texts: Why does a current account deficit contribute to making a country a "sitting duck" for currency speculators?

texts:
George Soros had this to say about the factors surrounding his famous short of the British pound:

The U.K. had a large current-account deficit…, modest FX reserves and
no capital controls to rebuff the speculators,” he said.“In short, it
was a sitting duck.

I'm thinking maybe the opposite would be true. The fact the UK had a current account deficit would seem to imply a depreciating currency, with cheaper exports and more expensive imports. At this juncture, I would think more investors would buy in to the currency, enticed by the prospect of asset appreciation. So wouldn't it make more sense to view current account deficits as having appreciating pressures (rather than depreciating)?
I doubt my econ is better than a billionaire, so I'm hoping (and anticipating) someone can explain the flaw in my logic.
Question
Why does having a current account deficit contribute to making a country vulnerable to hedge funds shorting the currency?
Note: I did not stipulate assumptions about the currency regime in question. Base case can be for a peg (the system used by the GBP at the time), but if other regimes (floating, currency board) merit a look, I'll leave them as optional.


texts: Beveridge Curve: Add a Variable for Young Share

texts:
A beveridge curve show the relationship between unemployment and vacancy.

Some papers add additional variables like Real GDP, real interest rate, etc to test for the matching efficiency of the BC.

However when it comes to age structure. Some researchers  use
1) Young Share in Unemployed, or
2) Young Share in labour force

What's the difference between 1) and 2)? How would a smaller young share in the unemployed vs the labour force affect the unemployment, vacancy and hence matching efficiency?

Thank you


texts: Given $f(x_1,x_2) = \min\{x_1,x_2\}^\alpha$ find the profit-maximizing factor demands, supply function and profit fuction

texts:
Given

$$f(x_1,x_2) = \min\{x_1,x_2\}^\alpha$$

I have to find the profit-maximizing demand functions, supply function and profit function but I am not sure how to when the function is given as it is.

I know that I for example have to use Lagrange. Thus

$$
L = p \cdot f(x_1,x_2) - w_1 \cdot x_1 - w_2 \cdot x_2 - \lambda \left(p_1x_1 + p_2x_2 - m \right)
$$
and then afterwards find the first order conditions. But how I find the derivative in regards to both  $x_1$ and $x_2$ when I have a function such as $f(x_1,x_2) = \min\{x_1,x_2\}^\alpha$ ?

Can you help me in the right direction?

Thanks in advance!


texts: How can a crypto currency crash affect liquidity?

texts:
To the best of my knowledge, no bank will allow a borrower to provide crypto as collateral for a loan.  So, if the price of crypto crashes to zero, there shouldn't be any liquidity issues because no fiat backed by crypto had been created.

All that would happen with a crash would be a redistribution of wealth: the people who sell first get the most, and the people who sell last get nothing.

So, why are bankers claiming a crash would cause liquidity problems for the financial sector?


texts: Why N>T is required on system GMM estimations?

texts:
My question is why N>T is required when working with dynamic panel estimations based on system GMM, such as xtdpdsys at stata. Is that based on the potential lost of information due to orthogonal deviations?
Thanks


texts: Maximum level of profit attainable when discount factor is too low

texts:
This is a question I encountered during my undergraduate studies in Industrial Economics. So the question goes like this:

  Consider two identical firms with constant marginal cost $c$ which
  compete in quantities in each of an infinite number of periods. The
  quantities chosen are observed by both firms before the next play
  begins. Inverse demand is given by $p = 1 – q_{1} – q_{2}$. The firms use
  ‘trigger strategies’ and they revert to static Cournot behaviour if
  cooperation breaks down.

  What is the lowest value of the discount factor $\delta$ such that the
  firms can sustain the monopoly output level?

This part I can answer and the value of $\delta$ needed to sustain the monopoly output level turns out to be $\frac{9}{17}$.

Now onto the second part of the question:

  Suppose $\delta$ is too small to sustain the monopoly output. In
  particular, suppose $\delta = \frac{1}{2}$. What is the most profitable subgameperfect
  equilibrium that can be sustained using trigger strategies?
  (Assume $c = 0$ for simplicity.)

So my line of thinking for this is, to sustain collusion the profit from colluding has to exceed the profit from defecting one period plus the punishment profit in subsequent periods.

$$
\pi^{C}\frac{1}{(1-\delta)} \geq \pi^{D} + \pi^{P}\frac{\delta}{(1-\delta)} \tag{1}
$$

Having from secion 1 of the question:

$$
\pi^{C} = \frac{(1-c)^2}{8},\quad \pi^{D} = \frac{9(1-c)^2}{64},\quad \pi^{P} = \frac{(1-c)^2}{9} \tag{2}
$$
Take into account that $\pi^{C}$ is the profit each firm obtains if they collude, i.e. monopoly profit divided by 2.

So, to me section 2 of the question is asking about $\pi^{C}$ (in condition $(1)$) when $\delta=\frac{1}{2}$. I know $\pi^P$ remains the same since it is the Cournot profit but I guess $\pi^D$ changes because it was calculated assuming the other firm would produce the monopoly level of output and this is not the case anymore since $\delta$ is lower than what is needed to maintain that level of output.

You can see I am a bit confused. Can anyone help me?


texts:
this site summarizes the difference between GDP and GDP per capita as:

1. GDP is a measure of a nation as economic health while GDP per capita takes into account
the reflection of such economic health into an individual citizen as perspective.
2. GDP measures the nation as wealth while GDP per capita roughly determines the standard
of living in a particular country.
3. GDP normally increase as the population increase while GDP per capita may decrease when
population increases.

Since real gdp is just gdp adjusted for inflation, would the same definition summarized for GDP vs GDP per capita hold true for Real GDP vs Real GDP per capita?


texts: Firm's profit max problem, in present value terms

texts:
So I am kinda stuck on this question. The question goes as follows:
Consider a multiperiod firm, selling q1 units of a product in period t=1 at spot price P1 and q2 units in period t=2 at spot price P2. It uses three factors in production: capital K, which is acquired for price Pk at t=0 and last two periods, and labor in each period, L1 and L2, with respective spot prices PL1 and PL2; the firm acquires L1 at t=0 and L2 at t=1. The firms product is perishable, so it cannot carry inventory from one period to another.

Assume prices are as follows: P1=40, P2=50, PK=20, PL1=10, PL2=15. the interest rate is r=10%.
Set up the firms profit maximization problem, in t=0 present value terms.

So our definition of spot price: spot price = price * (1+r)^t.
What I have at the moment is

max 44q1 + 60.5q2 - 10L1 - 16.5L2

or

max 36.36q1 + 41.32q2 - 10L1 - 13.63L2

I'm not sure what do about capital (K), since its acquired in t=0 and last two periods and is not noted to be a spot price.

EDIT: since PK=20, but the price isn't a spot price and its acquired in 3 different periods, does that mean it should just be 60*K in regards to the max problem?

EDIT 2: Could also be the formula PV = FV * (1/(1+r)^t). Where PV is present value and FV is future value (spot price).


texts: What is the proper academic term for "realizing sales from online traffic"?

texts:
Realizing sales form traffic is one of the major concerns for firms in a digital economy. To my knowledge, online marketing methods (such as SEO) usually generate traffic but not necessarily profits. What is the academic term for the action of "realizing sales from online traffic" or "traffic to profit conversion rate"?
For example, if the daily view of a merchant's website is 1000, and the number of customers spending money per day is 2. Then the "traffic to sales conversion rate" is:
$$\frac{2}{1000}=0.002$$
Second Question: While this term is discussed in the recent works in digital economy, I wonder if this term also belong to the field of digital marketing.


texts: Can increase of NEER cause higher inflation?

texts:
I´m trying to find siutable econometrics model for explaining inflation during financial crisis and after. My final model shows that if NEERnominal effective exchange rate) increases, the inflation increases too.

NEER is undertaken from Eurostat when increase of NEER means appreciation.

I´m not sure if this means increase above 100-> appreciaton. Or if any increase (for example from 78 to 80) means appreciaton.

I don´t know how to explain this model. Do anybody have any idea how the NEER works and why there is positive relationship between NEER and Inflation?

Thanks for any advice.

Here are my quarterly data for NEER: eurostat


texts: Blackwell order of information structures

texts:
Consider a model where a decision maker (DM) has to choose action $y\in \mathcal{Y}$ possibly without being fully aware of the state of the world.
The state of the world has support $\mathcal{V}$.
When DM chooses action $y\in \mathcal{Y}$ and the state of the world is $v\in \mathcal{V}$, she receives the payoff $u(y,v)$.
Let $P_V\in \Delta(\mathcal{V})$ be the DM's prior.
The DM also processes some signal $T$ with support $\mathcal{T}$ distribution $P_{T|V}$  to refine his prior and get a posterior on $V$, denoted by $P_{V|T}$, via the Bayes rule.
Let $S\equiv \{\mathcal{T}, P_{T|V}\}$ be called "information structure".
A strategy for the DM is $P_{Y|T}$. Such a strategy is optimal if it maximises his expected payoff, where the expectation is computed using the posterior, $P_{V|T}$.
Question: consider two information structures, $S$ and $S'$. We can compare them by using Blackwell Theorem which says that $S$ is more informative than $S'$ if the maximal expected payoff under $S$ is al least equal to the maximal expected payoff under $S'$. Is this correct? If yes, then it seems to me that I can rank any information structure using this criterion. Hence, why the Blackwell order is a partial order?


texts: What does a supply+demand curve look like for fare evasion?

texts:
Consider the demand curve for fare evasion on a train. The price (I suppose) would be the average amount of money paid per ride in fines, and the quantity would be the average number of fare evaders caught. The supply curve would quantify the target number of fare evaders to catch.

Normally technological advances push the supply curve rightward. This would correspond with more people getting caught.

But this obviously isn't right. If it were easier to catch fare evaders, you'd intuitively expect that the average price in fines per ride for a rider would be higher, thus, quantity would go down.

What does the supply/demand curve really look like for fare evasion and what would be the effect of a rightward supply curve shift?


texts: Even if immigrants take USA jobs, don't they consume proportionally to maintain supply-demand equilibrium?

texts:
I heard many times politicians argue that immigration (in USA in particular, but applies to anywhere) are taking "real" Americans jobs. Then I tough, but they also are new consumers on the market, so they create supplies too. If immigrants also consume goods in a similar quantity and type as Americans, that will produce new more demand and thus the extra supply the jobs produce will be "justified", "balanced" or "matched".

Obviously, this economical situation is EXTREMELY complex with millions of factors: how productive/educated both populations are, average age of immigration, in which sectors will immigrants work and if they will overload some part of the economy with too much supply... There are millions more factors.

