A guide to econometrics

5 Sep, 2019 at 11:11 | Posted in Statistics & Econometrics | 1 Comment

kennedyguide1. Thou shalt use common sense and economic theory.
2. Thou shalt ask the right question.
3. Thou shalt know the context.
4. Thou shalt inspect the data.
5. Thou shalt not worship complexity.
6. Thou shalt look long and hard at thy results.
7. Thou shalt beware the costs of data mining.
8. Thou shalt be willing to compromise.
9. Thou shalt not confuse statistical significance with substance.
10. Thou shalt confess in the presence of sensitivity.

This is the way

4 Sep, 2019 at 20:24 | Posted in Economics | Leave a comment


Summers and Stansbury only get it half right

4 Sep, 2019 at 18:48 | Posted in Economics | 5 Comments

The new Keynesian school emerged from the synthesis, propelled by the invention of a slew of frictions and rigidities – staggered contract negotiations perturbing labor markets, “menu costs” of changing prices and wages, prices locked into inefficient levels by contracts, probabilistic price revision, monopsony power of firms in labor markets, on and on. In the process, any and all discussion of effective demand was submerged.

newThe new Keynesian inventors are now the ruling elders of macroeconomics, unlikely to change their minds. So much for Keynes for now, but Summers and Stansbury might remember with Max Planck that science advances one funeral at a time. They are certainly correct in saying that “the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.” Convincing their peers is far more easily said than done …

Summers and Stansbury, to their credit, point to fundamental contradictions that central bankers confront. They cannot control inflation in a world of conflicting claims. The bankers’ chosen instrument, the interest rate, has little macroeconomic traction. How institutions largely determine output, employment, and inflation is beyond their ken. Demand drives output and prices, but it is not clear that the fiscal expansion Summers and Stansbury propose will boost inflation under existing labor market institutions. It is possible that both wage equality and inflation could rise if economic expansion combined with supportive regulation boosts workers’ bargaining power in the labor market.

Lance Taylor / INET

Les banquiers centraux sont les pompiers pyromanes

3 Sep, 2019 at 20:43 | Posted in Economics | 1 Comment

71clIBeIgnL Pour la première fois depuis l’après-guerre, les banquiers centraux sont confrontés à un problème contre lequel ils sont impuissants, le chaos politique. Les Etats-Unis étaient un acteur fiable, dont la devise était le pilier du système monétaire international ? Ils sont devenus imprévisibles, tandis que le rôle pivot du billet vert est remis en cause …

Ce n’est pas tout. En maintenant des taux très bas trop longtemps, en rachetant des dettes publiques à tour de bras, les instituts monétaires risquent aussi, malgré eux, d’amplifier l’instabilité du système financier. « Ces mesures sont en effet susceptibles de créer des bulles sur l’immobilier ou sur certains titres, et cela pourrait accentuer la prochaine crise financière », résume Patrick Artus, chez Natixis. Quand ils ne sont pas qualifiés de super-héros, les banquiers centraux sont également surnommés les « pompiers pyromanes »…

Le Monde

On the irrelevance of economics

3 Sep, 2019 at 11:32 | Posted in Economics | 1 Comment

I believe that as an economic theorist, I have very little to say about the real world and that there are very few models in economic theory that can be used to provide serious advice. However, economic theory has real effects. I cannot ignore the fact that our work as teachers and researchers influences students’ minds and does so in a way with which I am not comfortable. Can we find a way to be relevant without being charlatans?

stunAs economic theorists, we organize our thoughts using what we call models.
The word “model” sounds more scientific than “fable” or “fairy tale” although I do not see much difference between them. The author of a fable draws a parallel to a situation in real life. He has some moral he wishes to impart to the reader … Being something between fantasy and reality, a fable is free of extraneous details and annoying diversions …

We do exactly the same thing in economic theory … We perform thought exercises that are only loosely connected to reality and that have been stripped of most of their real-life characteristics.

