N}\delta_j I\left(i = j\right) + \sum_{k = 2}^{T}\gamma_k I\left(t = k\right) + \text{error},$$
least squares estimation of $\beta_3$ apparently does not use the within-unit within-time variation in $x$, because no such variation exists in the dataset.

My question is: what exactly is the variation used in model 3?

I understand that for model 3 we are essentially de-meaning $x$ and $y$ in forms like
$$\tilde{x}_{it} = \left(x_{it} - \bar{x}_i \right) - \left(\bar{x}_t - \bar x \right),$$
where $\bar {x} _i$, $\bar {x} _t$, and $\bar {x}$ are within-unit mean, within-time mean, and total mean of $x$.

Economists using model 3 often loosely say they "have controlled for unit fixed effects and time fixed effects", but "controlling for x" usually have the ceteris paribus interpretation, meaning we are comparing within groups with same values of x. See this answer for a nice presentation. I'm looking for intuitive and verbose interpretations that are more precise than "controlling for unit fixed effects and time fixed effects".


texts: Is there always at most one full-support extreme symmetric equilibrium?

texts:
Given a ($n$-player) symmetric game and two equilibriums $s_1,s_2$, is
  it true that if the support (the set of strategies with positive
  probabilities) of $s_1$ is identical to the support of $s_2$ then
  $\frac{s_1+s_2}{2}$ is also a symmetric equilibrium?

By $\frac{s_1+s_2}{2}$ I mean that a strategy $i$ will be selected by a player with a probability which equals the average of the probability of $i$ under $s_1$ and the probability of $i$ under $s_2$.


texts: inversely proportional utility functions

texts: If I have two products $x$ and $y$ and two users $A$ and $B$ whose utility functions for those products $u$ and $w$ are inversely proportional, would it be ok to express this relationship as: $u(x,y) = w^{-1}(x,y)$? Thanks.


texts: How far must one reason up the belief hierarchy?

texts:
In games of imperfect information, one must reason about the belief on the state of nature, the beliefs of other player's beliefs of their beliefs, and so on. This is referred to as the belief hierarchy, which can stretch all the way to infinity. The universal belief space, also referred to as the universal type space, is a compact way to model this.

Unfortunately, this is an unwieldy mathematical object. I realize that the value of it comes from the guarantee that in any game, one can represent the belief hierarchy by some set of types in a compact mathematical object. However, I am wondering if it is necessary to consider this level of detail in most games.

It seems that the higher one goes up the belief hierarchy, the less weight the information (beliefs of beliefs of...) carries. While this seems intuitive, I haven't seen any formalization of this in the literature. I realize this is a somewhat vague idea, but I am hopeful that there is some literature that formalizes this statement. Some papers I have seen only go up to second-order beliefs; it's unclear if this is because: it is sufficient for the game, it is a good approximation in some sense, or if the complexity of the reasoning precluded reasoning about higher levels.

Question: Are there general results (or even results for specific classes of games) that state how many levels up the belief hierarchy that one must reason about?


texts: What does it mean to "kickstart the economy"?

texts:
This answer claims that:

  the central banks have been lowering and lowering [interest] rates, desperate to kickstart the economy, but it's not been working

What does "kickstart the economy" mean here? What exactly are central banks desperate to achieve?


texts: Is there a term for the indirect sponsorship of large corporates by the state?

texts:
For example, unemployment welfare payments could be argued to be ameliorating the negative externalities of large corporates hiring newly arrived unskilled migrants.

Is there a term that covers this?


texts:
I've noticed that economists have been very accurate when it comes to predicting unemployment rates.

Most of their predictions usually fall within a 0.2% difference between their forecasts and the actual unemployment rate or are dead on what the employment rate is. I've looked at this site for information on the forecast vs the actual unemployment rate recently, which prompted me to ask this question.

http://www.tradingeconomics.com/canada/unemployment-rate
http://www.tradingeconomics.com/brazil/unemployment-rate
http://www.tradingeconomics.com/italy/unemployment-rate

Im aware of Okun's law and the cross country differences in terms of the measure of its coefficient. (see: http://unassumingeconomist.com/wp-content/uploads/2016/08/cross-country-evidence-on-okun-sep-2016-paris-workshop-draft-with-tables-and-charts.pdf)

But I am generally unaware of forecasting methods used by economists to predict unemployment rates.

What are some basic formulas or models used to forecast unemployment rates? Is there a pdf book anyone can recommend?


texts: Does it ever make sense to underproduce as a firm?

texts:
The larger the supply, the lower the price. Therefore, the more thneeds you (the firm) produce, the less you'll be able to sell each one for. Traditional sense says that as long as there are people who will buy them, you should always make more thneeds! But given profit is quantity * (selling price - costs), as price drops, you may eventually reach a point where profit decreases the more thneeds you make.
If and when this happens depends on the shape of the supply-demand curve, rather than using the simplified linear ones you learn about in early university economics.
Does this happen? Is there a "supply-induced-price-drop-compensated" ideal quantity to produce to maximize profit?


texts: How does the professional class fit into Marx and Engel's class struggle theory?

texts:
I know that in the first part of The Communist Manifesto, Marx and Engles discuss at length the relationship between the Bourgeois and the Proletarians. The former being the owners of the means of production and the latter being the working class that is engaged in a struggle against said owners.

However, after reading the first part of the manifesto I can't figure out where "Professionals such as doctors, layers, accountants, nurses, etc. fit into this model. While they aren't the owners of the means of production for physical goods they posses special knowledge that allows them to charge a premium for their services. As such, members of the professional class generally aren't viewed as struggling workers.

Why wasn't this class of worker included in the Communist Manifesto and where do they fit in with Marx and Engel's theory?


texts: The Effect of Two income Households on Housing Prices

texts:
In the book The Two-Income Trap: Why Middle-Class Parents Are Going Broke) by Warren and her daughter, she states the following in chapter 1:

  If two-income families had saved the second paycheck, they would
  have built a different kind of safety net—the kind that comes from
  having plenty of money in the bank. But families didn't save that
  money. Even as millions of mothers marched into the workforce, savings
  declined, and not, as we will show, because families were frittering
  away their paychecks on toys for themselves or their children. Instead,
  families were swept up in a bidding war, competing furiously
  with one another for their most important possession: a house in a decent
  school district. As confidence in the school system crumbled, the
  bidding war for family housing intensified, and parents soon found
  themselves bidding up the price for other opportunities for their kids,
  such as a slot in a decent preschool or admission to a good college.
  Mom's extra income fit in perfectly, coming at just the right time to
  give each family extra ammunition to compete in the bidding wars --
  and to drive the prices even higher for the things they all wanted.

