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Thursday, April 27, 2017

Fun With Central Bank Calvinball

In the comments to "Does the Governmental Budget Constraint Exist?" Nick Edmonds reminded about another piece of mainstream macro logic that triggers me: the governmental budget constraint holds, because the inflation-targeting central bank says so. From the perspective of a mathematician, this is just a variation of "because I want to assume it to be true." In this article, I run through whatever logic appears to exist.

Wednesday, April 26, 2017

Does The Governmental Budget Constraint Exist?

This article wraps up my discussion of the transversality condition and the governmental budget constraint. In summary, the governmental budget constraint used within mainstream macro has very serious flaws. I would have liked to use the title "The Governmental Budget Constraint Does Not Exist," but we need to take into account the rather curious Fiscal Theory of the Price Level. Furthermore, there are unsettling implications for the entire Dynamic Stochastic General Equilibrium (DSGE) model approach that relies upon optimisation. I abandoned looking at these models for this reason, and this article suggests why I believe the problems run much deeper. Unlike the previous articles, this article is largely free of mathematics, but I start out listing the various equations I refer to.

Tuesday, April 25, 2017

Mathematics Of The Budget Constraint (Again)

This article attempts to give a simpler mathematical discussion of the governmental budget constraint and transversality. After throwing my hands up in the air in my previous article, I run through the basic mathematics of the accounting identity for governments, and we can see that what is called "transversality" is just equivalent to making the assumption that the discounted primary surpluses converge to be equal to the initial stock of debt. However, household sector optimisation is nowhere in sight, which raises the question why it comes up in discussion of this topic in the first place.

Once again, the math-phobic may as well stay clear. I would also draw your attention to this article by Alex Douglas; he is jumping ahead to an extremely point about optimisations (in general, we have no reason to believe that the optimum exists when the set of solutions is not closed and finite).

Monday, April 24, 2017

On Being Pelted By Peanuts: Part I

Alexander Douglas (a lecturer in philosophy) wrote an interesting article on two subjects recently: "Macroeconomics -- A view from the peanut gallery." He covers two diverging topics: the transversality condition from mainstream macro, and the question of welfare functions in Stock-Flow Consistent models. I will take a stab at these topics over the coming days. In this article, I am expressing my deep displeasure with what is supposed to be trivial mathematics used by the mainstream: the transversality condition.

(He embeds some mathematics in his post, and so I am using MathJax to format an answer. The equations may not be properly rendered on some browsers. People who are allergic to equations may want to skip this one... I did this quickly, and already squashed a few typos.)

Sunday, April 23, 2017

SFC Models And Introductory MMT-Style Fiscal Analysis

The usefulness of Stock-Flow Consistent (SFC) models is that they allow us to illustrate concepts in economics without relying solely on verbal descriptions. In this article, I will discuss my interpretation of some of the ideas floating around in Modern Monetary Theory (MMT). I will note that these are my interpretations of statements made by others, illustrated by an extremely simple model. The key is that even simple models can be used to clarify our thinking.

Wednesday, April 19, 2017

Weaknesses Of Term Premium Estimates Derived From Yield Curve Models

Term structure models have been a growth industry for researchers in academia and at central banks. These models can be structured in many different ways, which makes generalisations about them difficult. For the purposes of this article, I am only concerned about the use of these models to estimate a term premium that is embedded in nominal yields (although my comments can be extended to cover related exercises, such as calculating an inflation risk premium). When I examine individual models, the term premium estimates appear unsatisfactory, but the issues are different for each model. I believe that the root problems for this exercise are fundamental, and we need to understand these fundamental problems before looking at individual models.

Saturday, April 15, 2017

Book Review: The Road To Ruin

James Rickards recently published The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis. His argument is that the risks of a financial crisis is building (possibly hitting in 2018), and that the financial system will be locked down as a result. (He argues that you need to buy gold to hedge against this.) The book is awkward, but has some interesting features. He describes various pop mathematics techniques for economic and financial analysis, although the book does not provide enough details to be able to evaluate them. James Rickards joined the LTCM hedge fund in 1994, and provides an insider's take on its collapse. He is also nostalgic for the economic framework of the 1950s, which parallels the views of a lot of post-Keynesians; the issue is that he is fixated on the gold peg, which was arguably an incidental feature of the 1950s economic institutions.