Ariel Rubinstein

Wahrheit und Ökonomie

3 Sep, 2019 at 10:34 | Posted in Economics | Leave a comment

plAuch wenn nur wenige ÖkonomInnen aus dieser Epoche sich explizit zu einem aprioristisch-platonischen Wahrheitsbegriff bekannt haben mögen (eine Ausnahme bildet Ludwig Mises), erlangte die ohnehin von großem Selbstvertrauen getragene Eigendarstellung der frühen Neoklassik spätestens mit den 1930er Jahren eine neue Qualität, die den wesentlichen Inhalt zentraler neoklassischer Theoreme als unwiderlegbar deklarierte. So schrieb etwa Lionel Robbins in seinem tausendfach zitierten Essay on the Nature and Significance of Economic Science:

„The efforts of economists during the last hundred and fifty years have resulted in the establishment of a body of generalisations whose substantial accuracy and importance are open to question only by the ignorant or the perverse.“ (Robbins 1932, 1)

Der deutsche Philosoph Hans Albert (1963) kritisierte derartige Haltungen aus grundsätzlichen wissenschaftstheoretischen Erwägungen als „Modell-Platonismus“. Ein solcher zeichnet sich dabei nicht nur durch die Verabsolutierung der eigenen theoretischen Ansichten aus, sondern entwickelt auch Strategien um eben diese Ansichten gegenüber empirischer Evidenz zu immunisieren. Die Ignoranz gegenüber empirischen Tests galt in der Ökonomie jahrzehntelang als – geradezu langweiliges – offenes Geheimnis.

„We have been told that, when theory and fact come into conflict, it is theory, not fact that must give way. It is very doubtful how far that dictum applies to economics.“ (Hicks 1983, 371)

Diese platonische Haltung zur Wahrheit, die auch heute noch manchmal erkennbar ist führte letztlich auch im Fall der Krise von 1929 dazu, dass viele prominente Ökonomen an der Annahme der Selbstheilungsfähigkeit der Marktwirtschaft festhielten.

Christian Grimm & Jakob Kapeller

External validity and experiments — a Faustian bargain

3 Sep, 2019 at 09:54 | Posted in Economics | 1 Comment

bed-net-2048x1152Under control conditions bed nets have been shown to be highly effective in preventing malaria: Households randomly “treated” with bed nets experience a reduction in malaria incidence relative to households randomly allocated to control conditions. These controlled experiments identify the “effects of causes”, in this case bed net use reduces malaria incidence. Based on this evidence, numerous programs have been implemented that freely distribute bed nets in areas of high malaria incidence. And yet, to date, the jury is still out as to the effectiveness of these interventions in reducing malaria incidence in the treated areas. Why? One answer is lack of compliance – providing a free bed net does not imply that it will be used appropriately.

This example illustrates the point that just because X can be shown to cause
changes in Y , it does not follow that it explains any of the observed variance in Y in the real world nor, indeed, that it can be an effective cause in the real world – a problem of external validity -, where we may lack sufficient control to ensure full compliance. In other words, there are other factors (potentially unobserved) that moderate the causal effect in real applications … We gain understanding of potential
causes for reducing malaria, but we may still end up with bad policy predictions.

Fernando M Garcia & Leonard Wantchekon

The problem many ‘randomistas’ end up with when underestimating heterogeneity and interaction is not only an external validity problem when trying to ‘export’ regression results to different times or different target populations. It is also often an internal problem to the millions of regression estimates that economists produce every year.

‘Ideally controlled experiments’ tell us with certainty what causes what effects — but only given the right ‘closures.’ Making appropriate extrapolations from (ideal, accidental, natural or quasi) experiments to different settings, populations or target systems, is not easy. ‘It works there’ is no evidence for ‘it will work here.’ Causes deduced in an experimental setting still have to show that they come with an export-warrant to the target population/system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods — and ‘on-average-knowledge’ — is despairingly small.

RCTs have very little reach beyond giving descriptions of what has happened in the past. From the perspective of the future and for policy purposes they are as a rule of limited value since they cannot tell us what background factors were held constant when the trial intervention was being made.

RCTs usually do not provide evidence that the results are exportable to other target systems. RCTs cannot be taken for granted to give generalizable results. That something works somewhere for someone is no warranty for us to believe it to work for us here or even that it works generally.

Why monetary policies are impotent

2 Sep, 2019 at 18:57 | Posted in Economics | 3 Comments

Even if interest-rate cuts at all points proximately increase demand, there are substantial grounds for concern if this effect is weak. It may be that any short-run demand benefit is offset by the adverse effects of lower rates on subsequent performance …

commercial illustratorFrom a macro perspective, low interest rates promote leverage and asset bubbles by reducing borrowing costs and discount factors, and encouraging investors to reach for yield. Almost every account of the 2008 financial crisis assigns at least some role to the consequences of the very low interest rates that prevailed in the early 2000s. More broadly, students of bubbles, from the economic historian Charles Kindleberger onward, always emphasize the role of easy money and overly ample liquidity.