Could someone provide some references for this? I'd like to see when this happened, and some evidence. And is this what economists call a "bubble"?


texts: Is maximal utility conditional on information linear in convex combinations of priors?

texts:
This is related to a Mathematica question here - https://math.stackexchange.com/q/1952779/374929

Is a (maximal expected utility) function of the form

$U(\mu, X) \equiv \int_\Theta \int_\mathcal{X} \max_a \int_\Theta u(a, \theta) d \mu(\theta|x) d P_\theta (x) d \mu(\theta)$

linear in convex combination of priors; that is, is it true that

$U(\alpha \mu + (1-\alpha) \nu, X) = \alpha U(\mu, X) + (1-\alpha) U(\nu, X)$?


texts:
The US president Donald Trump has repeated said that China will pay for the tariffs he has or plans to impose on Chinese goods entering the US. Many commentators has said that tariffs are paid at time of import by the importer, and that those costs are simply passed onto the consumer.

What would be the consequences if, instead of adding a tariff cost to the item being imported, the US Government instead deducted the same amount from the US debt that the Chinese Government owns? This would make it literally true that the Chinese are now paying for the trade deficit, and it would automatically stop once the Chinese no longer own US debt.

Besides making lenders extremely wary of buying US debt, what could be the economic repercussions from such a decision?


texts: Increase in Debt / GDP positive or negative for currency?

texts: When a nation-state and/or monetary union increase it's debt to GDP ratio. Is this a net positive or negative for its currency?


texts:
could you please help me to understand when I should use either white or newey-west standard erros?

I do work with time-series data. I look at both contemporaneous and intertemporal realtionships.

My understanding is that NW s.e. are appropriate when I look at an intertemporal realtionship and one variable is constracted using overalapping observations.

example I have y(t) and x(t) for t=1,...,T.

I construct y3(t) as y(t) + y(t+1) + y(t+2) for t=2:T-2, and then I regress y3(t+1) on x(t).

For this kind of regressions, it is common to use NW s.e., in particular if x is highly persistent.

Can you please help me to understand more in general how to choose between White and NW s.e. (or other s.e. appropriate for time-series analysis)?

Thanks a lot!


texts: In a trade imbalance does the importing country's currency become more valuable?

texts:
Suppose that country A buys freely from country B, but B uses steep tarriffs to block its citizens from buying from A. In that case country A's currency will pile up in B.

Other things being equal, will this cause currency A to become more and more valuable relative to currency B?


texts: What actually went wrong in the economy as described by "The Big Short"?

texts:
Part of my personality is Engineering, so I look for root causes. I suppose that the cause of any bubble is "speculation", which just means pretending that ghosts are real, or that the word "LION" is an actual Lion. (So ironic when it eats you.) But because this has happened before, would someone please explain the chain of causality from people buying houses to the world economy nearly failing, through the sideroads of drinking and strip clubs? Was it just that people were selling the "actual value" of a long term asset like a house or land, and using it to buy immediate disposable things with no value, like drinks and entertainment?

What is the basic human failing that allows people to seem to do this repeatedly and not learn from it? I don't want to hear "greed". Greed is one person acting one time. I mean: how can people believe in ghosts? How can many many people pile on thinking that something holds up the entire scheme, and that it will not eventually come crashing down and crush them inside? How can people make this particular mistake? "Stupidity"?


texts: Regarding the assumption of Classical Linear Regression Model

texts:
For the given model $y = x\beta + \varepsilon$, the four assumptions would be

The model is linear in $x$ and $\beta$, also additive in $\varepsilon$
The conditional mean of the error terms are zero (i.e. $E[\varepsilon|x] = 0)$
$Var[\varepsilon|x] = \sigma^2I_n$
Exogeneity of $x$ (i.e. either $x$ is fixed or independent of $\varepsilon$)

My questions is that in the case of the following situations which assumptions have been violated.

Case 1. $E[x'\varepsilon] \neq 0$ [I am not sure whether this implies the second or fourth assumption has been violated]

Case 2. $Cov(x_i,\varepsilon_i) \neq 0$ [I suppose the third one has been violated but could it imply the violation of other assumptions?]

Any help will be greatly appreciated.


texts: How to set up the payoffs properly for a division of labor game

texts:
I'm admittedly a novice when it comes to game theory (currently a few lectures into Yale's intro course lectures), so hopefully people will indulge me what may be a dumb question.
I was trying to understand how Nash Equilibrium affects division of labor (which was one of the examples used in the class). In particular, I was trying to represent a simple marital dispute: who cleans the house. I'm assuming that both partners would prefer equally that the house be clean, and that they have similar cleanliness standards. Furthermore, I'm assuming that if they both clean, they contribute to the work equally (or, at least, in a way that both of them are equally satisfied with). John Gottman's books and personal experience both assure me that these are rather naive assumption, but bear with me.
The two Nash Equilibria are a) where they share the work equally or b) where neither of them clean (the "bad" equilibrium). This is because neither of them wants to be the one that gets stuck doing all of the work. My reasoning behind that is that neither one would like to be the one who has to do all of the cleaning; however, they would both prefer it if the other person did all of the cleaning.
I tried to formulate that as follows:

Husband Cleans
Husband Doesn't Clean

Wife Cleans
1,1
2,0

Wife Doesn't Clean
0,2
0, 0

On the plus side, them sharing the cleaning is effectively a compromise - they both share the cost equally and they both get the benefit equally. On the other hand, the following facts bother me:

Does the way that I've structured the payoffs imply that there's no payoff at all for the spouse that does all the work? Yes, they have the added "cost" of doing all the work themselves, but this would say that the cost of the added work would entirely offset the benefit of having a clean house - it's just as "bad" for them as if the work hadn't gotten done at all (which seems strange to me, because some spouses might prefer to do all of the work themselves than to have it not done at all).
Similarly, there's no "penalty" for having the house not cleaned - they just don't get a payoff. I'm a little bit confused if that's ok, though; if neither people get what they want, should the payoff be negative because they're unhappy about that fact, or should it just be 0 because they didn't get what they wanted (and therefore got no payoff)?
To my previous point: if I adjust the payoffs, I would like to make sure that I do so in such a way that both of them cleaning or neither of them clean are still equilibrium solutions.

Are my concerns well-founded here, or did I do the table correctly after all?


texts: Commonly used indicators for currency pair strength?

texts:
I am attempting to write a program in Python that monitors a single currency pair, GPB/NZD to be specific. My main focus will be to run constant calculations every 2 to 3 minutes in order to give feedback to me when certain indicators have been observed in the current stream of data I am processing which will send me an email.

