Heterodox Shocks Prepared for Eastern Economic Association conference, - PowerPoint Presentation

Slide1

Heterodox ShocksPrepared for Eastern Economic Association conference,New York, May 9, 2013

Greg

Hannsgen

Levy Economics Institute of Bard College

Annandale-on-Hudson, New York, United States

www.levyinstitute.orgSlide2
Slide3
Slide4

Views from reference works:2nd

edition Companion to Post Keynesian Economics (2012)—Mentions shocks only as part of exogenous approach in entry on “business cycles”

New Palgrave Dictionary (1987 edition)—mentions “innovations”—time-series forecast errors—in entry for “time series.” But no separate listing for “shocks” of any kindSlide5

Idea of paper

Readers and heterodox economists

(W.C. Mitchell [1927], J.M. Keynes [1936],

H.

Minsky

[1954], M

.

Kalecki

[1956], L.

Pasinetti

[1962], G. Shackle [1973], L. Taylor [2010], W. Godley [2012], many others)

alike have benefited from the use of this tool/trope.

Looking at this topic a bit like studying our pencils or computers. They are there, but not often thought of as a subject in themselves or seriously studied.

The two types of shocks correspond broadly to (

Type 1

)

Keynes’s “changes in independent variables”

(1936) and (

Type 2

)

random simulation shocks

as in

Kalecki’s

Theory of Economic Dynamics

(1956).Slide6

Type 1 shocks (one-time impulses) have roots in Keynes’s

General Theory

Chapter 18 divides exogenous factors into “independent variables” and “given factors”

In practice, “…there is not one [factor] which is not liable to change without much warning, and sometimes substantially” (p. 249).

Example: Relatively stable but “precarious” social conventions normally undergird stock-market prices.

Sudden “crises” are a distinct dynamic phenomenon developed in Chapter 22 on the business cycle

OTHER RELEVANT SOURCES: J.M. Keynes (1937) and in G.L.S. Shackle’s

Keynesian

Kaleidics

(1973)

Often used as one-time simulation shocks, as in

this example

from Lavoie and Godley ([2006] 2012)Slide7

Type 2 heterodox shocks: randomly drawn shocks used in simulations

Stochastic error terms or parameters used throughout simulations, not just to set initial conditions

Example 1

: C.

Chiarella

, P.

Flaschel

, and R.

Franke

(2005), chapter on Keynes-Metzler-Goodwin-Taylor rule model: normally distributed shocks to aggregate demand equation.

Example 2

: W. Godley used random demand shocks in simulations of a sequence of events in posthumously published “Macroeconomics without Equilibrium or Disequilibrium” (2012). Slide8

Practical suggestions (tentative)Some forms of hybrid shocks, if you will, may be useful. Occasional shocks for simulations, a bit like regime changes

Condition expected size or rate of occurrence of shocks on prior events. Example:

Mean rate

of occurrence = f(fragility, time since last occurrence)

Size, given that crisis occurs = g(fragility, time since last occurrence, size of economy)

Consider use of

stable

(i.e., “

Lévy

-stable” or “alpha-stable”)

shocks

(potentially fat-tailed and/or skewed) when empirical work suggests that they fit.Slide9

Possible characteristics of shocks considered in sections of the paperKeynesian?

Exogenous?

Noneconomic?

Inexplicable?

Random?

Stably distributed?

Unexpected?

Symmetric?

Comparable to other heterodox

techniques?

Anomalous?

Merely expositional?

Historical?

Pragmatic?

Jumpy (discontinuous)?Slide10

Pragmatic considerationsSometimes things jump exogenously with a major effect on macro variables—how else do you model a 10-percent market correction in one day?

Shocks sometimes allow role for history—sometimes it

does

matter, even in economics

Avoid implication of complete predictability, given model and initial conditions

Not

everything

can be ascribed to deterministic causes. Yes, there are nonlinear endogenous dynamics; don’t forget them either

Often just as good as deterministic model if goal is model that can mimic properties of data series.

Use them to

s

how robustness to a skeptical publicSlide11

J. Steindl: They are there

“

My personal point of view is that the shocks are there in any case…I think it is most important keep a theory of the cycle flexible so that it will be capable of accommodating all the exogenous influences: the history, the accidents, and that a simple endogenous model cannot possibly take into

account.”

In “Reflections on

Kalecki’s

Dynamics” (1989)Slide12

Shackle: transformation in an hour or a moment

By the

kaleidic

theory I mean the view that the expectations, which together with the drive of needs or ambitions make up the ‘spring of actions’, are at all times so insubstantially founded upon data and so mutably suggested by the stream of ‘news’, that is, of counter-expected or totally unthought-of events, that they can undergo complete transformation in an hour or even a moment, as the patterns in the kaleidoscope dissolve at a

touch…

In

Keynesian

Kaleidics

(1973)Slide13

Back to outline

Source:

Approaches to Stock-flow Modeling,

Lavoie and

Zezza

, eds., New York, Palgrave Macmillan, 2012

.Slide14

Back to outline

Sources:

C.

Chiarella

,

P.

Flaschel

, and

Fr

a

nk

ë

,

Foundations for a

Disequilibrium Theory

of the Business Cycle,

Cambridge University

Press, 2005Slide15

Related imageSlide16

Back to outlineSlide17

Source:

Book authors’ webpage containing

Eviews

macros for

Monetary Economics:

An Integrated Approach to Credit, Money,

Income, Production and Wealth,

Palgrave Macmillan, 2006, 2012

http

://

gennaro.zezza.it/software/eviews/glch10.php#insout5

Back to outline