From a micro perspective, low rates undermine financial intermediaries’ health by reducing their profitability, impede the efficient allocation of capital by enabling even the weakest firms to meet debt-service obligations, and may also inhibit competition by favoring incumbent firms …

In moving toward the secular stagnation view, we have come to agree with the point long stressed by writers in the post-Keynesian (or, perhaps more accurately, original Keynesian) tradition: the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand …

What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Lawrence Summers & Anna Stansbury

New ‘Keynesians’ — like Paul Krugman and Simon Wren-Lewis — have long been arguing that, at the zero lower bound of nominal interest rates, central bankers don’t have the tools to effectively fight recessionary tendencies in the economy. This yours truly and other Post Keynesian economists have criticized, arguing that those monetary measures don’t work even when we’re not even close to the zero lower bound.

In the New ‘Keynesian’ world we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

Now, the logic behind the New ‘Keynesians’ loanable-funds-IS-LM-theory is that if the government is going to pursue an expansionary fiscal policy it will have to borrow money and thereby increase the demand for loanable funds which will — “other things equal” — lead to higher interest rates and less private investment. According to this approach, the interest rate is endogenized by assuming that Central Banks can (try to) adjust it in response to an eventual output gap. This, of course, is essentially nothing but an assumption of Walras’ law being valid and applicable, and that a fortiori the attainment of equilibrium is secured by the Central Banks’ interest rate adjustments. From a Post Keynesian point of view, this is a belief resting on nothing but sheer hope.

We have to free ourselves from the loanable funds theory — and scholastic gibbering about ZLB — and start using good old Keynesian fiscal policies. Keynes — as did Lerner, Kaldor, Kalecki, and Robinson — showed that it was possible to promote economic growth with an “appropriate size of the budget deficit.” The stimulus a well-functioning fiscal policy aimed at full employment may have on investment and productivity does not necessarily have to be offset by higher interest rates.

larryNow Larry Summers has come to realize that the New ‘Keynesian’ dogma is wrong and that we need other stabilisation (read fiscal) tools to get the economy going. That’s great. Now we’re eagerly awaiting some other guys to finely wake up …

Expected utility theory and ergodicity — poor guides to decision-making

1 Sep, 2019 at 20:36 | Posted in Economics | 2 Comments

Behavioural scientists generally explore decision making using simple gambles with “additive dynamics.” In each gamble, a person wins or loses fixed amounts of money – say, gaining £1 for a win, and losing £0.50 for a loss. Gambles of this kind turn out to be “ergodic” in the sense that averages over the possible outcomes really are equal to averages over time if the gamble is played many times.

lml_LOGO_whiteBGBecause of this, using Expected Utility Theory with a linear utility function – utility simply being proportional to the amount won or lost – turns out to be optimal for maximising the growth of wealth over time.

But this additive paradigm isn’t a useful model for many real-world decisions where the amount gained or lost in a gamble depends on how much wealth an individual already has … Many gambles with positive expectation values – seemingly worth playing from the EUT perspective – actually yield consistent losses when played out in time. In situations with multiplicative dynamics, it turns out that one can still use the EUT framework, but only if the utility is considered to depend logarithmically on the outcome.

This implies that the actually optimal behaviour depends very sensitively on the nature of the gamble dynamics. Or, in the setting of EUT, that the utility a person assigns to an outcome – winning £1, for example – should change if the gamble flips between additive and multiplicative dynamics. If people really act this way, it’s a big problem for both expected utility theory and prospect theory which assert that utility functions should be fixed and stable, indifferent to dynamics.

Mark Buchanan

Suppose I want to play a game. Let’s say we are tossing a coin. If heads comes up, I win a dollar, and if tails comes up, I lose a dollar. Suppose further that I believe I know that the coin is asymmetrical and that the probability of getting heads (p) is greater than 50% – say 60% (0.6) – while the bookmaker assumes that the coin is totally symmetric. How much of my bankroll (T) should I optimally invest in this game?

A strict mainstream utility-maximizing economist would suggest that my goal should be to maximize the expected value of my bankroll (wealth), and according to this view, I ought to bet my entire bankroll.