The only thing I care is if my argument disproves the IMO fallacious argument

  "Immigrants will take our jobs"

Tell me if this in more correct:

  "immigration will prompt the creation of more jobs and the new
  population demand will (hopefully, if everything goes well, which would
  not) balance with the new supply, without taking jobs in
  massive proportions, thought some people may loose jobs to more
  skilled immigrants."


texts: Solution to maximization not Pareto efficient

texts:
In my economics class, we saw a proof that if an allocation $ ((\hat x_h), (\hat y_f)), h\in H$ (the set of households), $f\in F$ (the set of firms) is Pareto optimal/efficient, it must necessarily be a solution to the maximization problem:

$$ max \quad U_1(x_1) $$

Subject to:

$$ U_h(x_h) \ge U_h(\hat x_h), h=2,...,m $$
$$ x_h, y_f \quad feasible \quad \forall h \in H, \ f \in F $$
$$ \sum_{h=1}^m x_h \le \omega + \sum_{f=1}^r y_f $$

Where $\omega$ is the total endowment in the economy, m is the total number of households, r is the total number of firms, and $U_h:\mathbb{R}^n_+ \to \mathbb{R}$ is the utility function of household h.

I am curious if anyone can give me a simple example in a pure exchange economy (so obviously removing the firms from what is given above) where the utilities are such that $\hat x_h$ solves the maximization problem, but is NOT Pareto optimal (i.e. something showing that the converse of the statement above does not always hold). Preferably, I'd like to be able to draw it in an Edgeworth box, to convince myself of the need for additional assumptions on the utility function(s) to make the fact that $\hat x_h$ is a solution a sufficient condition for $\hat x_h$ being Pareto optimal.


texts: Indifference curves passing thru few points

texts:
Tommy Twit’s mother measures the departure of any bundle from her favorite bundle for Tommy by the sum of the absolute values of the differences. Her favorite bundle for Tommy is (2, 7), that is, 2 cookies and 7 glasses of milk. Tommy’s mother’s indifference curve that passes through the point (c, m) = (4, 5) also passes through

a.
the points (4, 7), (2, 5), and (2, 9).

b.
the point (2, 7).

c.
the points (2, 3), (6, 7), and (4, 9).

d.
the point (6, 3).

e.
None of the above.

How to solve this question? I thought that it is enough to find a line passing through two points given however then the equation would be $y=9-x$ however the points given does not fit to the equation. Correct answer given in a questionbank is C. I have no additional info regarding this question and i have to admit yes it is badly stated.


texts:
Say I buy a glass bottle, I can either put it in the landfill or recycle it.
My understanding is, glass will breakdown into sand. (Not sure how well though, since we sometimes find glass from Roman times.) Alternatively we can recycle it.

But I was wondering wouldn't this put some people out of work? Such as the people who have to mine all the silica for use in making the glass in the first place. And considering it is more economic to recycle glass, this seems like fewer humans would be needed.

Therefore could I make the case that not recycling my glass bottle is helping with employment. On the other hand, recycling might be helping the economy as a whole and there might be more money in the economy for public sector jobs. Which is right?


texts: Proof that the diff-in-diff (wrt sample size) of the expectation of a first-order statistic is positive (Stigler 1961)

texts:
I'm trying to prove a claim made in Stigler (1961), "The Economics of Information." This claim has to do with showing that the marginal benefit
of making an additional search (e.g., searching an additional store for a lower price) is decreasing in the number of searches.

Let $F$ be the distribution of prices $p$. Then, the expected value of the minimum price after $n$ searches is
$$
E(n) \equiv n \int_0^\infty p (1-F)^{n-1} F' \mathrm d p.
$$
In the paper, the claim is that
$$
[E(n+2) - E(n+1)] - [E(n+1) - E(n)] > 0.
$$

I have found a related question here. However,
this linked question considers the max of arbitrary $n_1 < n_2 < n_3$. Here, I'm
considered only with the statement as it appears in Stigler's article.
Does anybody know how to prove this?

Notes:

I'm note sure if "convex" is the right term here. The linked question and its answer raise some doubts that it is convex in the strict sense of the word. I suppose what I'm after is just the differences in the differences (a weaker condition that convexity?).


texts: Data Set for Mankiw, Romer, and Weil 1992

texts: I am trying to replicate the results of Mankiw, Romer and Weil 1992, and cannot seem to find the original data.


texts: Interpretation of multinominal logit regression (Stata)

texts:
I have a few questions about mlogit. I have a set of independent variables and a categorical, but ordered, dependent variable with three categories (Disagree, Neutral and Agree). The assumptions for ologit were not fulfilled. I chose Neutral as the base category. The coefficient of one of the independent variables X (a dummy taking the values 1 or 0), so the multinominal log odds, is negative for both Agree and Disagree, so the two effects are in different directions. The coefficient for Disagree is -1.264 and for Agree it is -0.672. If I calculate the corresponding probabilities, the change in probability of Agree is higher than the change in probability of Disagree, when taking the difference between X=1 and X=0 (using the equation on page 6: https://www.stata.com/manuals/rmlogit.pdf). This indicates that the effect on Agree is actually larger than the effect on Disagree, even though the absolute value of the coefficient is smaller.
Can the change in probability of an outcome compared to the base be higher than the change in probability of another outcome compared to the base, even though the absolute value of the coefficient (or log odds) is smaller for the former?
Also, what is the difference between the change in probability of an outcome relative to the base (as described on page 6 of https://www.stata.com/manuals/rmlogit.pdf) evaluated at X=1 and X=0 and the marginal effect (margins dy/dx), which also describes the probability of the outcome?
Thanks


texts:
"The SPNE of a sequential game might not necessarily be Pareto Optimal"

I understand the definitons of Nash Equilibria and Pareto Optimality and that these are not synonymous concepts. An example in reference to this question would be a Firm-Union Wage Setting Game, in which there might be $w$ offers which provide greater payoffs to both the firm and union.
Please share some other examples for the same. Thanks!


texts: How to estimate a model by pooled OLS when we DO NOT have panel data?

texts: The data set is mostly binary with years and location. We have a linear probability model. We DO NOT have panel data. How to estimate this model in R by Pooled OLS? Again, we DO NOT have panel data.


texts: Why is the Euro a bad idea compared to other currencies?

texts:
Many economists, including Nobel laureates Paul Krugman and Joseph Stiglitz, have said that the Euro was a bad idea from the beginning and is a major reason for all the current economic problems. My general understanding of this issue is that different countries with different monetary policies would have more control over how to control their debt and financial obligations instead of being tied to the same rules that all the other countries have to follow. This makes sense to me.

However why does the USA and China not have similar issues even though they are very large countries with a single currency as well? Should the US and China actually be using different currencies for different regions?


texts: Rational preferences/individual decision-making theory

texts:
I am taking advanced micro course this semester. In one of the problems we need to determine whether the preference relation is rational (i.e. complete and transitive). Since we have not really discussed the set of two-dimensional real vectors $X=R^2$ (non-negative), I am wondering whether these preference relations are indeed rational, and if yes, how can it be shown
(i) The relation ≽ defined by $(x_1,x_2)$ ≽ $(y_1,y_2)$ if and only if $x_1≥y_1$ and $x_2≥y_2$
(ii) The relation ≽ defined by $(x_1,x_2)$ ≽ $(y_1,y_2)$ if and only if $x_1≥y_1$
(iii) The relation ≽ defined by $(x_1,x_2)$ ≽ $(y_1,y_2)$ if and only if $\min\{x_1,x_2\} ≥ \min\{y_1,y_2\}$
(iv) The relation ≽ defined by $(x_1,x_2)$ ≽ $(y_1,y_2)$ if and only if $x_1>y_1$ or $x_1=y_1$ and $x_2≥y_2$


texts:
newbie here.

Q1 - What needs to be done by the Argentinian government for their currency to regain back its strength?

Q2 - Why has the Argentine Peso depreciated against the U.S Dollar for more than 18 years? What started the reasoning?

Many thanks to all that contribute to answering.

Kind regards

Nicholas


texts: What is the relationship between population growth and economic growth?

texts:
Population Growth is only one of several factors of influence on economic growth but it is not strictly necessary for the economy to grow.  I have also heard of the term called the population bonus - which describes how a change in the demographic breakdown in the working-age population can impact economic growth.

I want to understand what is the relationship between population growth and economic growth and how can population bonus potentially increase growth in GDP.   Can anyone help explain the importance?


texts:
In all of economics that I know, people maximize their Utility $U_i=f(x_1,...,x_n)$, and therefore make some kind of cost-benefit analysis.

One obvious criticism to this model is that we often do not have the right information on the $x_k$ (it is hard to have a parameter for altruism for instance).

But except from that, is this formalism  irrefragable ? Or are they theoretical limitations, situations that it cannot account for ?

I would gladly accept any thought or reference on the subject


texts: Elasticity of demand equals -1 but income decreases!

texts:
In my textbook, it's stated that:

  When $\epsilon < -1$, demand is elastic and raising price will result in smaller income, while lowering price will result in bigger income.

  When $\epsilon = -1$, demand is neither elastic nor inelastic and change in price won't      result in change in income.

  When $\epsilon > -1$, demand is inelastic and raising price will result in bigger income,                 while lowering price will result in smaller income.

  $\epsilon = \%\Delta Q / \%\Delta P$.

This is the exercise I found confusing:

  Old price: 5

  New price: 6

  Old quantity: 25

  New quantity: 20

  Calculate elasticity

This is my solution:

$\% \Delta P = \frac{\text{new price } - \text{ old price}} {\text{old price}} = \frac{6 - 5} 5 = 0.2$

$\%\Delta Q = \frac{\text{new quantity } - \text{ old quantity}} { \text{old quantity}} = \frac{20 - 25} {25} = -0.2$

$\epsilon = \%\Delta Q / \%\Delta P = -0.2 / 0.2 = -1$

$$$$
This is why I am confused:

$\text{Old income} = \text{old price} \times \text{old quantity} = 5 \times 25 = 125$

$\text{New income} = \text{new price} \times \text{new quantity} = 6 \times 20 = 120$

Old income does not equal new income even though elasticity is -1!

What am I doing wrong? Am I misunderstanding the textbook?

$$$$
Edit: the answer provided is $\epsilon = 1.22$ but I have no idea where it comes from.


texts: How is productivity measured in public sector?

texts: How do they measure productivity in the public sector? Companies just say this is how much money we make per input but what about the public sector?


texts: What percentage of UK imports/exports were with the EU in the economic year 2015-2016?

texts:
With the referendum over whether or not the UK should leave the EU or not I am interested to know what percentage of UK trade is made up of trade within the EU (Imports & exports).

