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from Lars Syll The first thing to understand about macroeconomic theory is that it is weirder than you think. The heart of it is the idea that the economy can be thought of as a single infinite-lived individual trading off leisure and consumption over all future time … This approach is formalized in something called the Euler equation … Some version of this equation is the basis of most articles on macroeconomic theory published in a mainstream journal in the past 30 years … The models...

October new home sales plummet — but take it with a big grain of salt As you may have already read elsewhere, new home sales plunged -8.9% in October to the seasonally adjusted annual rate of 544,000. Here’s the accompanying graph: BUT … take this with a big grain of salt. The reason I rely on building permits, espectially single family permits, is their much smaller volatility, and *much* smaller rate of revisions. To put this in context, here’s...

from David Ruccio The historically low black unemployment rate is one of Donald Trump’s favorite applause lines. Even Reuters [ht: ja] declares that Trump is right. It doesn’t seem to matter that most of the decline in the unemployment rate for African American workers (from a high of 16.5 percent in the beginning of 2010 to a low of 6.3 percent today) occurred before Trump was ever elected. What does matter is that, even as the rate has dropped (the purple line in the chart above),...

from Lars Syll Dynamic stochastic general equilibrium (DSGE) models remain the work-horse models employed by many academics and research departments at central banks … Prior to the Global Financial Crisis the financial sector played no role in these DSGE models. That limitation is now widely acknowledged and numerous aspects of the financial sector have been incorporated into second and later generation DSGE models … Unfortunately, these efforts are misguided because they do not address...

from Asad Zaman and the current issue of RWER The outcome of all this discussion can be summarized metaphorically by saying that we all use glasses to see the world. The direct world out there is a jumble of sensations – a matrix of points – which makes no sense by itself, and must be interpreted using our own frameworks, represented by the glasses. This means that ALL observations are tinged with subjectivity, and interpreted within the frameworks created by our past experiences,...

The circus that is the Liberal National Party was pushed down the Queensland TV news today by bushfires, caused in turn by an unprecedented heat wave. There’s little doubt that the severity of the heat wave is the result of global warming, and that it’s part of a broader pattern. The two events are, of course, linked. The chaos in the LNP reflects the determination of the climate deniers in its ranks to reject any action to reduce greenhouse emissions. None of these people are acting in...

from John Balder and the current issue of RWER In addition to the explosive growth in credit, the manner in which credit was deployed also shifted toward financing transaction in housing and other assets (e.g., equities, bonds, et al). As noted above, up until the early 1980s, credit was used mostly to finance production of goods and services. Growth in credit from 1945 to 1980 was closely linked with growth in incomes. The incomes that were generated were then used to amortize and...

from Lars Syll [embedded content] A non-trivial part of statistics education is made up of teaching students to perform significance testing. A problem I have noticed repeatedly over the years, however, is that no matter how careful you try to be in explicating what the probabilities generated by these statistical tests really are, still most students misinterpret them.  This is not to blame on students’ ignorance, but rather on significance testing not being particularly transparent...