A few months back, I came across an interesting presentation by him titled “Endogenous Indoctrination“. He uses interesting techniques to see how indoctrination can evolve in a society and influence voter attitudes where teachers have a certain attitude towards the market system.

Enjoy!

http://www.chrispapageorgiou.com/papers/NBERwp15455.pdf

Abstract:

These models try to capture the nature of economic complexity that is easily eschewed by the DSGE framework in favor of precision and neat quantitative results. According to Caballero, “ the nodes of such economic models are special for they contain agents with frontal lobes who can both strategize and panic”. Networks are important and such agents introduce much of unpredictability in the linkages.

Do agents always understand the complete networks and linkages? Apparently not. In fact  “the importance of this lack of understanding is at its most extreme level during financial crises when seemingly irrelevant and distant linkages are perceived to be relevant”.  Novelty and uncertainty play an important role in determining the size of reaction as well.

He also introduces us to literature that deals with developing a policy framework which is robust to small mistakes from the policy maker. Hansen and Sargent’s extremely readable “Robustness” is an important contribution to this literature.

I don’t really have the expertise to comment on what this means for the fate of the whole DSGE world and whether grad students can get away with not learning it. However, I am definitely convinced that the research cited by Cabellaro certainly offers a fresh perspective of linking individual behavior to macro behavior. Randomly browsing the net for his cited references, I came across a course on networks offered by Daron Acemoglu of MIT. The introduction in his course syllabus is worth reproducing here:

“Networks are ubiquitous in our modern society. The World Wide Web that links us to and enables information flows with the rest of the world is the most visible example. But it is only one of many networks within which we are situated. Our social life is organized around networks of friends and colleagues. These networks determine our information, influence our opinions, and shape our political attitudes. They also link us, often through important but weak ties, to everybody else in the United States and in the world. Economic and financial markets also look much more like networks than anonymous marketplaces. Firms interact with the same suppliers and customers and use web-like supply chains. Financial linkages, both among banks and between consumers, companies and banks, also form a network over which funds flow and risks are shared. Systemic risk in financial markets often results from the counterparty risks created within this financial network. Food chains, interacting biological systems and the spread and containment of epidemics are some of the other natural and social phenomena that exhibit a marked networked structure.“

So, while working on the dissertation, when I was just starting to think that I finally might have made it at least somewhat near the frontier, here comes a group of very intelligent economists pushing it even further!

Timothy Lane’s talk was a good survey of lessons learnt so far from the crisis with a bit of central banker’s perspective. Robert Hall’s speech promised a lot. It was kind of a precursor to what he was suppose to talk the next at the SED plenary session (the plenary talk did not turn out be that interesting though!). One of the important points that he made based on the data was that the zero lower bound on the interest rate may not mean much if the rates faced by consumers are positive and sticky. The second arguement was that because consumption expenditure has been pretty resilient and productivity infact surged during the crisis the real business cycle explainations of the crisis are completely useless.

Narayana’s speech turned out to be the attraction of the evening.  Based on the idea that finanical investments by banks pose a negative externality and hence need to be internalized by taxing risk taking, in his speech he carefully laid out the arguement and some thoughts on how to approach its implentation.  When Kocherlakota was appointed as the Fed Chief, lot of people had doubts about his effectiveness as a policy maker. But he has time and again proved that clear and disciplined thinking can save the day anywhere. I am sure in the coming days this first rate theoretician will have many interesting things to say and I will be all ears!

The second half of the workshop was a round-table discussion by two Nobel prize winners- Bob Lucas and Ed Prescott and John Murray from Bank of Canada. It contained much of off hand talk by Bob Lucas and a no nonsense presentation by Ed Prescott. In spite of the argument by Bob Hall above,  Prescott continued with his RBC story of the crisis. He argued that Hall is wrong because data can be revised any time and mostly contrary to what Hall is saying. Hall argued that Prescott is wrong because his RBC story requires completely unrealistic estimates of Frisch elasticity. The most notable feature of the evening, however, was that in spite of the clash of titans, all the questions after the presentations and the round table were for Kocherlakota and his idea of risk tax. He kind of completely stole the show.

There, of course, has been some careful analysis of the gender gap phenomenon. Steve Levitt’s this paper is an example.  However, there are some people who just tinker with the distribution of the test scores to infer something about differences in abilities between male and female students.

So the important question is can we use the distribution of  test scores for male and female students to infer something about the difference in their abilities? My answer is a straight no. Technically there would arise what we call an endogeneity problem. Existence of social bias and the ever pervasive gender stereotyping has a great influence in shaping the preferences and development of certain abilities among male and female students. If this is the case, the resulting distribution would reflect these cultivated differences and hence any inference based on it about the gender gap is going to be obvious. It is like we planted one avocado and one mango tree a while back and then after some time infer that they give completely different fruits.  How stupid would that be?

If we decide  to believe Prof. Ohanian of UCLA, then this rigidity was not because markets did not respond but it was more of a case where they were not allowed respond. To support this claim, he develops a theory of labor market failure for the Depression based on Herbert Hoover’s industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. He finds that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation/low nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.

You can watch this video in case you don’t want to read the paper.