I am aware that the UK Government currently runs a trade deficit with the EU, and a ultimately a trade deficit in general.

My question is, how much of UK trade is within the EU, and how much of this is imports/exports in the economic year 2015-2016?
An objective link proving this would be excellent.

Apologies for the 'trade deficit with EU' link being far from ideal, but as you can imagine, it is hard to find solid fact among the propaganda.

& To clarify, I do not want people's opinion on whether the UK should remain or not. I am in the process of forming my own opinion based on the objective information I come across.

And as always, thank you to those that take the time to answer!


texts: What is the difference between intensive margin and extensive margin in labor economics?

texts: What is the difference between intensive margin and extensive margin in labor economics, or general RBC model, where we talk about labor-hours supplied changing with extensive margin or intensive margin?


texts: If my employer pays me in a currency different from the one I use, is it worth while to buy financial instruments to offset changes forex rates?

texts: Say I live in country A yet my employer pays me in the currency of country B, is it worth while to buy puts on currency B to offset my exposure to that currency? In particular, I live in Canada and I am employed by an American company which pays me in USD. My expenses are relatively stable and measured in CAD, however my income fluctuates as the ratio of USD to CAD fluctuates. Is it worthwhile offsetting my exposure to the forex market, or do the risks out way the benefits.


texts: Book recommendation: first year economics course

texts: Can anyone help me find a nice introduction (possibly popular economics) into the field of black market economics.


texts: Where to find official sources for price-to-rent ratio?

texts:
Where can I find price-to-rent ratio data for housing real estate in any major nation?

Any G-20 country or any top-10 country by GDP would be good for me, as long as it's official data like from a country's census or statistical bureau.


texts: Why is ATC tangent to Demand in a Monopolistic or Mopolistically Competitive Firm Making Zero Profit?

texts:
I understand that the Average Total Cost is equivalent to demand in a zero profiting monopoly or monopolistically competitive firm in order for there to be zero profits (when ATC = P at a given quantity), but why is ATC tangent to demand instead of intersecting demand at a point when ATC is downward sloping?

See:


texts: Why will these steps NOT fix the problems with LIBOR?

texts:
I am new to finance and recently came across the LIBOR scandal that happened some time in 2008. From my limited understanding of finance, it looks like a scandal that was obviously going to happen and the fix also seems obvious. Clearly, the fix I suggest has issues, or else they would've already been implemented. I want to understand why my proposed solutions will not work.

Here's some background on LIBOR and the scandal. LIBOR is an index maintained by Thomson Reuters on behalf of the British Bankers' Association that attempts to track the interest rate at which world's major banks are borrowing and lending from each other on a daily basis. It is calculated by asking 18 main banks the question "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11am?" and then taking the average of the numbers reported after removing the top 4 and the bottom 4. Some time in 2008, the people responsible for answering the question started collaborating with each other and reporting incorrect interest rates in order to manipulate Thomson Reuters' calculations. This was good for the participating banks but bad for the world in general since several financial products traded throughout the world are defined in terms of the LIBOR rate and thus misreporting could potentially lead to harmful effects worldwide.

From what I understand after reading many articles, the two main incentives that lead a bank to misreport its borrowing rates are: 1) reporting a higher borrowing rate is bad for your own reputation since if everyone is charging you high rates on loans then it means they don't trust you, 2) if you are one of those 18 banks that are polled for calculating LIBOR and you also happen to be dealing in a financial product that is defined based on LIBOR, then you might be incentivised to manipulate it.

Here is my proposed solution. Following things can be done to handle #1:

Anonymize the answers. Thomson Reuters doesn't need to know exactly which bank reported what. All it needs is the 18 numbers from 18 different banks. Anonymizing should be easy to do with the help of technology. Or law, i.e., Thomson Reuters can promise to not reveal the data to anyone. The technological solution will probably be less prone to future scandals than the legal one.

Instead of asking what rate a bank can borrow at, ask them what rate they will lend at. Of course you will need to specify "to which bank". So do this for each pair of banks. Ask each bank A what rate it will lend at to each bank B. You can't manipulate your own image by answering incorrectly. The only thing you can potentially do is manipulate another bank's image. But with roughly 18^2 numbers to look at, I am sure you can detect a lot of manipulation attempts. For someone to make one specific bank to look bad, they will have to collaborate with several banks at once and ask them to report poor lending rates for that specific bank.

To handle #2, the obvious way is to take the median instead of the mean. Median is much more resilient to manipulation than mean. All 18 banks will have to collaborate to be able to manipulate the median. Is it possible that all of them want LIBOR rate to move in the same direction? Even if it is, I imagine it will be much harder for all of them to collaborate at once.

Finally, one solution to all these problems is to base LIBOR on the actual rates at which trades are being made as opposed to the estimates of those rates. I guess this one will be hard to implement because if the trades are happening over the counter then the records will not be public. And there is probably no way to force the banks to trade on some sort of exchange without invoking law, which as we have seen, is always open to manipulation.


texts: What conditions characterise "cheap-talk" games

texts:
I've looked all over the internet but couldn't find a simple answer. My claim is that if none of the players utility functions depend on the messages being sent, then the game is a cheap talk. Consider this :

  Suppose that after you graduate you have two options when applying for a position at a firm: You can either use your undergraduate diploma or pursue graduate studies for two years and receive an MA diploma and send it as part of your application. Your skill level is either High or Low. You learn your skill level but the employer does not know your skill level. The employer only knows that your it is High with probability 1/4. After you learn your type you either apply for the job with your undergraduate diploma or get an MA degree and apply with master’s diploma. Thus you have two possible messages. You already have a BA degree, so its cost is zero. The cost of MA degree is 2 if you are High type and 5 if you are Low type. The employer, observing the message you send but not your type, decides what kind of job to offer you. There are two possible jobs: job1 pays 10 and job2 pays 6. The net payoff of the employer is 10 if you are High type and employed at job1, 5 if you are High type and employed at job2, 0 if you are Low type and employed at job1, and 3 if you are Low type and employed at job2. Is this game a cheap talk game?

We can clearly see that for the employee the messages (whether choosing a MA or BA degree) will have an effect on her payoffs. Therefore I conclude that the game is not cheap talk. But I'm not sure since this kind of games are characterised under cheap talk games, what makes a game cheap talk? How I can explain whether the game above is a cheap talk or not


texts: Employment Volatility and the Relevance of Aggregate Wage Rigidity

texts:
The Mortensen-Pissarides (MP) framework of search labor is the thing in analyzing (equilibrium) unemployment over the business cycle. Shimer showed that the lack of hires is the big margin that affects the volatility of labor. Since then people tried to analyze potential wage rigidity for new hires.

Is it safe to conclude that - in this context - wage rigidity of old matches does not matter anymore? Is this somewhat depending on the framework (As in: old wages don't matter for hires in MP because of XYZ, but this is a strong assumption)?

Is wage rigidity, conditional on the match being new, the only relevant metric onwards?


texts: How do I calculate the price and risk of a senior tranche?

texts:
Say I grant two risky X years loans P(default)=0.1 of 1000 USD. For simplicity let us assume that the interest rate is 0.
I want to sell a X years Senior tranche of 1000 USD and a Junior tranche of USD 1000 backed by these two loans.
How do I calculate the price of these tranches?
This exercise seems trivial if the P(default) of the two loans are either completely uncorrelated or perfectly correlated.
But how do I do this if: 0< correlation < 1?


texts: Pure exchange economy: Set of multiple equilibria endowments

texts:
Initial endowments which can result in multiple equilibria in a pure exchange economy are explained here. Given a pure exchange economy, that is given the utility functions (which fulfil the usual properties) and total amounts of each good, what are some properties of the set of 'multiple equilibria endowment points'?
 Is this set connected?
 If yes, is it convex?
 Are there additional properties, does a charaterization (a set of necessary and sufficient properties) exist?


texts:
In Stabilizing an Unstable Economy (1986), Hyman Minsky argues that "bank examination is largely perfunctory... rather than an inquiry into the economic viability and the exposures to risk of banking organization." ( chapter 10, p.240). He then holds that "the existing examination procedures are not a serious substitute for costumer and collegiate surveillance for giant banks with complex asset and liability structures." (ibid.)

Now here are my two questions:

What exactly does he mean by costumer and collegiate surveillance?
Why is that so important for him? I don't think I really get his point here.

Thank you!


texts:
Are there any empirical studies on the question of whether independent central banks cause price stability?

I am seeking to understand if independence (of the central monitory authority) is part of the market function that determines price stability at all, and if there are any studies conducted in this area.

The case I have seen arguing for independence leading to price control from here, in an article titled

  Nobel-Winning Economist Kydland Backs RBI's Anti-Inflation Policy

  In his speech, Mr Kydland observed that independence of the central bank is key to achieving the broader goals of policymaking, and interference by the executive is not desirable.

The case against (probably) from here

  The 1995 Reserve Bank of Zimbabwe Act legislated a greater degree of autonomy
  for the central bank. After 1995 the bank had its own budget and could decide on its own
  finances. The act also established the control of inflation as the unique objective of monetary policy,

  Clearly, increased CBI (Central Bank Independence) did little to restrain Zimbabwe’s subsequent monetary policy.


texts: How do you determine the strict core in a matching game?

texts:
So I have a game in which home owners prefer certain other's homes.  The owners are A, B, C, and D with a, b, c, and d referring to their respective homes.  They each prefer homes according to the ranking

A: bdac
B: cadb
C: dbca
D: acbd

I've read an article by Shapley about an algorithm to find one assignment in the strict core, but I'm asked to "determine the strict core" which I assume means finding all assignments in the strict core.  How does one do that?

In case it's of any use, I'll describe the algorithm in the Shapley article.  Make a graph of people's top preferences and select "top cycles", then delete the people who were in top cycles and do it again.  Repeat the process until everyone has occurred in a top cycle and every cycle represents a permutation of people and houses that will be in the strict core.


texts: A law against selling any house cheaper than it was bought for, what consequences would that have?

texts:
I'm looking for a more general and principled answer and use Scandinavia today only as a sketchy example of the kind of scenario I'm asking about.

I live in Scandinavia where house prices has had an uninterrupted bubble boom during a quarter of a century now. Households are the most indebted in the world. Mostly of course in the form of housing loans. If the housing bubble would burst in Scandinavia as it has done in many other places the recent decade, certainly all banks will immediately be wiped out and millions of Scandinavians will become completely destitute for the rest of their lives with unpayable debts and no property to match it as a deep depression sets in.

Some key figures (for Sweden, not the oil country):

+7% housing prices on average per year since 23 years, with record increases the last couple of years.
0% growth in GDP per capita last 10 years (housing prices doubled anyway).
1.2% (positive) CPI-inflation since 10 years.
0.8% (positive) consumer housing loan now offered in ads without negotiation (after tax deduction) while central bank interest rates are stuck deep into
the negative.