This is purely a solo project I am wanting to develop but I am having trouble finding some good indicators that I could somewhat utilise in giving myself feedback on current market strength. I don't want to use anything that entails pages of algo calculations but I am willing to mimic some currently used indicators that are a simple examples of strong market movement.

tl;dr: Does anyone know technical names of currency pair indicators used to give feedback on market strength between a currency pair that could be calculated by myself using Python?


texts:
From what I've read in mechanism design theory, it seems to me that the mechanism designer always plays an essential role in a mechanism. Information is sent to the designer who designs incentives that aim to enforce the truthful revelation of information from the strategic agents of the mechanism.
But, within the mechanism design theory, is it possible to remove the requirement of agents communicating their information to a central authority (aka the designer)?
For example, design a framework where the agents communicate with each other based on certain rules and figure out by themselves the designer's desirable outcome without any communication between the agents and the designer.


texts: Which is the origin of the "economic" approach to production?

texts:
Economic theory states that under competitive markets, economic profits are zero (even though accounting profits are not zero). What is the origin of this analysis? Who was the first author to write about this? Who was the first to put this into mathematics? I don't know how to search for this. I know Alfred Marshall is an important economist, who wrote a widely used book, but I do not have access to it. Is it him?

Any references are most welcomed.


texts: When calculating GDP using the income approach how do we make sure that we count only wealth produced in given year?

texts:
As far as I understand, when we calculate GDP we want to estimate wealth produced during given year in given country. But it seems like it will be problematic when using the income approach (the expenditures approach doesn't suffer from this problem. After all, in the vast majority of cases people pay full price for services and goods at one sitting. When they have problem with paying full price they take a loan and then pay full price with money that they got from a creditor).

1.We include income from receiving interest because giving loans is a service. But if lending money is a service, then it can viewed as kind of service what you can spend literally years to pay for.
There will be incomes from some loans that were given in previous years, yet they they will by included in GDP of this year.

2.We include deprecation. It seems to make sense at first. After all, if an asset was produced this year and was completely worn out the same year, then it's still production. By including deprecation we avoid situation when worn out asset is treated like it has never been produced in the first place. BUT, assets that were created in previous year are also included in this calculation. Why would we include cost of deprecation of something that was NOT produced this year?

Or maybe I don't understand something and there are good reasons to make exceptions for interest and deprecation?

P.S. Okay, so we add deprecation in order to ignore it altogether, thus we don't really count deprecation of old assets. But how about income from loans given years ago?


texts: How to estimate long term exchange rate?

texts: I'am looking for a book or paper that explain (in a theoretical and empirical way) how to estimate the long-run exchange rate for a country. Could someone suggest me one?


texts: Year Fixed Effects in a Dynamic OLS Regression with Cointegrated Variables

texts: I am estimating a dynamic OLS model since I have variables that are non-stationary, but cointegrated. In addition, the data is a standard time-series (i.e. one observation per one time period) so technically not panel. I know that one should control for year fixed effects when you have panel data. My question is should I still control for year fixed effects even though my data technically isn't panel. Also, does it even make sense to control for year fixed effects when the independent and main dependent variable are non-stationary, but cointegrated?


texts:
I am looking for the researches that have studied factors influencing marital status probability. I need them for citation purposes. After looking for a long time I have not found anything. So I need something like probit/logit regression on marriage status probability and so on. Any researches of these kind published in scientific journals are welcome.

Will be very greatful for help!


texts: Is it necessary to ask permission before including someone in the acknowledgements of a economic research paper?

texts:
Do I need permission to thank someone, even if I said “all mistakes are our own”?
Do I have to make sure that the person being thanked must read the paper, or, it is fine if he just discussed about the general ideas and the administration stuffs of the target journal?
As a student I don't know how does a specific journal work so I asked a lot of questions. I think I need to ask for the permission before acknowledging, but, if it is unnecessary, then I will be just wasting the time of a super busy professor.
I know that in Math people almost never ask for permissions but in life science people need permissions. I think theoretical economics follows the culture in mathematics?


texts: Public debt and GDP in post-socialistic countries

texts:
Why is public debt in % of GDP in post-socialistic countries of Eastern Europe is less than in countries of Western Europe.

Some arguments, opinions or articles?


texts: Lifecycle Consumption Models and Dispersion in Consumption

texts:
Lifecycle models base on the assumption that households want to maximize their consumption and at the same time insure themselves against income shocks.

However, there is a lot of (c.p.) consumption dispersion observed in the data. At lower ages, the literature argues that income processes are very persistent (and not insurable), and hence such consumption profiles are optimal.

However, at older ages, especially at retirement, most of the income uncertainty goes away. Yet, consumption keeps dispersing with age.

The only argument I heard that tries to justify the lifecycle models given this empirical observation is that at older age, "available income" is still a random walk, given that health expenses become potentially very high and persistent.

Are there other arguments that can reconcile the empirical observation of consumption dispersion at older ages with life-cycle consumption models? Are there any studies on that?


texts:
What would be the correct procedure to adjust costs figures to make them comparable?

For example, I find two papers that report the cost of similar pesticides in a developing country. One reports USD \$100 in 2010 dollars for pesticide A. The other reports USD \$120 in dollars of 2015, for pesticide B.

I want to compare them both and I've seen different approaches. I would like to hear opinions on the most appropriate procedure. Here's some of the procedures I've seen around:

1) use nominal exchange rate for the respective year (2010) to convert reported costs in dollars to local currency. Then use some price index to adjust the local currency for inflation, to express local currency of 2010 in local currency of 2015. And then use the exchange rate for 2015 to convert the local currency again to usd.

2) similar, but without inflation adjustment. So, only using 2010 exchange rate to get local currency and then use 2015 exchange rate to express local currency in 2015 dollars. The argument here is that inflation adjustment is not necessary because nominal exchange rates partly reflect changes in prices (so kind of assuming the theoretical postulate that the real exchange rate is constant over time).

3) like the first one, but adjusting also for inflation in foreign currency.

4) other approaches using GdP deflators.


texts:
Certainly there is a time value of money: If the nominal interest rate of treasury bonds is 5%, then if one has a choice between receiving a hundred dollar bill now and receiving it a year from now, the better option would be to receive it now.

But what if we lived in a society where charging interest is illegal? Would there still be a time value of money? In other words, if we lived in such a society, then if one had a choice between receiving a hundred dollar bill now and receiving it a year from now, would the better option still be to receive it now?

So the essence of my question is "Is the time value of money natural or artificial?" If it is natural, then a law against charging interest would have no effect on the reality that there is a time value of money. And if it is artificial, then the law which states whether charging interest is illegal or not is what determines whether there is a time value of money.


texts: Textbooks addressing Markov decision processes in microeconomics/game theory/decision theory?

texts:
I have learned about the Markov decision process (MDP) formalism in the context of machine learning. I know that micro theorists also study MDP's, and agent behaviour in this context (both single and multi-agent I think).

I am wondering if there is a good/standard textbook on MDP's from the perspective of micro theory (game theory/decision theory)?

