Recent Posts

Wednesday, December 13, 2017

Comments On Short-Dated Breakeven Inflation

In an earlier article, I commented on the usefulness of breakeven inflation as an inflation forecast. This article continues that line of thought, but with respect to short maturity index-linked bonds. In my view, there is significant market segmentation in the index-linked market when compared to conventional bonds. My belief is that short-dated breakevens are relatively unbiased, but have to be interpreted as a play on oil prices.

Sunday, December 10, 2017

Equations In Stock-Flow Consistent Models

I had some communications with a reader Adam K. who is doing some work on stock-flow consistent (SFC) models. He had some questions about the equations and variables in the Python sfc_models framework -- as described in my latest book.

One of the things I noticed late in the formatting stage of the book is that I did not give a detailed explanation of the algorithms that generate the equations. This was not entirely an oversight: I wanted the book to be survive updates to the code, and the equation generation algorithms are a target for a major refactoring. This article explains the current situation, and how it developed. The need for an easily extensible equation generation algorithm trumped the desire for formality. The structure of SFC models makes extremely formal procedures fairly brittle.

Saturday, December 9, 2017

Bitcoin As A Vindication Of Mainstream Monetary Economics

Say what you want about the backers of Bitcoin, they managed to create a currency unit that acts in the insane fashion that matches the way money works in mainstream economic models. For anyone with any attachment to reality, it offers a very good real world explanation why the DSGE approach to economics is inherently useless.

Wednesday, December 6, 2017

Is Breakeven Inflation The Same Thing As A Forecast?

One of the difficulties in discussing the index-linked market is pinning down what we mean when say a certain rate of inflation is priced into the market. The breakeven inflation rate is (roughly) the rate of future inflation for which the nominal bond and the inflation-linked bond have the same total return. Alternatively, we might refer to the breakeven inflation rate as the market expectations for inflation. Unfortunately, we could have a situation in which the breakeven rate does not match what market participants forecast for inflation.

Sunday, December 3, 2017

Robust Control Theory And Model Uncertainty

Mainstream mathematical economics has a very strong influence from optimal control theory. As I discussed previously, optimal control was abandoned as a modelling strategy decades ago by controls engineers; it only survives for path-planning problems, where you are relatively assured that you have an accurate model of the overall dynamics of the system. In my articles, I have referred to robust control theory as an alternative approach. In robust control theory, we are no longer fixated on a baseline model of the system, we incorporate model uncertainty. These concepts are not just the standard hand-waving that accompanies a lot of pop mathematics; robust control theory is a practical and rigorous modelling strategy. This article is a semi-popularisation of some of the concepts; there is some mathematics, but readers may be able to skip over it.

Saturday, December 2, 2017

Republicans Cut Taxes. Sun Rises In The East.

At the time of writing, it appears that the Republican-controlled Congress will be able to patch together a tax cut bill. What exactly will be in the bill is still unknown; you gotta pass the law to see what's in it. Based on the chatter I have seen, it seems likely that the tax cut will not have a major macroeconomic impact, although it might help trigger rate hikes. This cut has raised in an interesting debate within the Democratic Party: should they follow the same strategy that has failed for decades, or take a MMT line on the topic?

Wednesday, November 29, 2017

Why Parameter Uncertainty Is An Inadequate Modelling Strategy

We live in a world of uncertainty. One strategy used in economics is to incorporate the notion of parameter uncertainty: we have the correct model, but the parameters have some random variation from a baseline value. This strategy is highly inadequate, and has been rejected by robust control theory. The belief that we have the correct model was an underlying premise of optimal control theory, and the weakness of this premise in practice explains why optimal control theory was largely abandoned in controls engineering. (Interestingly enough, it persists in Dynamic Stochastic General Equilibrium (DSGE) models).

In this article, I give an example of an abject failure of parameter uncertainty as a notion of model uncertainty.