Imagine that the government makes a law that forbids anyone to sell any housing at a lower price than what it was last bought for. Thus per definition the house bubble cannot burst, not legally anyway. And everyone is safe, the crash prevented and everyone will keep making millions simply by borrowing more for risk free "investing" in simply owning ones own house, right?

What would the negative consequences be and how would it play out?


texts:
In a highly controversial paper by Robert Aumann(see here), it is stated as a theorem:

  In PI games, common knowledge of rationality implies backward induction.

If we stick to the strong and controversial definition of rationality in the paper

  Rationality of a player means that he is a habitual payoff maximizer:
  that no matter where he finds himself,
  at which vertex,he will
  not knowingly continue with a strategy that yields him less than he could
  have gotten with a different strategy.

Can we have some other implication, like, If a game admits a unique Nash equilibirum, does common knowledge of rationality implies Nash equilibirum?


texts: In economic modelling, how are we sure the linearized equilibria behave similarly to original equilibria?

texts:
The following problem is in the context of continuous time, although I suspect something could be said about discrete time also.

Let's assume that we have the following equation:

$$\dot x=f(x)$$

where $x(t)\in \mathbb{R}^n$, for $t\in I\subset \mathbb{R}$.

I'm reading a book on Ordinary Differential Equations. In this book, they state that one should verify some conditions on $f$, usually $f\in C^2(E\subset \mathbb{R}^n)$, to be sure that the linearization of $f$ behaves in a qualitatively similar manner (ensures existence of a $C^1$-diffeomorphism).

For example, consider

$$\begin{aligned}
  \dot x &= -x -\frac{y}{\ln \left(\sqrt{x^2+y^2}\right)}\\
  \dot y &= -y -\frac{x}{\ln \left(\sqrt{x^2+y^2}\right)}\end{aligned}$$

with $f(0)=0$. This $f$ is only $C^1$ not $C^2$(transform to polar coordinates$(\theta,r)$, and then see $\frac{d^2 \dot \theta}{dr^2}$ tends to infinity as $r$ goes to zero). The linearization gives a stable node, but according to a more general definition, we have a stable focus for the original non-linear system.

However, whenever I see any kind of linearisation being done (DSGE or Growth Theory), not once do I see any concern related to this... Maybe, there's something, which I'm missing, that makes economic diff. equations already satisfy this. Or am I wrong, and this simply isn't, and shouldn't be a concern to theoretical macroeconomists?

Any help would be appreciated.


texts: If billionaires stopped spending what would the economic effect be?

texts:
For example they always invest every available wealth they have (or they burn money for cooking or dump money into the sea to make artificial islands)?

In some sense that money is not returned to the economic system.

In other words what are the effects besides the money supply decreasing?

I am asking this to satisfy my curiosity.


texts:
So I am doing this project, which includes in calculating the Economic Metrics for a profitability analysis. I have calculated Return on Investment (ROI), Net Present Worth (NPW) and Payback Period (PP). But the problem is that the values for my project are not 'textbook like', if you can call that. I have the following.

ROI = -60 %/yr

PP = -4 years

NPV = -200 Million

I am having trouble in understanding what the above actually mean in terms of investment. The way I have understood is the following:

For ROI, since it is negative, therefore the cost of the investment is way higher than the current value investment. Looking at the formula, it should mean that the we have a 60% loss every year, with regard to the actual value of the investment.

For PP, this I don't fully understand. If the payback period is negative, does it mean that the investment is never reached, but instead 3 years worth of investment is also lost? Or that the investment period should be increased by 3 years in order to get profit?

For NPV, does it mean that the outflow is 200 million higher than the inflow? Is this based on inflation or something else.

I am not fully sure about the 'analysis' of these for an investment and their 'meaning'.

If anyone can help or give a hint, it will be highly appreciated.


texts: Saddles and Rational Expectations. Language barrier preventing me to solve this exercise

texts:
For the system
  \begin{align}
\dot{x} = x + y + 1\\
\dot{y} = 2x - y + 5
\end{align}

  (i) Find the fixed point.

  (ii) Transform the system into deviations from the fixed point. What are the characteristic roots of the transformed system?

  (iii) Derive the equations for the stable and unstable arms.

  (iv) Set the model up on a spreadsheet and plot, on the same graph, the following trajectories:

  (a) The trajectory from initial point (-2,4)

  (b) The unstable arm passing through the point at which $x=2$

  4th exercise page 172 in the "An Introduction to Economic Dynamics book"

Can anyone explain to me how do we solve - (ii) Transform the system into deviations from the fixed point. What are the characteristic roots of this transformed system ?

I simply do not understand the point of the exercise. Anyone care to explain what it wants us to do?

I am a Slovakian student, and the exercises in English are getting me stuck. Any help would be appreciated.


texts: I'm trying to find some data on the level of corruption in Venezuela, since Chavez came to power, and its evolution along time. I've searched the world bank, but they don't seem to have this data on Venezuela...


texts:
I am making an OLS model. Firstly, I want to confirm that checking heteroskedasticity.
How to check the presence of heteroskedasticity?
Is it just plot resid against independent variables, right?

Secondly, If the model does have heteroskedasticity, does it impact this OLS model prediction?


texts: Do I understand the second welfare theorem correctly?

texts:
As far as I understand, the second welfare theorem says that all Pareto-optimal allocations can be reached by market equilibrium on free competitive markets.

Yet it seems that this understanding is not without problems. I will provide you with an example:

There are two sides, Americans and British. Americans prefer airplanes over bombs and British prefer bombs over airplanes. There are no money, only barter between them. Let's suppose that initially Americans have 100 airplanes and 100 bombs, while British can suggest nothing in return because they have neither airplanes nor bombs. This is Pareto-optimal situation, yet it's unclear for me how we can end up here due to market equilibrium.

P.S. Americans receive positive utility from bombs and British receive positive utility from airplanes.


texts: Are savings necessary for economic growth?

texts:
So, I've had this confusion for a long time. We all know how spending is absolutely vital for economic growth. However, at the same time, are savings necessary too?

My initial opinion was "no". In a very particular argument, someone argued with me that "since the money that goes into the companies as investment is nothing but the savings money,savings are important too"

I feel that if companies are getting all they want from direct profits (consumer spending), say with 100% consumer spending, they wouldn't need investments.

Would I be right in my argument? Or am I wrong?


texts:
Is there any comprehensive survey on potential games and their usage in game theory?

Potential games seminal paper is by Monderer and Shapley.

I could find this chapter of a book online, but I am not sure from which book it is coming from.


texts:
I am looking for good econometrics books for self-study.
I am strongly interested in macroeconomics and monetary economics/policy, so that I try to build up knowledge in econometrics especially for these fields.
At first I am looking for a basic introductory book but also for a book, which covers time series methods, VAR and so on (so macroeconometrical topics in general, I guess).
Applications are more interesting for me than pure theory, so the book(s) shouldn't be too theoretical.

Some more information about me: I study mathematical economics on graduate level and I bring prior knowledge in (measure theory based) probability theory.

Maybe one of you guys could help me :)
Thanks in advance!


texts: How does the IS/LM model respond to organic GDP growth when the money supply is held constant?

texts: If GDP increases (due to tech change/good investment), interest rates would move up along the LM curve and down along the IS curve, so what happens to the equilibrium? Do we assume GDP cannot grow without money supply growth, because an increase in interest rates along the LM curve would kill investment, bringing GDP back to equilibrium?


texts:
In this blog post, economist Bob Murphy raises a puzzle involving the principle that in a competitive market, the price equals the marginal cost:

  There’s a general principle from intro to microeconomics that says in
  a competitive industry, in equilibrium P=MC. So how would we actually
  apply that in practice to the fast food industry? At the point at
  which the burgers are already made and sitting on the back warmer,
  what’s the marginal cost to the firm of the worker picking up the
  burger and handing it to a customer? 5 cents? So, in an efficient fast
  food industry, burgers should be priced at 5 cents. Don’t you dare say
  that the firm needs to charge at least enough to cover average costs,
  because (as David points out) that involves a sunk cost fallacy…
  Something is obviously not right in the above. But I’m curious to see
  how you guys would unpack it. If you want to say, “I don’t trust them
  there textbooks with their funny graphs!” OK fine, but ideally I’d
  like you to solve it within the world of standard textbook micro,
  since presumably that can be done.

What he's saying is that once the burger is already made, the cost of making the burger is a sunk cost, and thus the marginal cost of the burger is just the cost of the tiny labor involved in picking it up and selling it to the customer.

So why is it that in the fast food industry, the price of a burger takes into account the cost of making the burger and not just the cost of handing it over to the customer?  Is it because the fast food industry is far away from the conditions of perfect competition, or can this be explained using a perfect competition model?


texts: Help finding the right term - Behavioural Finance / Pricing jargon

texts:
There is a phenomenon used in Economics(?)/Marketing/Pricing/Psychology when selecting the right price for your product. Within a certain price range, the customer is insensitive to changes in the price, considering the price or changes in it as too low and insignificant.
Also within the same (acceptably low) range, the customer makes an easy purchasing decision since the price is too low to affect one's budget - I'd call it a "spare change" item here.
For example, in NZ for the top 10% of the market, products below NZ$10 are automatically considered to be "spare change" facilitating customer's trying a new product within that price range. As a seller it will be rational to price your product up to 9.99 than to settle on anything lower than that number.
What's the name of this phenomenon/term describing this sweet-spot price range?


texts: How do I distinguish price-taking in perfect competition from monopsony?

texts:
I'm working on a practice problem where I'm giving the following:

Suppose a firm is a price-taker and can sell the good it produces at price $p$.

There is more to the problem, but it is not relevant for my question.

I am not given any more information about the market other than the firm is a price-taker. So it is therefore not a price-setter meaning the market is setting the price.

I can imagine two scenarios under which a firm would not be a price-setter.

(1) if there were perfect competition between sellers, the firm could not set a price.

(2) Also, if there were only one buyer, the firm would not be able to set a price either since the buyer could refuse to buy until the price went low enough.

My Question:

Is there something that distinguishes price-taking due to competition between sellers from price-taking due to monopsony? How do I tell which one it is?


texts: How to maximize revenue by changing price?

texts:
I run a SaaS and I have the following data from it:
Number of trials (A), number of subscribers (B), subscribe cost (C) and total revenue (D) for every type of service my SaaS provide.
If I increase (C) it can reduce (B) and in result I can get less (D).
So, is there a way to find balanced (C) to maximize (D)?
Also I think there is some dependency between (A) and (B) that shows subscribers solvency.


texts: Crude oil benchmarks and production places

texts:
I discovered recently that there are 3 main price indicators for crude oil (used by the IMF): WTI, Dubaï, and UK Brent. If I understand correctly, each place trades some specific kind of oil (with more or less sulfur among other), which is related to the production place.