If not, is there at least a micro theory textbook that heavily focuses on MDP's?


texts: How is reserve money 'multiplied' by the banking system?

texts:
I'ma an econ newbie so please forgive my lack of understanding.
I am confused as to how the money multiplier effect works. I get that the money multiplier effect doesn't actually hold true as banks don't loan out all their funds but I don't understand the mechanics behind how the multiplication takes place.
Initially I had thought that when, for example, a bank receives $10,000 from a Fed asset purchase, it is able to use the 10,000 USD to meet its (let's say 10%) reserve requirement, and can thus make 100,000 dollars in new loans. However I've just read an article by the Federal Reserve Bank of Chicago that suggests that this is not how money multiplication occurs, and instead that it occurs indirectly through many transactions (best demonstrated graphically, below). This confuses me, why doesn't the initial 10,000 dollars count as reserve money? Surely the  first bank could use it to loan out 100,000 dollars, creating an asset in the form of a loan and 'creating' a liability in the form of the borrower's deposit - isn't this how money is created?   Thank you in advance.


texts:
I'm a civil engineering student and I'm interested in economics and I would like to learn everything about it. I would like to learn everything from banks to the stock markets and everything there is to learn about. I always read articles about stocks and the market but I feel really ignorant. Can you recommend me some introductory books or some learning ressources?
Thank you in advance.


texts:
I have tried to know what exactly is the no free lunch axiom.

I got multiple links but none of them explain (a bit rigorously, with examples and mathematical formulation) what is this axiom and how I can formulate it in a problem.

Any explanation/formulation is very much welcome. Thanks.


texts: Why does a strong dollar make imported goods cheaper?

texts: I'm having a hard time visualizing why a strong dollar would make an imported good cheaper?  If I buy an ounce of gold in the US for \$1,353.70 (todays rate) and I buy an ounce of gold in Europe, would it not cost me 1,092.81 Euros at todays exchange rate of \$1.24 to 1 Euro?  Why would I expect to get to get more than an ounce of gold if I spend \$1,353.70 in Europe?


texts: Is there an economic interpretation of the envelope theorem?

texts:
I wonder if envelope theorem has also some hidden economic interpretation. For example, Lagrangian multiplier in economics can have interpretation of 'shadow price' which is useful economic concept.
The envelope theorem seems like something that should have some deeper economic interpretation as it is about examining how function adjusts when parameters change given that we are at some optimum. The envelope theorem says that only the direct effects of a change in an exogenous variable need be considered, even though the exogenous variable may enter the maximum value function indirectly as part of the solution to the endogenous choice variables. But I am not sure if this makes sense. Is there any economic concept attached to the envelope theorem?


texts: Why is the labour supply independent of the wage in this case?

texts:
Consider the model $\max U = \ln c + \ln l$ subject to $c=Lw$ and $1=l+L$, where $c$ denotes consumption, $l$ leisure, $L$ the labour and $w$ the wage rate.

The optimal choices of $L$ and $l$ can be easily computed to be 1/2. I don't understand the intuition why the labour supply decision is independent of the wage rate in this case.
Is it possible to argue in terms of substitution effect and income effect of a wage rate change?


texts: Finding Cobb-Douglas Hicksian Demand using Duality

texts:
I'm trying to follow the in-text examples from Mas-Colell. I can confirm I have the correct first order-conditions and hence the Marshallian demand functions for Example 3.D.1: $u(x_1,x_2) = x_1^\alpha x_2^{1-\alpha}$ subject to the budget constraint, $p_1x_1 + p_2x_2 =w$. By going through the example and taking Lagrange, I found the Marshallian demands to be $x_1(p,w)=\frac{\alpha w}{p_1}$ and $x_2(p,w)=\frac{(1-\alpha) w}{p_2}$. Fine.
The part I'm having difficulty with is finding the Hicksian demand, we know from 3.E.4 that $x(p,w)=h(p,v(p,w))$, where $v(p,w)$ is indirect utility, it's made clear that we can find indirect utility by substituting our Marshallian demand functions into $u(p,w)$.
I attempt to find v(p,w) by substituting the Marshallian demand for $x_2$ into the $u(x_1,x_2)$ : V(p,w)=
$(\frac{\alpha w}{p_1})^\alpha [ \frac{(1-\alpha)m}{p_2} ] ^{1-\alpha}$
To quote the notes given to me by my tutor, 'Marshallian is Hicksian if we substitute utility by indirect tility function:
$x^*(p,w)=h^*(p,V(p,w))$
I've reached a bit of a dead end here, I have the indirect utility function, but don't know how to get the Hicksian demand.


texts: When a demand function is split, how do we algebraically change function

texts:
For example, in tacit collusion for a Bertrand situation, demand would be split between the two colluding firms. How would the reflect upon the demand function?

For example D = 100 - 2Q, and for simplicity sake MC = 0.
I though to divide D by 2, D* = 50 - Q.

This does not make intuitive sense to me, as how does splitting the demand function change the slope?


texts: Can a spending freeze solve the problem of the Italian enormous government debt?

texts:
In view of the upcoming Italian general election, I've been reading the program of a party (please let me know in the comments whether I can/should mention its name), and in a section of it they propose a freeze of the public spending for the next 5 years in order to face the gigantic public debt. Not having a solid understanding of Economics, I thought of asking about it here.
Here's the translation of the relevant passage:

The Italian government debt, stabilised over the last few years around 132% of GDP, has become an unsustainable weight for the country's economy.
Interest expenditure, equal to 66 billion euros (around 8% of the total expenditure), is a huge weight on the national budget that determines a displacement of resources in the economy. Besides, the high stock of debt is a threat to the stability of the whole euro area and one of the major obstacles to the process of integrating budgetary policies at European level.
To face the problem we propose a freeze of the public expenditure in nominal terms for the duration of the next parliamentary term, as well as a redesign of taxation with cuts to the tax rates on income of people and companies, and a reduction of fiscal expenditure: thus there would be a redistribution of resources from the public to the private, from income to productive economy.
To freeze nominal expenditure means to establish an insurmountable limit for five years, which entails a reduction of public spending as a share of GDP if inflation and economic growth are positive. It is therefore necessary to reduce current outlay and tax benefits in order to compensate for the inertial increase of pension costs, by acting on current expenditure on the basis of the guidelines set by the former commissioners for the spending review.

I have seen critics to this strategy: according to Dr Domenico Moro, a lecturer in Economics at Birmingham Business School, debt growth does not depend on public primary expenditure. Indeed he states that in Italy it was below the European average in 2016, whereas the problem is interest expenditure (4% in Italy vs 1.8% in the EMU). He also points at wrong choices made by the Treasury Department over the last few years.
But in fact he adds that reducing public spending wouldn't be only useless, but even counterproductive: in a context of weak recovery and most of the new workers having a temporary contract and being underemployed, it would result in a drop of aggregate demand. This notoriously has a downward effect on GDP growth, and in turn an upward effect on public debt - since it is calculated as a percentage of GDP.
He then concludes the other proposal, i.e. the reduction of the company tax rate accompanied by the VAT increase, would make it worse: prices would rise and workers' income would drop proportionally; this would yield a further decrease of aggregate demand, especially of consumer goods rather than luxury ones, and consequently a decrease of GDP.
Question: is Moro's analysis completely sound? Did he really demolish the economic agenda of this political party?


texts: Anything written on the process behind "multiplicative" production function?

texts:
Intuitively, one might make a naive first guess that the production function of the economy, or of a firm, should be a "leontief" production function: "for example, you need both a factory and a worker to produce cars. A worker by himself, without the help of furnaces, and so forth, cannot construct a car, and the furnace by itself cannot do so either"

Obviously, this argument does not mean that the production function has to be leontief, but intuitively this might be what one expects.

