Friday, October 12, 2012

Economics Nobel bleg

Tyler Cowen rounds up the chatter around the Eco Nobel. Here's WSJ, and here are the Thomson Reuters predictions. Northwestern has its own list too - it leans heavily towards the Industrial Organization & New Institutional Economics side of affairs. Both good, but rewarded in the recent past.

My contention is, if Jean Tirole and/or Oliver Hart are awarded, so will/should Bengt Holmstrom. Oliver Hart is a forerunner for the incomplete contracts view of the theory of the firm, Holmstrom has done masterful work on the disaggregation of the liquidity and the the connections between corporate finance & macroeconomic phenomena, culminating in what he calls the Liquidity-based Asset Pricing Model. This line of research is extremely promising, and yet to be fully exploited.

But if IO/NIE does not win, the prize really should go to Angus Deaton. Deaton is among the foremost authorities on consumption, inequality & poverty in developing countries, and a lot of his research focuses on India. If you wish to educate yourself on modern interpretations of the challenge of poverty & development in India, Deaton really is person you should listen to. His lack of an axe in the cacophonous debates on this helps- he seems to be intellectually compatible with both Surjit Bhalla & Jean Dreze, something that most Indian readers will find unbelievable.

The American finance gurus - Fama, Shiller, Thaler & Ross are all deserving, but I know who I'm rooting for.

Monday, October 08, 2012

A simple framework to think about business cycle macro

I think that my comparative advantage lies in curating and contextualising the insights of my intellectual superiors rather than coming up with new ones.  I like to believe that this is a useful skill in macroeconomics & monetary economics - where people tend to repeat, forget and and re-invent the same debates for a couple of hundred years, and where there is growing evidence that there really is very little new under the sun. The important stuff has probably already been said, debated, understood (and sadly, forgotten) multiple times over. However, there's still ample scope to organise and parse it in a relatively novel fashion.

To this end, I often find myself creating frameworks to organise things I read. The macro-cube still serves me well in organising the leading thinkers. Here's another framework - a much simpler one - to think about the leading theories of short and medium run, or business-cycle macro.

Money, Capital, Production, Prices. That's what business cycle macro is about. The money-capital connection is the 'financial axis' , roughly corresponding to the asset markets and the underlying real assets they represent claims to. The capital-production connection is the 'real axis', the connects the productive capacity of the economy with actual production (via, say, the Cobb-Douglas production function). The money-prices connection is the 'nominal axis', which explores the connection between the purely nominal variables in the economy, e.g. money and total spending, via, say the equation of exchange and QTM.  The production-prices connection connects the macroeconomy with the microeconomics of individual markets - the general equilibrium (GE), so to speak.

It's possible to organize a surprisingly wide array of macro thought along these lines. I will invoke this framework often enough in subsequent posts.