Is there some stylized facts, or a precise matrix available, which relate the production place and the price index?

My first guess was OPEC production $\Rightarrow$ Dubai and US production $\Rightarrow$ WTI but I'm not sure regarding the UK Brent...


texts: Why does short run market supply become more elastic with more firms

texts:
I have heard a justification along the lines of this: The supply curve becomes flatter (more elastic) with more firms in the market, because a given increase in price calls forth more production when there are many firms rather than one. This however does not make sense to me as elasticity only cares about proportional change. Mathematically is there are $N$ firms with supply functions $q(p)$ and a market supply of $Q(p) = Nq(p)$ then
$$ \frac{p}{Q}\frac{\mathrm dQ}{\mathrm dp}=\frac{p}{Nq}\frac{\mathrm dNq}{\mathrm dp}=\frac{p}{q}\frac{\mathrm dq}{\mathrm dp}$$


texts: Why'd the lender suffer the collateral haircut, not the borrower?

texts:
In the quote below, why'd Steve offer $10.5, when your Air Jordans are worth \$11? Why wouldn't Steve (the lender) assign the collateral haircut to you, and require you to pay him \$11 + risk premium?

Apologies for the lengthy quote : please advise how I can shorten it.

ELI5: Repos, reverse repos, bonds & how they correlate. : investing

  It's lunch time and you're sitting in the cafeteria wearing your special edition purple and gold Air Jordans when you realize that you forgot your wallet at home. You need your wallet so that you can buy food. Or maybe you need your wallet so you can repay Jimmy for the sandwich he bought you last week.

  You got to your friend Steve who comes from a rich family and is always carrying extra cash around. You want to see if Steve will lend you some money if you promise to pay him back tomorrow. Steve is no dummy--he knows if you forgot your wallet today you might forget it tomorrow. So he offers to give you \$10 for lunch if you pay him back \$11 tomorrow. The extra \$1 is interest you pay Steve for trusting that you will pay him back.

  \$1 seems like a lot of money for one day to you. But you do need to eat so you don't have a lot of options. You don't have your wallet. But you do have your Air Jordans. Let's say your Air Jordan's are worth exactly \$11.

  You offer to let Steve hang on to your Air Jordans as a guarantee that you will pay him back tomorrow. If you don't pay him back--he gets to keep your shoes. The Air Jordans are what is called collateral. Steve agrees to this because he knows if you don't pay him back, someone else will buy the Air Jordans from him immediately for a market price of \$11.

  $\color{red}{\text{Steve offers you a new deal.}}$ In exchange for holding on to your Air Jordans, he will give you (immediately) a \$10 bill with the obligation that you will buy back the Air Jordans from him tomorrow for \$10.50.

  Two things have happened here. Firstly, Steve is giving you \$10 to hold on to an \$11 pair of shoes. How can he get away with this? Well--Steve is assuming the risk that Nike announces overnight that the Air Jordans are undergoing a recall and the value goes to \$0. Exchanging shoes as collateral for a loan at less than the market value is called a collateral haircut. The haircut is meant to account for the risk that the collateral asset might lose considerable valuable before the end of the loan. In this case the haircut was 1/11 = 9.1%.

  Next, you are still paying \$10.5 back to Steve tomorrow. This new rate of interest (\$.5/\$10 = 5%) is called the repo rate. This is 50% smaller than the loan Steve offered without a collateral backing (\$1/\$10 = 10%). Steve is still charging a "premium" for the possibility that you don't pay him back tomorrow (a default) and the opportunity cost he is experiencing by not investing his \$10 in something else.

  This entire transaction (exchanging the Air Jordans for \$10 and repaying \$10.50 the next day and receiving back the Air Jordans) is called an overnight Repo transaction. Overnight is indicative of the term of the repo. A term repo could be an agreement over a longer period of time.

  In this case, Steve has performed a reverse Repo. Typically dealers and other large financial institutions use repos to generate liquidity--getting cash (\$\$) in exchange for an asset (Air Jordans)-- or to achieve leverage by using their current assets to secure a loan that is used to buy another asset-- using the cash from the Air Jordans repo to buy a second pair of Air Jordans--.


texts: Difference between chained CPI and normal CPI in simple terms

texts:
I am taking a community college level intro to macro course, and while self-studying the text, I came across the concept of C-CPI or chained CPI. While I feel I have a grasp as to what CPI is, I have found explanations of chained CPI confusing.

Can anyone ELI5 (explain like I'm 5)?


texts: Informed traders do know the cross section of the privately known signal between each other

texts:
I am having the following setup of privately known signals and I am trying to understand an assumption. Here, I quote the setup.
Consider two agents idexed by $i=\{1,2\}$ and each one observes some privately noisy signal, that is
\begin{align}s_i=\tilde{v}+\tilde{u_{i}}\end{align}
where $(\tilde{v},\tilde{u_{i}})$ are identically distributed, with $\tilde{v}\sim N(v,\sigma_{v}^2)$ stand for the payoff of the risky asset and $\tilde{u_{i}}\sim N(0,\sigma_{u_{i}}^2)$ denotes the error term of each of the privately known signals. Also, it holds that $\sigma_{(u_1,u_2)}\neq 0$ and $\sigma_{(v,u_1)}=0=\sigma_{(v,u_2)}$.
The assumption that I am trying to understand following the aforementioned setup is the following:
``Every informed agent does know the cross sectional distribution of the privately knonw noisy signal that the other agent observes." Also in the market, there are uninformed traders etc. Does this mean, that in fact they know exactly the signal that each other observes or do I catch it wrong?


texts:
Can the cost of any good be determined based on its ratio to a minimum wage?

For instance, if 10 years ago, eggs cost \$2 / dozen and the minimum wage is \$10 / hr (eggs cost 20% of the minimum wage) and at present, due to inflation, eggs cost \$2.50 / dozen and the minimum wage is \$15 / hr (eggs now cost 16% of the minimum wage).

Could it be said that the cost of eggs have decreased despite a rise in prices due to inflation?


texts:
Apparently, Mundell and Tobin used different methods to explain the Mundell-Tobin effect (which means that in general higher inflation increases the nominal interest rate, but decreases the real interest rate so Fisher's statement about the one-for-one adjustment of the nominal interest rate to the increase in inflation is slightly wrong) and I have two questions regarding their arguments:

According to Mundell, higher inflation reduces demand for money and increases demand for Bonds, decreasing the required return on bonds and decreasing the real interest rate.

Question here: Aren't required return on bonds "nominal"? So I assume here that the decrease in the required return for bonds means a decrease in the "nominal" interest rate. But isn't the Mundell-Tobin effect supposed to result in 'higher' nominal interest rates? This looks likes a contradiction to me but obviously I'm pretty sure I'm misunderstanding something here so I wish to know what I'm missing.

According to Tobin, higher inflation reduces demand for money and increases demand for real capital, decreasing the marginal productivity of capital and decreasing the real interest rate.

Question here: I believe that an increase in the demand for real capital means the same thing as the increase in the demand for loanable funds to acquire capital as investment(in the loanable funds market). In this case the rightward shift of the demand curve for lonable funds actually increases the real interest rate in the loanable funds market, which directly contradicts Tobin's statement (since it is the real interest rate that is associated with the loanable funds market, not the nominal interest rate). So how should I understand this contradiction?


texts:
I'm currently writing my thesis in which I compare a series of ESG General Equilibrium models. I fell over this proof in Pastor, Stambaugh, Taylor Sustainable Investing in Equilibrium (2019) page 42. Here, they prove going from a given utility function to the models portfolio weights. These are the calculations of which I simply don't understand how they start on the second line and arrive at the third:
\begin{align}
\mathbb{E}( V(\tilde{W}_{1i},X_i)) &=\mathbb{E}(-e^{-A_i(W_{0i}(1+r_f+X'_i \tilde{r})-b'_iX_i)}
\\&= -e^{a_i(1+r_f)} \mathbb{E}( e^{-a_i X_i'(\tilde{r}+\frac{1}{a_i} b_i)})\\
&= -e^{a_i(1+r_f)} ( e^{-a_i X_i'(\mathbb{E}(\tilde{r})+\frac{1}{a_i} b_i)+\frac{1}{2}a^2_i X'_i\Sigma X_i})
\end{align}
We've previously defined $\tilde{r}\sim(\mu,\Sigma) $.
I've been staring at this for hours. I hope somebody can help me out with a hint on what is happening between these two steps.


texts: What are the arguments against the rational expectations hypothesis?

texts:
I believe the rational expectations hypothesis says that agents in a model bear expectations that are the same as mathematical expectations.

Under what circumstances does this hypothesis become questionable? What are the usual arguments against this hypothesis?


texts: On the relationship between income distribution and GDP

texts:
I was thinking about the following simple example when I wondered what the theoretical effects wealth equality or inequality may have on GDP:

Suppose there is a society with three individuals who have enough money to cater for all their needs, and there is an additional 600 units of disposable income left over.

Let us assume that $S_i$ is the disposable income allocated to person $i$ and let us first assume person $i$ will then spend an amount proportional to $\sqrt{S_i}$ (This assumption is incorrect, but I'm just using it as an example of a non-linear income to expenditure relationship example, which I will compare below with a linear assumption), that is, disposable expenditure would be given by $k\sqrt{S_i}$ for some constant k.

Now if all the excess income was allocated equally among the three members, the total excess expenditure is $k(\sqrt{200} + \sqrt{200} + \sqrt{200}) = 42.43k$.

However if all of the excess income is allocated to a single individual, the total excess expenditure is $k\sqrt{600} = 24.49k$

Thus given the assumption that expenditure is proportional to the square root of disposable income, a lower GDP should be observed in economies with increased inequality of disposable income.

However if expenditure is proportional to the square of disposable income, then it can easily be shown with a similar argument that wealth distribution will increase the GDP in this simple model.

According to modern economics principles, in simple terms how does distribution of disposable income affect GDP?

Note:  I'm not interested in the politics behind equality, such as riots and revolutions etc that might result from severe inequality, but merely the financial/economic principles.


texts:
Consumer 1 has utility $u_1=min\{x_1,y_1\}$, Consumer 2 has utility $u_1=min\{x_1,2y_1\}$, their endowments are $w_1=(a,0)$ and $w_1=(b,0)$ and in this case $a=b$.
I know the offer curves look like this
But there's no clear explanation. To find the offer curves I know that we must find UMP and then consider 3 cases when $P_x/P_y>0$, $P_x/P_y<0$ and $P_x/P_y-=0$ to draw them. But sadly I'm not finding enough material in regards to this and every case confuses me. Could someone give an explanation what are the steps we take to derive this?


texts: Can Autonomous Consumption be Greater than Income of individual?

texts:
Autonomous consumption is done either through past savings or by borrowing money or selling asset to have minimum consumption in order to survive.