I am looking for something written, that goes into great detail, on what the processes are behind the form of the production function (both firm-level and aggregate). Why would we expect a certain form of production function and not another? E.g. why would we expect a CES production function? why would the elasticity parameter be close to negative infinity, or to 0, or to 1? I hope that someone has written something that answers these questions on the basis of a micro level account (whether mathematical, or narrative).


texts: what is monotonicity and strict monotonicity in preferences?

texts:
I am really confused between monotonic preferences and strictly monotonic preferences, I saw some video and read certain answer where it is mentioned that the

When preferences are monotone / weak monotonic preference, the
consumer prefers more of both goods.
When preferences are strictly    monotone or having strong monotonic
preference, the consumer prefers    more of one good but no less of
the other.

(source: https://www.learnpick.in/questions/details/11169/what-is-a-monotonic-preference)
whereas when I read this other paper it says

Monotonicity means that if c1 contains more of some or all
commodities, but no less of any, than c2 (c1 ≥ c2) then c1 ≿ c2.
Strict monotonicity means that if c1 contains more of each commodity
than c2 (c1 > c2) then c1 strictly prefered c2

(source: http://www.math.uchicago.edu/~may/VIGRE/VIGRE2008/REUPapers/Shon.pdf)
I am confused as both the answers are quite contradicting as the (first as per sequence I mentioned) says that in strict preferences the consumer more of at least one good but no less of the other.
whereas (second as per sequence I mentioned) says in strict monotonicity we prefer more of both the goods. Also, I am able to understand the graphical representation of the monotonicity.
Please tell me where I am getting it wrong I am really stuck on this.
Thank you.


texts: GDP data for the baltic states from 1988-1994

texts:
since I have to write a paper on transformation/transition processes in the baltic states (Estonia, Lithuania and Latvia), I would like to analyze GDP data from 1988 (shortly before the end of the soviet union) until now.
I already checked eurostats, the world bank and OECD databases.
Unfortunately I couldn't find any GDP data for these countries for the period from 1988-1994.

I would highly appreciate recommendations for other databases, that might contain the data I am looking for.


texts: Are there two different meanings of the discount rate?

texts:
Today I suddenly became aware of how the term "discount rate" are frequently used in two different contexts:

When people prefer to have something now rather than in the future. The reason is supposedly human psychology. The discount rate in this case is inherent to the individual.
The same amount of money now is more valuable than in the future. The reason is that if one has that money now, he can invest and earn interest. The discount rate in this case is the real interest rate, determined by the market.

Am I correct in thinking that these are essentially two distinct phenomena subsumed under the same term? Or there is actually a deeper connection between them?


texts: Inverting price functions and their conditions/intervals

texts:
If I have demand functions

For $P<15$:

$$
Q(P) = 700-40P
$$

For $P>15$:
$$
Q(P) = 400-20P
$$

If I invert them, I get the price functions

For $Q<100$:
$$
P(Q)=20 - (1/20)Q
$$

For $Q>100$:
$$
P(Q)=17,5 – (1/40)Q
$$

I know how I get the expressions, for instance, $Q = 700 - 40P \Leftrightarrow 40P = 700 - Q \Leftrightarrow P = \frac{700}{40} - \frac{1}{40} Q$, but I don't how the conditions $P < 15$ can change to $Q < 100$.


texts: Does quantitative easing appreciate or depreciate the domestic currency?

texts:
410 gone says the domestic currency depreciates.

  You've identified the first-order effect: the supply of local currency has increased, so its price (and from the perspective of other currencies, that's its exchange rate) decreases. That's assuming that the move wasn't already (fully) priced-in by the market.

Jess Mehta says depreciates too, but she looks like a mooch for "Crypto Coin Market Expert".

  An increase in the money supply could lead to a depreciation in the exchange rate. This is for two main reasons:

  Inflation: The domestic inflation will make your goods relatively less competitive and export demand will fall. Therefore, there will be less demand for the currency and its value will tend to fall on the exchange rate markets.

  Lower Interest Rates: If you increased the money supply, then this reduces interest rates. Lower interest rates will also tend to reduce the value of the currency.

But Adriaan Slabbert on Quora says it appreciates.

  If there is less demand for something, the price of that thing tends to fall. Since the exchange rate is the price of currency, this means that Country A’s currency should fall, i.e. it will depreciate against other currencies, leading to a higher exchange rate of Currency A/US Dollar.


texts: Is there an accepted metric for "the value of the dollar"?

texts:
Is there a reasonably well-established scheme for estimating the value of the dollar in international trade, somehow relating it to the "average" of other currencies or to some currency-independent metric?  Something that could be used when researching the relationship between fiscal policies and international trade.

(I would consider using the Euro, but I'd like numbers going back to the 70s, at least, and obviously the Euro doesn't work for that.  In addition, it is perhaps a bit destabilized by, eg, the Greek economic crisis.)


texts: Does labor negatively affect output (from empirical perspective)?

texts:
I am estimating Cobb-Douglas production function for US using time series framework:
$$Y_t=A_t \times L_t^\alpha K_t^\beta $$
where $Y$ is output, $A$ is $TFP$, $L$ is labor and $K$ is capital. After log-transformation I estimate the following linear model:
$$lnY_t=\alpha_0+\alpha_1lnL+\alpha_2lnK+\epsilon_t$$
The estimation results are: $\alpha_0=16.8$, $\alpha_1=-0.72$ and $\alpha_2=0.64$. I am concerned about negative coefficient of labor. Is there any theoretical/empirical explanation for it?


texts:
During the entire Brexit debate in the media I never heard anyone discuss levels of tariffs imposed on countries wishing to export there that had no special deal arranged. I then tried to look up tariffs myself and found this site which looks unbelievably complicated. I just wondered if anyone was familiar with this area and could summarise it - at least crudely.

EDIT: digging around the site some more, I think that cars generally have a 10% tariff form all of USA/Japan/India/China... see here for example but the language is so technical that I'm not sure I'm reading it correctly.


texts: Which of the possible monetary policy channels is there empirical evidence for?

texts:
There are many possible monetary policy channels. These channels are the different ways that changes in the Fed's interest rates can affect the economy: exchange rate depreciations, business investment growth, consumer borrowing growth, wealth increases, improved firm liquidity, debt deflation, bank multiplier changes ...

Is there accepted evidence for any of these actually happening in the US? What are the key references?


texts: Quasiconvexity of the indirect utility function

texts:
In Mas-Colell, Whinston, and Green's Microeconomics they define the indirect utility function, $v(p,w)$ as

$$ v(p,w) := u(x^*) $$

Where $x^* \in x(p,w)$ solves the utility maximization problem.