Does that sound rational? Most people would answer no to that question. The risk of losing is so high, that I already after few games played — the expected time until my first loss arises is 1/(1-p), which in this case is equal to 2.5 — with a high likelihood would be losing and thereby become bankrupt. The expected-value maximizing economist does not seem to have a particularly attractive approach.

So what’s the alternative? One possibility is to apply the so-called Kelly criterion — after the American physicist and information theorist John L. Kelly, who in the article A New Interpretation of Information Rate (1956) suggested this criterion for how to optimize the size of the bet — under which the optimum is to invest a specific fraction (x) of wealth (T) in each game. How do we arrive at this fraction?

Continue Reading Expected utility theory and ergodicity — poor guides to decision-making…

Wie konnten sie diesen Präsidenten wählen?

31 Aug, 2019 at 10:45 | Posted in Politics & Society | Leave a comment

Gregg Popovich sagt: “Der Mann im Oval Office ist ein seelenloser Feigling, der denkt, er könne groß werden, indem er andere erniedrigt.”

Er sagt: “Wir haben einen pathologischen Lügner im Weißen Haus.”

popEr sagt auch: “Ich würde mich besser fühlen, wenn jemand dieses Amt bekleiden würde, der die Reife sowie das psychologische und emotionale Level gezeigt hat, das andere in seinem Alter haben.”

Und: “Unser Land ist eine Schande.”

Gregg Popovich ist von den vielen Sportpersönlichkeiten, die Donald Trump kritisieren, ziemlich sicher die hartnäckigste …

In San Antonio, wo Trump im Juni 2016 zu seinen Anhängern sprach, trainiert Popovich die Spurs. Fünfmal hat er mit den Spurs die Meisterschaft in der NBA gewonnen, erstmals 1999 und zuletzt 2014. Popovich, 70, ist der erfolgreichste noch aktive Basketballtrainer der Welt – und kaum einer würde der Aussage widersprechen, dass er auch der beste ist. Seit 2016 trainiert Popovich nebenbei das US-amerikanische Nationalteam …

Eine Nationalmannschaft soll ein Land vereinen, politische Gräben verdecken. Popovich aber zeigt auf genau diese Gräben, denn er versteht knapp die Hälfte seiner Landsleute nicht mehr, er fragt sich: Wie konnten sie diesen Präsidenten wählen?

Nico Horn / Die Zeit

Econometric forecasting — no icing on the economist’s cake

29 Aug, 2019 at 21:44 | Posted in Statistics & Econometrics | 1 Comment

twice_two__fav_scene_It is clearly the case that experienced modellers could easily come up with significantly different models based on the same set of data thus undermining claims to researcher-independent objectivity. This has been demonstrated empirically by Magnus and Morgan (1999) who conducted an experiment in which an apprentice had to try to replicate the analysis of a dataset that might have been carried out by three different experts (Leamer, Sims, and Hendry) following their published guidance. In all cases the results were different from each other, and different from that which would have been produced by the expert, thus demonstrating the importance of tacit knowledge in statistical analysis.

Magnus and Morgan conducted a further experiment which involved eight expert teams, from different universities, analysing the same sets of data each using their own particular methodology. The data concerned the demand for food in the US and in the Netherlands and was based on a classic study by Tobin (1950) augmented with more recent data. The teams were asked to estimate the income elasticity of food demand and to forecast per capita food consumption. In terms of elasticities, the lowest estimates were around 0.38 whilst the highest were around 0.74 – clearly vastly different especially when remembering that these were based on the same sets of data. The forecasts were perhaps even more extreme – from a base of around 4000 in 1989 the lowest forecast for the year 2000 was 4130 while the highest was nearly 18000!

John Mingers

Marxisme culturel — histoire d’une notion

28 Aug, 2019 at 16:52 | Posted in Politics & Society | Leave a comment

Cette expression connaît aussi un usage savant, surtout aux Etats-Unis. Dans ce cadre, il désigne un courant de pensée inspirée par l’œuvre de Karl Marx, qui fonde sa critique de la société non pas seulement sur une analyse des inégalités générées par le système de production économique, mais aussi sur l’aliénation qu’il engendre à travers la culture entendue au sens large – les arts, la publicité, la vie politique, les institutions, etc.

cultLa formule exacte de « marxisme culturel » serait née dans les années 1970, au sein de la gauche américaine, comme l’a montré le philosophe australien Russell Blackford … Il analyse la crise de la société américaine en s’appuyant sur les outils conceptuels développés par l’école de Francfort. Né en Allemagne dans les années 1920, ce courant de pensée a profondément renouvelé le marxisme en menant une critique radicale de la société bourgeoise et de ses manifestations sociales, culturelles et politiques. Trent Shroyer, qui est l’un de leurs disciples, se félicite de l’essor des mouvements de libération des Noirs et des femmes.