So can autonomous consumption be greater than our 1st level of consumption ?


texts: Optimal price function: application of calculus of variations

texts:
The problem, I am trying to solve is based on the paper by Rochet and Vila 1994 (see literature below). In fact, it is a variant of the seminal paper of Kyle 1985 in the finance/economics literature. Despite the problem being framed in the finance literature, the mathematical problem associated with it is far more general and is based on calculus of variations. Let me briefly introduce the problem:

Let $V \sim N(0, \sigma^2_V)$ denote the random asset value, $U\sim N(0, \sigma^2_U)$ the random liquidity trader's demand, $X$ the order by the strategic trader, and $Y=X+U$ the total order flow
The strategic trader observes the realization of the asset value $V=v$, the exogenous liquidity trades $U=u$, and submits an order $x(u,v)$ that maximizes his trading profits: $\pi(x,u,v)=x(v-P(y))$
The market maker observes total order flow $Y=y$ and sets the trading price equal to the conditional expected value of the asset, i.e. $P(y)=E[V|y]$.
A market equilibrium is characterized by a trading strategy $x(u,v)$ and a pricing rule $P(y)$ such that: i) Given the pricing rule, for every $(u,v)$, the trading strategy $x(u,v)$ maximizes the informed trader's profit $\pi$ and ii) given the trading strategy, the pricing rule $P(y)$ sets the price equal to the expected value of $V$ conditional on $Y=y$.

Now the authors show that this problem is equivalent to the following optimization problem $\min_{P(\cdot)} E [ \max_x (v-P(x+u))x]$, that is, the problem can be solved by the calculus of variations. They state the answer to be $P(y)=\frac{\sigma_V}{\sigma_U}y$ which is true, once we "guess and verify" the solution. However, I want to find the solution from scratch, that is, without "guess and verify".

My problems arise as the function over which the functional of $P$ is defined is itself an optimal value. We know that the insider maximizes $x(v-P(x+u))$ or equivalently $(y-u)(v-P(y))$. From the first-order condition, we can calculate the optimal demand $y(u,v)^*= \frac{v-P(y^*)}{P'(y^*)} +u$ which results in an optimal profit of $\pi(y^*,u,v)=\frac{(v-P(y^*))^2}{P'(y^*)}$.

Therefore, the market maker's optimization problem can be rewritten as $$\min_{P(\cdot)} E [ \max_x (v-P(x+u))x]= \int_{ \infty}^{\infty} \int_{-\infty}^{\infty} \pi(y^*,u,v) f_V(v) f_U(u) du dv = \int_{ \infty}^{\infty} \int_{-\infty}^{\infty} \frac{(v-P(y^*))^2}{P'(y^*)} f_V(v) f_U(u) du dv  $$ with $f_V$ and $f_U$ being the density functions of $V$ and $U$ respectively.

From the fact that $\pi^*$ is the maximum of the informed trader's objective function, we can use the envelope theorem to simplify: i) $\frac{d \pi(y^*)}{d u}=\frac{\partial \pi(y,u,v)}{\partial u}|_{y=y^*}=-(v-P(y^*))$ and  ii) $\frac{d \pi(y^*)}{d v}=(y^*-u)$.

This is where I am stuck. My problem is the fact that the argument $y^*(u,v)$ of the function we are searching for $P(\cdot)$ is itself the solution of a maximization problem. Especially, I do not know how to calculate the integral with respect to $v$ and $u$.

Any comments are highly appreciated. Thank you!

Literature:

Rochet and Vila 1994, "Insider Trading wihtout Normality", The Review of Economic Studites, Vol. 61, No. 1, pp. 131-152
Kyle 1985, "Continuous Auctions and Insider Trading", Econometrica, Vol. 52, No. 6, pp 1315-1335


texts:
The Sirius Report tweets:

  Surprises me how anyone imagines that #Russia only has 1800+ tons. Just look at the fact that they never export #gold production and what they have annually produce for years. That is just for starters,

Soviet Union aside, from wiki, we see that gold production in Russia (graph) seems to have stayed above 100 metric tons a year (minimum of 100 x 20 years would be 2000).  I can't find any support for "Russia doesn't allow gold exports" or that they've ever done this, though it's possible they did this during the Soviet Era.  I can find Russian gold coins (latest year) on GovMint, so it seems like they are allowing non-Russians to buy gold, or is this gold from other countries?

Is there any evidence that Russia does not allow gold exports and circumstances which may warrant exceptions?


texts: Why do we have autarky price of mud pies equal to 0.5 of cheese, while it must be zero?

texts:
(It's assumed that we work with the Ricardian model)
Absurdtopia is an autarky. Production of 1 mud pie requires 1 labor, while production of 1 cheese requires 2 labor. We know that price of 1 mud pie in terms of cheese under these conditions will equal to (labor needed to produce 1 mud pie)/(labor needed to produce 1 cheese)=1/2=0.5 cheese. Or in other word, 1 mud pie has price equal to the opportunity cost of its production, in this case 0.5 of wine. It's also called "Autarky price"

But there is one strange thing about this price. It completely ignores demand and utility of customers. Consequently, it is possible to imagine such result when this price will false. In our case it's obvious, nobody in their right mind would agree to give 0.5 of their hard-earned cheese for absolutely useless mud pie. Thus price of 1 mud pie in terms of cheese isn't 0.5, it's strict zero. It seems like our formula miserably failed to take into account utility function and demand of consumers, that it's inadequate.


texts:
Where can I find some details about quote driven markets? Can anybody show any notes or provide some paradigm about what the trader sees when he is about to trade in such a market? They say that he/she can see only quotes from the market maker(s). What are the real world makrets that we refer to them as quote (driven) driven markets?
Another question is, if the quote driven markets are theorized as centralized or decentralized markets, althout I thini they are theorized as centralized markets. Because tehre is a central dealer and all the transactions are made trhough them.


texts: What are some critiques to the principle of comparative advantage?

texts:
The principle of comparative advantage says that, in a free market, any agent should produce more of the goods for which they have a comparative advantage. The model is usually applied to advocate for the benefits of international trade. This answer to another question has a great explanation of the theory. In the same answer, some commenters criticized the application of the principle to international trade as misleading.

I got curious about that critiques, so decided to ask a new question: what are some critiques of that model?


texts: What oil price will minimise new resource extraction?

texts:
A higher oil price would increase incentives to develop new oil resource extraction, but it also increases the competitiveness of sustainable energy sources.

Conversely, a low oil price might mean less development of new resource extraction, putting projects such as hydraulic fracturing or offshore Arctic drilling on hold.

What I wonder is: what oil price will lead to the lowest level of new resource extraction?  Or, in other words: suppose that I strongly oppose the development of new resource extraction with potentially very high environmental costs (such as hydraulic fracturing or Arctic offshore drilling), should I be glad when oil prices or low... or when they are high?


texts: Does the contractionary monetary effect of tax conpensate for its deadweight loss?

texts:
We all know that if the government impose a tax on a product, then tax revenue is less than loss in consumer and producer surplus. This is known as deadweight loss.

We also know that taxing is a contractionary fiscal policy. Imposing a tax reduces inflation. So the real value of the social welfare is actually increased in this way.

As a result, some of the deadweight loss is conpensated by reduction in inflation.

Is this line of reasoning valid? If it is true, then does the reduction in inflation completely conpensate the loss or only partially conpensate it? If this is not true, what's wrong?


texts:
I am trying to explain why the size of producer price changes for Germany is significantly smaller than for the USA. For this purpose I wanted to look into the calculation method for both Producer Price Indices (PPI) and see if they weights for the industries differ. Different weights cold influence the size, i.e. if an industry with large changes is weighted stronger in the US PPI.
However, I have problems finding the the weights for the US PPI, as the bureau of labor statistics doesn't officially publish them. therefore I have two questions:

Does anyone know / have a source for the US PPI weights by NAICS industry classes?
What alternative explanations exist for the differences in PPI change sizes?


texts: Using the Federal Reserve's Implicit Price Deflator to Convert to 2020 Dollars

texts:
I have a list of government expenditures from 2011 to 2018 as shown below:
2011    2012    2013... 2018
$30m    $35m    $42m    $120m

How can I use the Federal Reserve's Implicit Price Deflator, to convert these figures into 2020 dollars? I'm not sure how to do this despite having read a lot online.
The index year for this table is 2012 equals 100 USD. I understand that this chart shows that 100 USD in 2012 is now worth approximately 112 USD, but I'm not sure how to use it if my index year changes etc.
The use case is I'm updating a report on short-run and long-run marginal costs associated with various activities and want to put them into 2020 dollars so that they are comparable.


texts: Does it make sense to apply complex mathematics in economics given that the result can be off by substantial percentage points?

texts: Complex mathematics make sense if the results can be calculated with precision. This applies for the physical sciences like physics and engineering. Economics is more of a social science subject. Does complex mathematics make sense in this context?


texts: Back when Hugo Chavez was still alive (former leader of Venezuela), he said they made "simulations" to predict how much oil prices will increase if they retire the supply of oil they were giving to the world, and that in that time that would cause trouble to US. That made me wonder how oil price could be predicted, since I had classes of computer simulation of different type of systems in the University and I can't even imagine how could it be done to predict oil prices. If I recall correctly, I was also told by a neuronal network professor that a researcher worked in predicting oil prices for years with neuronal networks, and the work became useless when a war triggered oil prices in a completely unexpected way. Knowing how hard making accurate predictions of oil prices could be, is there still an oversimplificated equation or something to predict oil prices in the market?


texts: Can a country's default on internal debt affect the rates of the external debt?

texts:
If a country is ready to default on internal debt and ready to confiscate their citizen's money to pay external liabilities, does that affect the yields of the external debt?

If yes, does that make it higher or lower?


texts: Is there a name for this generalization of the stable marriage problem?

texts:
I'm thinking of the following problem: There's a set $M$ of men and a set $W$ of women; furthermore there's a set $S$ of "possible marriages". Each possible marriage is a triple $(m, w, x)$, consisting of a man $m \in M$, a woman $w \in W$ and some arbitrary piece of extra information $x$.

For a man $m$, let $S_m = \{(m', w', x) \in S \mid m = m'\}$ be the set of possible marriages involving him, and for any woman $w$, let $S_w = \{(m', w', x) \in S \mid w = w'\}$ be the set of possible marriages involving her.

