Dollars and Jens
Thursday, September 29, 2011
Upgrades in estimates of service consumption and the trade deficit made the second quarter look less bad than it did a month ago.
III 07IV 07I 08II 08III 08IV 08I 09II 09III 09IV 09I 10II 10III 10IV 10I 11II 11
Gross domestic product3.01.7-1.81.3-3.7-8.9-6.7-.
Nondurable goods.29.06-.53.35-.89-.92-.15-.
Durable goods.43.19-.84-.23-1.01-2.12.19-.291.39-.
Change in private inventories-.28-.77-.66-.14-.73-1.54-2.66-.58.213.933.10.79.86-1.79.32-.28
Fixed investment-.22-.81-1.36-.80-1.91-4.05-5.09-2.26.13-.
Net exports of goods and services1.552.22.382.00.79-.122.442.21-.59.15-.97-1.94-.681.37-.34.24
Government spending.


Friday, September 23, 2011
A classic result from auction theory
This isn't the least bit timely, except that it was covered in one of my classes recently.

The King of Elbonia wants to build a new moat. The Elbonian Construction Group can do the job for $1 million, but the Construction Group of Elbonia has a new technique that brings their costs down. Unfortunately, nobody outside of CGE is quite sure how much, and the insiders can't quite be trusted to be honest about this information; the King's Counselors, though, are well known to believe that CGE could build it for somewhere between $800,000 to $1 million, with any dollar figure in between equally likely; the quality would be the same. Since Elbonia is located in Auction Theorist's World, all agents are known to keep their agreements, to be risk-neutral, to have no costs associated with putting together a bid, and not to anticipate any gain or loss after this deal as a consequence of it; for example, CGE does not worry that giving up information on their costs now will reduce their chance to exploit its privacy in the future. (None of these features of ATW are necessary for the qualitative effect being illustrated, though they will make it bigger, and much easier to calculate.)

The usual thing to do in a situation like this is to put it out for bid, in which case CGE would simply bid $999,999; everyone already knows that CGE is the low-cost producer. As an expected price optimizer, however, the King instead proposes the following: CGE will be hired to build the moat for $900,000, if it wishes to do it for that price; otherwise, ECG will be paid $1,000,000. If CGE can do it for $950,000, of course, the King is spending an extra $50,000 to have ECG do it; why would he do that? Well, with his proposal, there's a 50% chance that he'll save $99,999; the other 50% of the time he only loses $1 based on what CGE would actually bid, so that, overall, he saves an expected value of $50,000 (in round numbers) doing it his way. And, by doing it his way, he keeps CGE honest; there's no reliable way to get CGE to announce its costs while offering to pay no more than that. If he offered CGE two different rates, depending on its costs, CGE would have no reason not to claim to need the higher price. If he raises the price above $900,000, he's losing more, in expectation, than he's gaining.

Suppose neither company's costs are known exactly; then it gets more complicated. If ECG's price is somewhere between $1 million and $1,200,000, again uniformly distributed, the optimal plan turns out to be to ask both firms their price and hire ECG if its price is less than $100,000 more than CGE's price; CGE will be paid $925,000 if it's willing to do the job for less than $900,000, but would have no reason to admit to having lower costs than that; the $25,000 is necessary to keep the company from padding its costs. If ECG comes in right at $1,000,000 (and is hired), ECG will be paid $1,025,000—the $25,000 is, again, to keep it from inflating its costs. The essential point is that, even though ECG is known to be the higher-cost bidder, by committing to hire ECG if its price is close enough to CGE's, CGE can be made to compete with it—to the King's profit, at least in expectation.

As one final note, this is related to placing a reserve price on an auction to sell something you really don't want, anyway. In some sense, the King (in the original story) is selling the right to be paid $1,000,000 to build him a moat, and is asking CGE to bid for it; as far as he knows, it may be worth up to $200,000 to CGE, and he's insisting that CGE pay at least $100,000. If there were more than one potential bidder in the same position as CGE, each with its own cost, they would have to bid against each other, as well as the "reservation price"; with only one bidder, there's no reason to divulge anything but a willingness (or not) to pay the $100,000 for the contract.

Wednesday, September 21, 2011
The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in June August indicates that economic growth so far this year has been considerably slower than the Committee had expected remains slow.   Indicators suggest a deterioration Recent indicators point to continuing weakness in overall labor market conditions in recent months, and the unemployment rate has moved up remains elevated.  Household spending has flattened out, investment been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.   Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up Inflation appears to have moderated since earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks peaks.   Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee now expects a somewhat slower The Committee continues to expect some pickup in the pace of recovery over coming quarters than it did at the time of the previous meeting and but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.  Moreover, there are significant downside risks to the economic outlook have increased , including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further.  However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with its the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent .  The Committee and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these its tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period did not support additional policy accommodation at this time.

Possibly moved phrases:

The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
will maintain its existing policy of


Monday, September 12, 2011
Not Statistically Significant Does Not Mean Zero
I know I've seen this mistake in an accounting paper or two, but I haven't seen it a lot.
In theory, a comparison of two experimental effects requires a statistical test on their difference. In practice, this comparison is often based on an incorrect procedure involving two separate tests in which researchers conclude that effects differ when one effect is significant (P < 0.05) but the other is not (P > 0.05). We reviewed 513 behavioral, systems and cognitive neuroscience articles in five top-ranking journals (Science, Nature, Nature Neuroscience, Neuron and The Journal of Neuroscience) and found that 78 used the correct procedure and 79 used the incorrect procedure. An additional analysis suggests that incorrect analyses of interactions are even more common in cellular and molecular neuroscience. We discuss scenarios in which the erroneous procedure is particularly beguiling.
I suppose real scientists don't have to understand statistics as well as we do because they can do controlled experiments, so the statistics they need is a lot simpler.


Tuesday, September 06, 2011
mark-to-market accounting
Josef Ackermann just gave a terrifying speech about the fragility of the Euro banking sector right now.

At a conference in Frankfurt he said, "It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."
This isn't the first place I've read that. You'll remember that there was some discussion of whether mark-to-market was a mistake three years ago on this side of the Atlantic, or at least whether some debt-like assets should be allowed to stay on the books at a higher value than their market value if there was good reason to believe that the market value was lower for temporary liquidity reasons rather than risk-of-default reasons.

I think there was a stronger argument for supposing that the mortgage-backed securities at issue three years ago were going to pay off eventually - not necessarily in full, but by more than their then-market values indicated - than there is today that the sovereign debt is not really risky. But that's just my visceral judgment.


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