They state a property of $v(p,w)$ is quasiconvexity, i.e. the set

$$ \{(p,w): v(p,w) \leq \bar{v} \} $$

is convex for any $\bar{v}$.

Just the page before they said that convexity of preferences implies that $u(\bullet)$ is quasiconcave, so my question is why when we look at the max of $u$, it's quasiconcave property inflects (can't think of a better word) to quasiconvexity?


texts:
I am solving practice problems in Walsh. This is from 3rd edition page 87. Question 1.

I have max:  $$U=\sum\beta^iU(c_{t+i},\frac{M_{t+i}}{P_{t+i}})$$

s.t.  $$\omega_t=f(k_{t-1})+(1-\delta)k_{t-1}+(1+r_{t-1})b_{t-1}+m_t$$

I use a value function:

$$V(\omega_t,m_t)= max [U(c_{t},m_t)+\beta V(\omega_{t+1},m_{t+1})]$$

I then take F.O.C. w.r.t:$\space\space\space c_t,k_t,b_t,m_{t+1}$

My issue is when taking F.O.C. wrt $k_t$ I am getting $V_{\omega}(V_{\omega_{t+1}},m_{t+1})=\lambda_t$

but I should be getting my time subscript as t here instead of t+1. This is throwing off the next part of the question:

Show that $$\ \frac{U_m(c_{t+1},m_{t+1})}{U_c(c_{t+1},m_{t+1})}=i_t$$

Proving this ^^^ is easily done by rearranging and substituting my FOC. However, I need to correct my FOC for $k_t$ before the solution actually works since I am equating: $$U_c(c_t,m_t)=V_{\omega}(\omega_t,m_t)$$ and $$U_m(c_t,m_t)=V_{m}(\omega_t,m_t)$$

to achieve my solution. For now, my time subscript issue with k is creating a time subscript issue with my solution.

Can anyone help me with the time subscript issue?

*****I can add more of my solution if necessary but it is just FOC. Also - I have solved the problem and checked against a solutions manual. I have done every other part correctly - just need to fix the time subscripts for k*****


texts: AD-AS Analysis of the Effects of a Decrease in Corporation Tax

texts:
As a result of a decrease in corporation tax, which curve shifts to the right first? Does AD shift to the right first or does SRAS shift to the right?

My argument is that a decrease in corporation tax causes post-tax profits to rise as the cost of production decreases, resulting in an incentive for corporations to increase supply. The supply curve shifts to the right.
Alternatively, it has been argued that AD shifts to the right first as corporations react to tax cuts by increasing investment, causing demand-pull inflation.

Is it the case that AD always shifts before SRAS?


texts: Negative interest rates - Monetary Policy

texts:
(This is 1st part of series of questions under "Negative interest rates")

I've happen to stumble on two articles, with some weeks, that the central bank(CB) of switzerland, due to Russia ruble crisis, and being a stability haven, has decided to use a negative nominal interest rate for reserve deposits of banks at the CB, to facilitate the exchange rate peg. Bank of Japan(BoJ) also seems have implemented a nominal negative interest rate, even if for different reasons(not sure about the reasons).

In all textbooks, the topic of negative interest rates is easily dismissed, or simply taught of as impossible, and so the authors work with non-negative lower bound(ex:deflation trap). Almost every part of the economic theory is going to be influenced by this.

Hence I'm dividing my question into several.

This part is for monetary policy. With negative interest rates, what changes for monetary policy(scope, effects, etc.) can we expect?

Any help would be appreciated.

Edit: Here is an article by Nouriel Rubini on negative nominal interest rates. He writes on why these negative rates exist, their rationale, and one possible way(fiscal policy) to bring the economy out of this situation.


texts: Is economic growth measured in real GDP or in real GDP per capita?

texts: As an example, take a country where real GDP (measured in base year dollars) increases every year, but where the real GDP per capita (also measured in base year dollars) fluctuates, increasing and decreasing in equal measure. In this example, does the country experience economic growth every year? That is, does economic growth reflect the consistent increasing of RGDP or does it reflect the sometimes increasing, sometimes decreasing RGDP per capita?


texts: When does the "stationary" problem become and issue with panel data?

texts:
I recently came by a post that states in panel data with small time dimensions the stationarity issue is not present, is this true? can anybody provide a source for this?

I'm working with a panel data set for 10 states over 11 years, with variables: unemployment, poverty rates, age controls in (%) and minimum wages.

Should I bother trying to test for unit roots? if so what tests would you recommend? I am using R and having difficulties trying to find and understand some tests used in panel data sets.

-thanks


texts: Why not create money to assist the post-COVID-19 economy?

texts:
In an imaginary country, a horrible computer virus infected some banks.
Within a week, it caused the wealth of a large portion of the population (say, 50%) to drop significantly.
For some, it cut 80% of their checking account and savings.
Others - it put into debt.
The losses were great and posed a threat to the country's economy.

The following month, security experts analyzed the effect of the virus, and identified the majority of affected accounts, and the magnitude by which they were affected.

Then, the government ordered the banks to revert these people's accounts to their state right before the virus has manifested itself.

Calamity was averted, and the economy restored.

As I understand, the action of reverting the accounts' state can be seen as "generating money". Pushing large amounts of "free" money into a market causes inflation. But I think that in the above scenario it shouldn't create inflation, because the generated money substitutes money that has vanished due to an external event.

My questions are:

From economic perspective, does the action of reverting the affected accounts' states make sense? Are there downsides?
If it makes sense, then how is it different from the widespread loss of income incurred by the COVID-19 pandemic? If a business was forced to shut down for two months, during which it had no income, but had to keep paying rent, paying salaries, etc - why shouldn't the government generate and provide a sum that would cover this business' expenses for that period? Not get the money as a loan, but just print it. Wouldn't this solve the problem for free, without negative consequences?


texts: Has any country attempted to inflation adjust capital gains before taxation?

texts:
Inspired by the answer to a different question I wondered:

Can anyone think of a case study example, past or present, when capital gains are inflating adjusted before being taxed. I could imagine this making a lot of sense in high inflation currencies.

If there is an example, what prompted the introduction and was it considered a success?


texts: What would happen to the world GDP if we run out of minerals to mine but not of sources of energy?

texts:
I was thinking about how the depletion of minerals (metals and all material we mine from the Earth) will affect the GDP of the world. I read somewhere that at the current extraction rate, we will run out of easily accessible iron ore in the next 60 years.

I found this Wikipedia article and it seems that about 1% of the world GDP is in extracted or mined minerals.

A simple prediction would be that the world GDP would drop by 1%, but thinking about this more and not I'm not sure if this is correct, I think the lack of mined metals and minerals would have a much bigger effect on the economy than 1% since this 1% actually contributes a huge sum to the rest 99% and without it, we will just end up with whatever we have and will not be able to construct, manufacture or build anything anymore.