Instead of ranking the women he would marry, a man $m$ ranks the possible marriages: There is a total ordering $\leq_m$ defined on $S_m$. Similarly, for any woman $w$, there is a total ordering $\leq_w$ defined on $S_w$.

The problem is to find a stable matching. A stable matching is now a subset $X \subseteq S$ such that

 every person is matched at most once, that is, for each man $m$, the intersection $X \cap S_m$ has at most one element, and for each woman $w$, the intersection $X \cap S_w$ has at most one element, and
 $X$ is stable in the sense that for each possible marriage $s \in S$ between a man $m$ and a woman $w$, either

 $m$ is in a marriage that is at least as good for him as $s$, that is, there is some $s' \in X \cap S_m$ such that $s' \geq_m s$, or
 $w$ is in a marriage that is at least as good for her as $s$, that is, there is some $s' \in X \cap S_w$ such that $s' \geq_w s$.

The classical stable marriage problem is equivalent to the restricted version of this problem where for each possibe marriage $(m, w, x) \in S$, the "extra information" $x$ is required to be some fixed dummy value.

Has anybody studied this generalization and given it some name? If not, is there some naming convention for "this kind of generalization"?


texts: Why do higher real interest rates increase land value?

texts:
I'm using this equation to calculate market value of land based on the levied land value tax:

y = market land value
x = land value tax
r = real interest rate
a = real time-independent land value
i = tax revenue

$$y + (y*x)/r = a$$
$$y = (r*a)/(r+x)$$

But something can't be right here because if I lower the real interest rate (to imply an expensive future), then the market value of land should go up since the future rent of the land becomes more important in the market's mind. Instead, the market value of land goes down! I guess this is because future taxes are taken into account as well and out-weigh any future rent. When rates go up, are the higher taxes, resultant from higher land values, also dismissed easier and thus making higher land values more tolerable so land owners don't care about the future tax cost as much?

Another question is calculating the optimal tax rate to maximize tax revenues:

$$yx = x(r*a)/(r+x)$$

It seems that charging a tax higher than 100% will actually result in higher tax revenue. Is that because the real interest rate (~1%) has an effect on the future tax revenue so it's better to collect taxes as quick as possible or the tax base will not tolerate higher taxes from higher land values? Also, it seems interest that a 1% land value tax only collects half the tax revenue that it potentially could.

A final question, is how would I calculate exclusivity value? A 1% land value tax should add value intrinsically due to its dampening effects on future risk; ie, it's easier to maintain ownership over land if only a small amount of future value appreciation had to be paid for, than if the entirety of future value appreciation had to be paid for. Ex: paying 10k a year knowing it will never go up, vs paying 9k a year knowing it will go up.


texts: Increase in per capita GDP always means GDP is growing?

texts:
This question was asked in very popular civil services examination.

  Question is : Whether the following statement is correct or not?
  Statement : If a country is experiencing increase in its per-capita
  GDP, its GDP must necessarily be growing?

The approach I applied is that, in a country like Syria, if mass emigration happens then population will decrease and at the same time GDP might not decrease with same rate. so this statement will be false.

I know my assumption is not too correct, so ignoring that, please help me arrive in correct answer.


texts: What is the assumption behind "indifference curve does not cross"?

texts:
If only weak-ordering and continuity is assumed, "ICs" can definitely intersect.

If we assume Monotonicity or convexity in addition to weak-ordering, then we can get "no cross of IC".

But those two assumptions are argueably too strong. In some real world scenarios they are violated.

Are there any weaker assumptions for the "IC cannot cross"?


texts:
I want to apply grangers' Test between GSDP and Electricity production in the state. The state is a newly formed in the year 2000 and hence I have only 13 data points, as mentioned below

Year     |   GSDP

2000-01  |   29539

01 to 02 |  32493

02 to 03 |  38802

03 to 04 |  47862

04 to 05 |  53381

05 to 06 |  66875

06 to 07 |  80255

07 to 08 |  96972

08 to 09 |  99364

09 to 10 |  119420

10 to 11 |  144382

11 to 12 |  163461

12 to 13 |  185060

The test yields that it is not a stationary process. Kpss test yields that it is not a trend stationary process. Hence a the second popular choice comes to be difference stationary process. (Transformation of data yields the same result).

The question is how to convert this process to stationary process ?. Is it advisable to apply Grangers' Test using this limited number of data points?. If not what other methodology I can adopt for the same.


texts: Are there western governments that don't have to borrow in their own currency?

texts:
Are there any western and/or democratic countries where the central bank buys all government debt, interest free, directly from the treasury?  I.e. are there any such countries where government spending is effectively financed by money printing without the intermediary of a private market for government bonds?  I don't now for sure, but I suspect this is what happens in autocratic states like China and I wondered if such a regime exists elsewhere.
Edit:  @H2ONaCl is correct that I mean to ask about a case where the central bank holds the interest free debt in perpetuity. Alternatively, and in effect identically, the government just prints money when it wants to spend more than it has.


texts: Is the relationship between cost and value typically logarithmic?

texts:
Consider the comparison of two new cars. One costs \$250k and the other \$25k. One would naturally expect the quality (value) of the \$250k car to be greater than the \$25k car but does economics have a method to compute the likely increase in perceived value?

I would think it would be two ... a logarithmic relationship between \$250k and \$25k ... and not ten ... a linear relationship.

In casual observation this would seem to hold true for most other commodities ... car, guitar, home, etc. Are there products which actually could be 10 times, or greater value for double the cost?

Is there an economic law that states there is typically a logarithmic relationship between price and value?


texts:
What are the difference and relation between the concepts of business process and business strategy?

For example, the process of strategy planning consists of the following steps:

formulate missions and goals
conduct external analysis to identify opportunities and threats in external competitive environment
conduct internal analysis to identify strengths and weaknesses in internal operating environment
formulate strategies, according to the missions and goals, opportunities and threats and strengths and weaknesses.
implement formulated strategies
monitor and control the execution of implemented strategies

Is business process involved in some step(s) of the strategic planning process?

Thanks.


texts: Best response correspondences game theory

texts:
I'm studying game theory and there is a slide where I don't quite understand how exactly each value was deduced particularly:

For $BR_L(q)$ and $BR_c(q)$. I understand why they are functions of $q$ and $p$, since the best response of one player is dependent on what strategy the other player will choose, but i'm not sure exactly why they take values of $1$ and $[0,1]$ and $0$ for the specific values of $q$ and $p$. If someone could explain the derivation of these, that would help a lot!


texts: Are there any major commodity markets with a public order book?

texts:
Most major exchanges seem to have secret order books.

For example, on the NYSE only the specialists know the order books.

On the NASDAQ only the market maker can see the order book.

On Globex, the full order book (Level 6) is kept secret.

Are there any major exchanges with a public order book?

Example of a public order book:

https://www.bitstamp.net/market/order_book/


texts: Money Market, LM curve, starting with a change in Interest Rate

texts:
Consider

$$r=r^*+\theta$$

where $r$ is the domestic interest rate, $r^*$ is world interest rate, and $\theta$ is a risk premium and/or expectation rate adjustment.

The economy is small and open, which means there is perfect foreign capital inflow/outflow, and $r$ has no effect on $r^*$.

Shock: there is an expectation of appreciation of the domestic currency in the world markets; nominal exchange rate is expected to rise.

Question: describe the short-run effects on this economy's Money Market and LM curves (short-run means $P$ level is constant and $\left(\dfrac{\bar M}{\bar P}\right)^s$ is constant)

My answer:

$\theta$ decreases, so $r$ decreases

In the Keyensian Cross, lower $r$ leads to increased $I(r)$, so $PE$ shifts upward.

In the IS-LM, this corresponds to a rightward shift in IS curve

Here is the part where I start getting very confused....

Money Market: a decrease in $r$ means that the $OC$ of holding money goes down, so it seems to me there should be an increased demand for money, or liquidity preference, at all levels of income.

Does this mean that $L(r,\bar Y)$ shifts to the right?  This seems like the correct intuition, yet if $L$ shifts rightward with $\left(\dfrac{\bar M}{\bar P}\right)^s$ constant, the equilibrium interest rate is higher, not lower.

How would the money market adjust in this scenario, and what would the corresponding change of the LM curve look like in the IS-LM?


texts:
I have a doubt on how to log linearize an expression for the real exchange rate. I have read in several papers that they express it using substitutions. I haven't been able to find out what substitutions they use, so that is why I come here to ask for help.

For example, suppose that the law of one price holds such that:

\begin{gather}
P_{H,t}=S_tP^*_{H,t} \quad \quad \text{and} \quad \quad P^*_{F,t}=\frac{P_{F,t}}{S_t}
\end{gather}

Let $Q_t=\frac{S_tP^*_t}{P_t}$ be the real exchange rate and $T_t=\frac{S_tP^*_{F,t}}{P_{H,t}}$. Moreover, let the CPI be

\begin{gather}
P_t=[aP^{1-\theta}_{H,t}+(1-a)P^{1-\theta}P_{F,t}]^{\frac{1}{1-\theta}}
\end{gather}

I know that the log-linear version of $Q_t$ is given by

$$\hat{Q_t}=(2a-1)\hat{T}_t$$

Can someone please tell me how to obtain this latter expression?

Thank you very much.


texts: Can an overall improvement in technology make the owners of one factor worse off?

texts:
In a closed two-factor economy, suppose there is a biased technological improvement that increases the productivity of both factors, but one more than the other. Can this reduce the aggregate returns (and not just the share of returns) to one factor? If so, how is that consistent with the usual rules of factor pricing? Doesn't (or can't) the marginal productivity of both factors rise with their respective total productivity?

Finally, if biased technology improvement can result either in increased payments to both factors (in real terms) or in increase to one and decrease to the other, how might one characterize quantitatively the conditions for (partially) immiserizing technological growth?


texts: Capital Asset Pricing Modeling for Consumption

texts:
Suppose Asset $A$ has a variance of 7 and its returns are negatively correlated with consumption, while Asset $B$ has a variance of 3 and its returns are uncorrelated with consumption.

According to the Consumption CAPM, which asset should yield the higher return?

I believe it is Asset $A$ because CAPM asserts that you should choose an asset that is negatively correlated with consumption.

What do you guys think about my answer?


texts:
Recently we saw that the EU and Iran devised an instrument called INSTEX to avoid dealing in U.S. dollars and, hence, avoid U.S. sanctions. Similar thing is being planned between India and Russia (regarding the S-400 deal) to avoid U.S. sanctions under CAATSA.
I don't understand how changing the currency under the deal circumvents the problem. Isn't the whole problem the deal itself rather than the currency? The U.S. can still impose sanctions if it gets to know that a deal has happened. Then, how does this INSTEX work?
Sorry if I posted it on the wrong platform. I don't know where to go for such international, political and economics' questions.


texts: Are social goods and public goods the same thing?

texts: I am confused as to they are the same or different?


texts: If the price of oil and energy goes down, why does CPI go up?

texts:
Today, StatsCan revealed that Canada's CPI rose by 1.3%. They are attributing it to lower energy prices, led by the fall in the gasoline index (down 12.6% since one year ago).