C’est là le lien avec ce que la droite radicale entendra bientôt par « marxisme culturel ». Le terme prend alors une valeur péjorative : il désigne la prétendue volonté des disciples de l’école de Francfort de nuire à la culture occidentale et de s’attaquer à la société traditionnelle en se servant du féminisme, de l’homosexualité et du multiculturalisme. « Au tournant des années 1990, alors que le communisme vient de s’effondrer, les milieux ultra-conservateurs américains voient dans la mondialisation une menace pour l’Occident chrétien, remarque Jérôme Jamin, politiste et philosophe belge, spécialiste des populismes. Ils s’inquiètent aussi de la montée, sur les campus universitaires, du “politiquement correct” qu’ils assimilent à une attaque contre la liberté d’expression ayant pour but d’empêcher les discours ne reconnaissant pas la pleine égalité entre les hommes et les femmes, les Noirs et les Blancs, les hétérosexuels et les homosexuels, etc. » Le terme se diffuse au sein des milieux extrémistes de droite.

Marc-Olivier Bherer / Le Monde

Economics — a primary reason for the rise of inequality

28 Aug, 2019 at 13:08 | Posted in Economics | 13 Comments

In 2004, the Nobel laureate Robert Lucas warned against any revival of efforts to reduce inequality. “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

ineqAccounts of the rise of inequality often take a fatalistic view. The problem is described as a natural consequence of capitalism, or it is blamed on forces, like globalization or technological change, that are beyond the direct control of policymakers. But much of the fault lies in ourselves, in our collective decision to embrace policies that prioritized efficiency and encouraged the concentration of wealth, and to neglect policies that equalized opportunity and distributed rewards. The rise of economics is a primary reason for the rise of inequality.

And the fact that we caused the problem means the solution is in our power, too …

The market economy remains one of humankind’s most awesome inventions, a powerful machine for the creation of wealth. But the measure of a society is the quality of life throughout the pyramid, not just at the top, and a growing body of research shows that those born at the bottom today have less chance than in earlier generations to achieve prosperity or to contribute to society’s general welfare  …

Willful indifference to the distribution of prosperity over the last half century is an important reason the very survival of liberal democracy is now being tested by nationalist demagogues. I have no special insight into how long the rope can hold, or how much weight it can bear. But I know our shared bonds will last longer if we can find ways to reduce the strain.

Binyamin Appelbaum

Why attractive people you date tend​ to be jerks

28 Aug, 2019 at 10:17 | Posted in Statistics & Econometrics | 2 Comments

The Book of Why_coverHave you ever noticed that, among the people you date, the attractive ones tend to be jerks? Instead of constructing elaborate psychosocial theories, consider a simpler explanation. Your choice of people to date depends on two factors, attractiveness and personality. You’ll take a chance on dating a mean attractive person or a nice unattractive person, and certainly a nice attractive person, but not a mean unattractive person … This creates a spurious negative correlation between attractiveness and personality. The sad truth is that unattractive people are just as mean as attractive people — but you’ll never realize it, because you’ll never date somebody who is both mean and unattractive.

The spurious correlation — ‘collider bias’ — is here induced because the outcome of the two variables is ‘controlled for’.  Mean people are not necessarily attractive, and nor are nice people. Looking only at people that do date, you would however probably guess that the mean ones are attractive. In order to date lack of nicety has to be compensated with attractiveness.

If anything this should be a helpful reminder for economists who nowadays seem to be more than happy to add lots of variables to their regressions ‘controlling for’ omitted variables bias. In this case, dating someone is a collider of multiple causes — attractiveness and personality — that gives the false impression that there is a trade-off between the two variables.

Richard Feynman — le grand explicateur

27 Aug, 2019 at 17:46 | Posted in Education & School | Leave a comment


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