Archive for the ‘research’ category

Interesting working paper

September 22, 2007

Housing IS the Business Cycle (NBER)
by Edward Leamer


Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor’s output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe.

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Good quote

August 21, 2007

“Its not even the number of deviations any more”, said one trader, “its that the deviations aren’t standard”

via: RGE – Reverse engineering financial engineering

Here’s the conundrum in economics: looking at historical data to ‘test’ models is tricky, because things are too complex.  And no model is perfect, anyway.  Instead a model is a metaphor, a way to understand the basic forces driving things.  But we need quantitative discipline in the models.  So the important thing is to take the basic message from the historical evidence in the models, but don’t ‘overfit.’  Impossible.  Hence, strong belief in theory, which has been subject to some empirical evidence, and is internally consistent.

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An interesting sounding paper

August 13, 2007

Here is the abstract:

In two laboratory experiments, we examine whether norms associated with one’s social identity affect time and risk preferences. When we make ethnic identity salient to Asian-American subjects, they make more patient choices. When we make race salient to black subjects, non-immigrant blacks (but not immigrant blacks) make more risk-averse choices. Making gender identity salient causes choices to conform to gender norms the subject believes are relatively more common. Our results provide evidence that identity effects play a role in shaping U.S. demographic patterns in economic behaviors and outcomes.

Social Identity and Preferences

No risk, no return

August 10, 2007

One of the basic ideas in finance is ‘no free lunch’—you don’t get something for nothing.  All those people making high returns by investing in complicated bonds were taking the risk of the defaults.  Now it’s happening,  but they did earn money for taking the risk.  The interesting question is:  Will financial contagion mean that the people who did not earn those high returns also get hurt? It didn’t happen last time, but what about now? FRB: Speech, Bernanke–Hedge Funds and Systemic Risk–May 16, 2006.

Another one, though I am not sure I agree…  RGE – Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch

You are dead to me.

June 17, 2007

In my opinion, one of the most hurtful things you can say to another person.

That phrase has got me thinking about social networks. One of the most interesting study of relationships versus markets is a study by a sociologist who looked at Hassidic diamond merchants in NY. The economic problem to solve is that you need time to study the diamond to see its value. But then, you will be worried that the examiner would steal the diamond. One way to make sure that the examiner returns it is some sort of collateral system: you put a big deposit down to examine the jewel. But that is not always feasible. So instead, the diamond mechants substitute social capital for financial capital. They are a small tightknit community. If you steal the jewel, you are out, and your children are out, etc, etc. As a consequence, no need for elaborate financial requirements. Of course if the community gets to too big, the social capital will fail.

I wonder if the internet changes the community size.

The sad state of economics education

May 24, 2007

Nearly 80% of People Believe Gas Prices Have Been Manipulated by Daily Fuel Economy Tip

via: Digg

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A working paper with discouraging results

April 26, 2007

Tipping and the Dynamics of Segregation

Tipping and the Dynamics of Segregation
David Card, Alexandre Mas, Jesse Rothstein
NBER Working Paper No. 13052
Issued in April 2007

—- Abstract —–

In a classic paper, Schelling (1971) showed that extreme segregation can arise from social interactions in white preferences: once the minority share in a neighborhood exceeds a critical “tipping point,” all the whites leave. We use regression discontinuity methods and Census tract data from 1970 through 2000 to test for discontinuities in the dynamics of neighborhood racial composition. White population flows exhibit tipping-like behavior in most cities, with a distribution of tipping points ranging from 5% to 20% minority share. The estimated discontinuities are robust to controls for a wide variety of neighborhood characteristics, and are as strong in the suburbs as in tracts close to high-minority neighborhoods, ruling out the main alternative explanations for apparent tipping behavior. In contrast to white population flows, there is no systematic evidence that rents or housing prices exhibit non-linearities around the tipping point. Finally, we relate the location of the estimated tipping points in different cities to measures of the racial attitudes of whites, and find that cities with more tolerant whites have higher tipping points.

Although there a small glimmer of good news—preferences for discrimination don’t have to be fixed. House prices don’t drop discontinuously at the ‘tipping’ which I think means that tipping in not completely $ based, although I don’t know how to interpret that evidence yet.