From my understanding, an increase in Canada's CPI means Canadian goods/services cost more CAD to purchase.

But if energy has become cheaper, why are things overall becoming more expensive to purchase?


texts:
I wondered if someone could potentially explain the Inada conditions in plain English, and the implications.
$$lim_{c_t\searrow0}\frac{\partial U}{\partial Ct}= +\infty$$
$$lim_{c_t\nearrow+\infty}\frac{\partial U}{\partial Ct} = 0, \forall_t$$
$$\Longrightarrow C_t^*\in (0,+\infty),\forall_t$$
I've stated the conditions using:https://faculty.babson.edu/lcdstein/210/sectionall.pdf


texts:
If house prices are a function of location, physical characteristics and an error term i.e.

house_price = f (location, physical, e)

And I estimate a regression with the log of house price as my dependent variable, and a range of location characteristics (e.g. distance to CBD/coast/roads etc) and physical characteristics (e.g. no. bedrooms/bathrooms/garage etc) as regressors.

Can I call this my house price model? or is it a reduced-form estimation?

I think I can call it my model, because I am modelling how house prices are explained, but I am unsure.


texts: Do changes in the interest rates affect the supply of currency?

texts: I understand how changes in interest rates affect the demand for currency (i.e. foreign exchange), but was wondering whether there is also an effect on its supply. I am hypothesising the following: high interest rates -> lower MPC -> people spend less on imports -> will supply fewer domestic currency in exchange for foreign currency -> reduces supply of currency in the FX market. Does such a hypothesis sound at all credible? Is there another way in which the interest rates can affect the supply of a currency?


texts: Why do bonds pay back the entire principal at maturity instead of paying it off gradually?

texts:
Bonds usually pay interest only and the entire principal is paid back at maturity. On the other hand fixed rate retail loans pay back both interest and principal such that at the end no debt is remaining.

To me, the latter seems to be more manageable. The borrower never need to pay back a lump sum of money at the same time.

Why do governments and companies prefer the first structure of payments when borrowing money instead of paying annuity?


texts: If nominal GDP is, for example, \$1,620 billion in 2017 and increases to \$1,680 billion in 2018, is the growth rate 3.7%? Or does real GDP first need to be calculated using a deflator?


texts: Solution to the Aiyagari model: why a sparse capital grid?

texts:
When solving a model à la Aiyagari, why is it needed to have more points close to zero?

I would be grateful if you could point me out some reference on how to implement the sparse grid. In particular, how should the fineness of the grid decrease as we move away from zero? I tried different grids and the wealth distribution I get changes quite a bit.


texts: Is the Cobb-Douglas Utility Function Locally Non-Satiated at (0,0)?

texts:
My understanding of local non-satiation is that increasing your allocation of one good by a marginal amount increases utility. Suppose your utility takes the following form:
$$U(x,y)=x^\alpha y^\beta$$
and your initial endowment is $(0,0)$. Now, if you increase either good without increasing the other, your utility does not increase. Does this mean that your utility is not locally non-satiated?


texts: Finding optimum market value of vintage car

texts:
I am trying to find first and second order conditions for the following problem:
$$P(t) = V(t)e^{-rt}- \int^t_0 me^{-r\tau}d \tau $$
I managed to find the first order condition:
$$P'(t) = V'(t)e^{-rt} -  rV(t)e^{-rt} - me^{-rt} =0 \\
V'(t) = rV(t)+m $$
According to our textbook this is correct, but I have problem finding SOC.  We learned before that SOC are found by taking second order derivative and examining if it is > or < than 0.
When I try to find $P''(t)$ I get:
$$P''(t) = V''(t)e^{-rt} -  rV'(t)e^{-rt}-  rV'(t)e^{-rt} + r^2V(t)e^{-rt} + rme^{-rt}$$
But the textbook says that the second order condition should be:
$$D=V''(t) -rV'(t)$$
this looks like the derivative of $V'(t) = rV(t)+m \implies V'(t) - rV(t) - m = 0 $
but I don't understand why that is correct. Previously when deriving SOC we always just took the 2nd derivative of the function so how come that does not work here?


texts: How Would a Firm Which Produces a Giffen Good Maximize Profits?

texts:
I am curious as to how a firm which produces a giffen good would maximize profits? Having an upward sloping demand curve seems to imply that we cannot guarantee that there exists a quantity where marginal revenue is equal to marginal cost, and even if there is, would that point be the profit maximizing point?

My thoughts are the following:

There are two cases to look at:

(1) If the marginal revenue curve never crosses the marginal cost curve (i.e. they have the same slope and a different intercept). This yields two sub-cases:

$\qquad$(i) The marginal revenue curve lies above the marginal cost curve: This case would clearly $\qquad$lead to infinite production because the firm is always increasing profits.

$\qquad$(ii) The marginal revenue curve lies below the marginal cost curve: This case would lead to $\qquad$ the firm choosing not to produce because they will always make a negative profit.

(2) If the marginal revenue curve crosses the marginal cost curve. This also yields two sub-cases:
$\qquad$(i) The marginal cost curve starts below the marginal revenue curve: This case seems to be$\qquad$ just like our classic case where we would see production up until the point where marginal $\qquad$ revenue is equal to marginal cost.

$\qquad$(ii) The marginal cost curve starts above the marginal revenue curve: This case is the one $\qquad$that I find most interesting. Would this case lead to infinite production? After marginal $\qquad$revenue crosses marginal cost, marginal revenue also grows at a faster rate than marginal $\qquad$cost, so my intuition tells me the firm could earn infinite profits.


texts:
in second priced auctions, the highest bidder wins the auction and pays the price of the second highest bidder. What happens if there's only one bidder? That bidder would have won the auction, but does the winner pay his/her own bid? Or does the winner pay zero, imagining a second bidder with zero value bid?

Thanks


texts:
Are there freely available historical data on implied repo rates?
In quick review, what's an implied repo rate?
In futures markets, the implied repo rate (also commonly called the IRR) is the rate of interest implied by the price of the cheapest to deliver and the futures price. Recall that for futures, where the underlying can be stored, the then to make an arbitrage portfolio we can do as follows:

Sell an at the money futures contract (go short) at settlement price $F$
Buy the underlying cheapest to deliver in the spot market for $S$
Borrow $S$ dollars (at interest rate $r$ per year) for the remaining life of the future (assume this is the only relevant cost)
At futures maturity, deliver the underlying, collect $F$, repay loan for $(1+r)^{t}\cdot S$
So, if no arbitrage holds:
$$F - (1+r)^{t}\cdot S  = 0 \Rightarrow r=(\frac{F}{S})^{1/t} - 1$$
and $r$ is the implied repo rate. Notice that if you check all the possible cheapest to deliver prices and the futures settlement price, you can get the implied repo rate without actually knowing the actual repo rate.

I've looked around, but I haven't been able to find any such free data. In addition to the usual search engine stuff, I also tried Quandl and  WorldData.ai. Bloomberg does have these data, but they are not free.


texts: If 1% of the solar energy of the Sahara can power the entire world, why isn't it happening?

texts:
There is an article on Forbes where Mehran Moalem, UC Berkeley professor, argues:

  1.2% of the Sahara desert is sufficient to cover all of the energy needs of the world in solar energy. [...] The cost of the project will be about five trillion dollars, one time cost at today's prices without any economy of scale savings.

I know 5 trillion dollars is a lot, but it's definitely worth it. Are there economical reasons against such project, or is it a political issue?


texts: How to measure expected price growth rate for oil?

texts:
How can someone measure the expected annual price growth rate for oil?

Also, where can I find past annual price growth rate for oil values?

Any help would be appreciated.


texts:
Suppose that you face risk. It is obvious that taking gambles whose outcomes are negatively correlated with the outcomes of your other gambles can reduce your overall risk ('hedging'). My question, however, concerns uncorrelated gambles - can these reduce your overall risk, and if so when?

Edit: to be clear, I am asking about when you can reducing your risk by taking additional uncorrelated gambles, not simply by replacing some gambles in your portfolio with others.


texts: Is it right to derive social marginal benefit by adding individual prices instead of quantities?

texts:
I come across a lecture material on market functions and externalities that makes me quite confused. Here's the setup: Two stores are located next to each other. If one installs a camera system in front of the shop to provide security supervision then it will cover both stores (hence both will be benefited).

The willingness-to-pay functions of these stores for that camera system look like this:

The question is to draw the social marginal benefit function $(SMB)$ of adopting the camera. This is how it is done:

What it does is to add vertically the prices for each level of quantity. Hence for the first part where $P_{WTP2} \ge  0$, $SMB=WTP1+WTP2$. Then after that point $SMB=WTP1$.

What I usually do and see for deriving total demand is to add up quantities for each level of price. Is it because now they are WTP and SMB functions that it's done the other way around?


texts: Is 10 years monthly data enough for forecasting?

texts: I want to forecast demand for the cement industry. I have data for 10 years- Monthly data. Is that desirable for forecasting?


texts: "Competitive equilibrium" vs. "General equilibrium"

texts: What is the difference between the term "competitive equilibrium" and the term "general equilibrium"? Here in econ.SE, they are two different tags, so there is probably a difference between them, but I don't understand what exactly.


texts: Was underestimation of the risk of Senior tranches partially responsible for the 2007-2008 subprime crisis?

texts:
I am trying to understand this explanation by Professor of Finance Andrew Lo of the 2007-2008 subprime crisis:
Say we have two risky loans, P(default)=0.1 of USD 1000: SP1 and SP2.
An intermediate grant these loans and creates and sell two products:
Senior
A safe tranche of 1000 USD that has dibs on SP1 and SP2: P(default)=0.01.
Junior
A risky tranche of 1000 USD P(default)=0.19.
The probabilities above are if P(default) of SP1 and SP2 are uncorrelated.
The corresponding expected values/price is: senior: 990USD, junior: 810USD.
In the severe economic crisis caused by a real estate bubble the uncorrelated assumption was clearly wrong.
Let us instead assume that P(default) of SP and SP2 were perfectly correlated:
Senior: P(default)=0.19
Junior: P(default)=0.19
The video does unfortunately not discuss how this could cause the subprime crisis.
To me it seems that the problem here was that pension funds were exposed to way larger risk than what they expected when they bought Senior tranches?