So to make this simple and to make sure that energy sources are out of the equation, let's assume that humanity will never run out of sources of energy like oil, gas and coal, but will run out of all metals and minerals that we can mine so that there is no any additional minerals being added to our economic system. How would that affect the GDP of the world?


texts:
Take the standard portfolio choice problem as presented in MWG (p.188-189), but with a risk loving decision maker:

with initial wealth  $w$
invests an amount $\alpha$ in a risky asset with a random gross rate of return $z$, where $z$ is distributed according to cdf $F$, and $\int zdF(z)>1$

The decision maker solves the following problem
$$
  \max_{\alpha\in[0,w]} \int u(w-\alpha +\alpha z) dF(z),
$$
where $u'>0$, $u''>0$.

Is it true that the optimal solution is $\alpha^*=w$?

Note that since $u$ is convex, the usual first order condition is not sufficient for a maximum.

Intuitively the answer should be yes. But what's the reason, exactly?


texts:
While looking at debt to GDP ratio of various countries, I had difficulty with different figures on different websites.
Look at this which shows China's debt to GDP ratio as 43.9%:
http://www.tradingeconomics.com/china/government-debt-to-gdp

Then there are many other links which show China's debt as 250% of GDP.
https://www.theguardian.com/business/2016/jun/16/chinas-debt-is-250-of-gdp-and-could-be-fatal-says-government-expert

What am I missing here?


texts:
The global economy depends on growth, but growth can never be indefinite in a finite world with limited space and resources.  Moreover, growth always tends to decline over the long term due to the law of diminishing returns, as we choose opportunities which give the best returns first, leaving those which give lower returns for later.

So does this mean economic collapse is inevitable?  Could the global economy survive indefinitely with zero growth, while borrowing more and more money to avoid decline?

Under what scenario would the economy be indefinitely sustainable, without a huge collapse?


texts: How a countries interest rate (official cash rate in NZ) and inter-bank network determines retail interest rates?

texts:
In New Zealand, there is the OCR, which is the rate at which retail banks borrow from the central bank (https://www.nzherald.co.nz/nz/news/video.cfm?c_id=1&gal_cid=1&gallery_id=213767)

However, banks also borrow and lend money to one another in the inter-bank network. When banks lend out to normal people (e.g. taking loan out for a car), is the rate determined by the rate of the inter-bank network? In other words, does the inter bank lending market drive the interest rates (mortgages etc) - are the interest rates of mortgages determined by adding a premium to the inter bank market rates?

Edit: I should have phrased the message on the bounty differently. I didn't phrase my question correctly to address what I was confused about before.


texts: Terminology and formalization for "anonymous" game forms

texts:
I have an intuitive notion of what an "anonymous" (extensive) game form $\Gamma$ is. In my mind an "anonymous" game is a game in which the players' identity does not matter. This includes the (again intuitive) ideas that

1) The players' strategy spaces are "identical" (e.g. a normal form game in which players have the same action spaces, or a centipede game in which the starting player is determined randomly).

2) There is no discrepancy in the order in which players play (at least stochastically). For instance, the probability that any player play first (or be one of the players who play first simultaneously) should be the same, and similarly for the second, third, ... play.

3)  For every (strategy) profile $s = \{s_1,\dots,s_n\}$ in the space of profiles and every permutation $\pi : \{1,\dots,n\} \leftrightarrow \{1,\dots,n\}$, the outcome of $\pi(s) =  \{s_{\pi(1)},\dots,s_{\pi(n)}\}$ is the same as the outcome of $s$, up to permutation (something like $\Gamma_i(\pi(s)) = \pi(\Gamma_i(s))$, e.g. an ultimatum game in which the identity of the player who makes the offer is determined randomly).

With the help of @ml0105, I realized that 1) and 3) identify the class of symmetric games (in fact, I think 3) is more restrictive than needed for a game to be symmetric, but let's leave it there). Hence I guess my question boils down to :

  is there a common name for symmetric sequential games that also satisfy 2)?

Note : I am aware that the term "anonymous game" is already in use in the literature (e.g. Daskalakis and Papadimitriou (2007), Computing Equilibria in Anonymous Games, or https://en.wikipedia.org/wiki/Succinct_game#Anonymous_games) and defines a different class of game than the one I tried to intuitively describe about.


texts: What is the difference between the Classical and Keynesian models?

texts: I have read something about the short and long run aggregate supplies, but I don't know what the main difference is about these two models. Does someone know the difference(s) between these two models?


texts:
Considering the New Keynesian Model we have the Phillips curve and dynamic IS curve in log-linearized form with price shock $u^{\pi}$ and demand shock $u^{IS}$ :$$\pi_t=\beta E_t\pi_{t+1}+\kappa(y_t-y_t^n)+u_t^{\pi}$$ $$y_t=E_{t+1}-\frac{1}{\sigma}(i_t-E_t\pi_{t+1}-\rho)+u_t^{IS}$$

where $\kappa>0$, $1>\beta>0$,$\sigma>0$. The shocks follow some stochastic process.Furthermore, natural level of output $y_t^n$ is determined by a technology shock, also following a stochastic process.

Now, we have the following Taylor rule of the central bank: $$i_t=\rho+\phi_{\pi}E_t\pi_{t+1}+\phi_y E_t(y_{t+1}-y_{t+1}^n).$$

I know that following this Taylor rule, we are not able to stabilize any of these shocks. However, could someone tell me step by step how me come to this conclusion? Also does our conclusion change if we would use t terms rather than expected (t+1) ones?

I came so far:

1. Price shock: inflation increases, central bank reacts (because of higher $E_t\pi_{t+1}$?) with higher interest rate.And higher interest rate leads to lower demand and production($y_t$). Since in order to decrease inflation an output gap has to be created, divine coincidence does not hold and stabilization is not possible. This is actually a reasoning that my teacher gave. However, if output gap exist because of an attempt to lower inflation, could the inflation gap not close after inflation is stable again? Also, as before, I do not know if we can use expected terms like actual terms. Also, if it is stated that shocks follow a stochastic process, actually all expected terms for the next period, shouldn't they be all 0?

2. In terms of a demand shock, demand increases leading to an increase in actual output, creating a positive output gap, leading to an increase in inflation. If my understanding of the expected terms is right, central bank would expect positive inflation also for the next period? And hence interest rate  increases (also with increase of expected output gap)? Then demand decreases and output gap decreases. My teacher stated in the solutions that at some point the interest rate adjusts for the shock, however, not totally. I do not see this though. Could someone explain to me the obvious?

3.In terms of a technology shock, a negative output gap leads to a decrease in inflation. Because of the negative output gap, also a negative output gap should be expected in the future (if we assumed an AR process?), that comes with decrease in inflation, hence, central bank lowers interest rate to adjust demand and output.

I would appreciated it if someone could tell me step by step how the reasoning is done here to come to the conclusion that this Taylor rule cannot stabilize inflation.


texts: Is risk aversion bounded in CRRA utility?

texts:
For instance, Cagetti (2003) estimates ρ > 2 by targeting the median wealth of households,
Gourinchas and Parker (2002) find ρ < 2 by targeting the mean consumption of households,
Chetty (2006), using the effects of wage changes on labor supply, finds that ρ < 2.

Marginal utility of consumption is decreasing very fast when ρ > 2, still you can find in macro or finance even ρ = 10. In experimental or in labor ρ is close to 0.

Is there any bound on this coefficient?


texts: Intertemporal utility maximization through consumption

texts:
I need help in solving this question from one of the entrance examination.

Q.Consider an economy where a representitive agent lives for three periods.
In the first period, she is young - this is the time when she gets
education. In the second period, she is middle-aged and with the level
of education acquired in the first period, she generates income. More
specifically, if she has $h$ units of education in the first period, she can
earn $wh$, in the second period, where $w$ is the exogenously given wage
rate.

The agent borrows funds for her education when she is young and
repays with interest when she is middle aged. If in the first period,
the agent borrows $e$, then the human capital $h$ at the beginning of the
second period becomes $h(e)$, where $$dh/de > 0$$$$d^2h/de^2 < 0$$

In the third period of her life, she consumes out of her savings made
in the second period, that is, when she was middle aged. Assume
that the exogenous rate of interest (gross) on saving or borrowing is
$R$. For simplicity, assume that an agent does not consume when she
is young and, thus, the life time utility is $u(c^m) + bu(c^o)$, where $c^m$ and $c^o$ are the level of consumption when they are middle-aged and
old respectively and $0<b<1$ is the discount factor.

1. Write down the utility maximization problem of the agent and the
first order conditions.

2.  How does the optimal level of education vary with the wage rate
and the rate of interest?

I cannot understand how to use the interest rate. Also I have got following answer to 1:-

maximizing$$U = u(c^m) + bu(c^o)$$ subjected to the constraint
$$c^o/(1+r) + c^m = wh(e) - (1+r)e$$
from which we can get Lagrange first order equations.

I cannot see how $R$ could be used. Also got a doubtful answer for 2.


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Can anyone explain why the net income of some MNCs overwhelmingly surpass the GDP of countries/regions, where their sources of labor/raw materials are located? Accompanying references are welcome.
P.S. :- My academic training is in history, and am not really familiar with nitty-gritty aspects of economics. Apologies, if this is a stupid question.


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In reading the Wikipedia article about hyperbolic discounting, I read that it says that hyperbolic discounting created strange consequences:

  But note, the time inconsistency of this behavior has some quite perverse consequences.

Is it just that people make choices that their future selves would not make? The same article further says this:

  Individuals using hyperbolic discounting reveal a strong tendency to make choices that are inconsistent over time – they make choices today that their future self would prefer not to have made, despite using the same reasoning.

What are the consequences of hyperbolic discounting (HD)? (Although they seem to match some observed behavior, does HD produce predictions that are undesirable?)

Also, beside time inconsistency, what are the consequences of hyperbolic discounting, if any?

(Also, any references to good material are always welcome.)


texts: Could low interest rates encourage savings?

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We normally assume that a lower interest rate will induce less saving as the returns on saving are lower. However, if a central bank committed itself to a low or even negative interest rate for a long period of time, could citizens come to anticipate that they will need to save more for their future/retirement as they won't be able to rely on interest payments anymore? Before 2007, when interest rates in the UK for example were often around 5%, people with a pension large enough would have been able to live off of the interest they earnt. Today, however, interest rates are closer to 0% so retirees would only be able to fund themselves by withdrawing their savings or risking their funds in investments elsewhere, something which many people either lack the knowledge to do or are too risk-averse to consider. Anticipating this, a rational person would likely save a great deal more, knowing that they'll be without any significant interest earnings during their retirement. So, could low interest rates lead to more savings in the long run?
Adair Turner briefly mentions this phenomenon in Chapter 8 of his book Between Debt and the Devil, describing how it occurred during the rapid growth periods in Japan, Korea and Taiwan where the governments followed policies of financial repression to increase loans to businesses and thus investment, with funds provided by households saving more.


texts: Why is United States Gross Capital Formation per capita so far ahead of the big 3 European economies?

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So, I was pondering the weakness of the UK economy (I am British) and its lagging productivity performance.  I was thinking that capital deployed per worker would be an explanatory variable.

Looking at figures from www.tradingeconomics.com: Gross Fixed Capital Formation data : Germany
|United Kingdom|France|United States.

Dividing through by population (proxy for working population) I get the following per capita figures

UK       $1,506.79
Germany  $1,860.17
France   $1,858.21
USA      $8,715.27

If the Sterling/dollar exchange before Brexit were used then the three European economies are very close to each at $1800.  But the key standout is the USA figure its miles ahead.

So I am now wondering why is United States Gross Capital Formation per capita so far ahead of the big 3 European economies?


texts: How do governments deflect risk through greater volatility in the housing market?

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Source: p 123 of 296, Understanding Housing Policy, by Brian Lund

  Although
  housing immobility limits the impact of globalisation, its influence on financial and labour markets
  magnifies regional and local variations in economic conditions within countries through internal and
  international migration. This may have prompted a more ‘selective’ response from national
  governments. Globalisation also magnifies ‘risk’ and prompts governments to deflect this ‘risk’
  onto homeowners in the context of greater volatility in the housing market.

Please explain the bold, which suggests that governments want greater volatility.


texts: Is the Austrian wage system bad for its economy?

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In Austria, the law is forcing employers to pay 14 wages instead of the usual 12 (one per month) per year for almost every employee. More specifically, employees get a 13th payment around July called "Urlaubsgeld" or Vacation money and a 14th payment around December called "Weihnachtsgeld" or Christmas money. Thus, if you compare monthly payments with its neighbour germany, where you can but usually do not get 13th and 14th payment, it seems like austrians are getting less money paid than germans, but the difference is that Austrians get theirs 14x and Germans 12x. Also, in Austria, the 13th and 14th payment are significantly less taxed than the usual twelve.

Now I have no idea what are the reasons for that, but what I was thinking about was the following. It is a fact that most Austrians are going on Vacation in December/January and July/August and use their 13th and 14th salary for doing so. And as we all know, when money from economy x get spent abroad (which is what happens when people go to vacation), economy x is becoming weaker. Isn't it then the case, that Austrian economy is weakening itself by organizing two big payments during vacation times by encouraging Austrians to spend money abroad?


texts: Theory about supply of money, prices, and output?

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"In theory, we should have enough money in an economy so at current prices we can buy all of the goods and services the economy is producing. What economic theory does this remind you of?"

On a basic level this reminds me of a simple supply/demand equilibrium. In addition, it brings to mind the importance of reserve ratios in banking. As a side note, I also thought banking's use of debt would assert we could not buy every good and service in the economy at this time.

My professor enjoys trick questions. Any thoughts on what I have proposed?