Must-Read: : The Leijonhufvud Tradition:
Suggested slogan: "Nash Equilibria don't just find themselves" https://t.co/gxPzAWkuD5
— Nick Rowe (@MacRoweNick) May 3, 2016
Needed: "overhaul of macroeconomic theory to place the problems of coordination and information front and center" https://t.co/T5bQyMnAp5
— Perry Mehrling (@PMehrling) May 3, 2016
Must-Read: : Computer Science Meets Economics: “Constantinos Daskalakis,[‘s]… dissertation… proves that computing the Nash equilibrium for a three-person game…
…is computationally intractable…. Consequently, Daskalakis argues, it’s unlikely that the real-world markets modeled by game theorists have converged on Nash equilibria either…. When computer scientists run up against an intractable problem, their first recourse is to investigate the tractability of approximate solutions to it. After his doctoral thesis, Daskalakis focused on importing notions of approximation from computer science into economics. First, he published several papers examining the computation of approximate Nash equilibria. Some of those results were disheartening: For general games, even relatively coarse approximations are still intractably hard to find…
Must-Read: At least this has produced some useful work in how to teach the ignorant today things about convergence to equilibrium that Frank Fisher, Tom Sargent, and many others knew very well back at the end of the 1970s:
: Neo-Fisherian Equilibrium with Upper and Lower bounds: “Naryana [Kocherlakota]… [thinks] models should have relatively robust predictions….
If what happens in the limit is totally different from what happens at the limit, we have a problem…. If each boy racer had wanted to drive at 90% of the average speed, we get exactly the same Nash equilibrium, where they all drive at 0km/hr and stay in Ottawa, only now it’s a ‘stable’ equilibrium. We do not get multiple equilibria by adding an upper (or negative lower) bound to their speed. Any plausible equilibrium should be like that; it should be robust to minor changes in the boundary conditions. But if each boy racer wants to drive at 110% of the average speed, so driving at 0km/hr becomes an unstable equilibrium, adding boundary conditions creates new equilibria that are more plausible than the original unstable equilibrium, simply because they are stable….
We can see what Narayana is doing, when he considers a finite horizon version of the same game, as being like adding boundary conditions. If the game’s equilibrium is very fragile when you add or subtract or change those boundary conditions, there is something wrong with that equilibrium. We ought to get the same results in the limit as at the limit. If we don’t, we have a problem. Something like the Howitt/Taylor principle (or controlling a monetary aggregate or NGDP rather than a nominal interest rate) can convert an unstable equilibrium into a stable one.
Must-Read: : Advanced Economies Are so Sick We Need a New Way to Think About Them: “Standard new Keynesian macroeconomics… [and] to an even greater extent… dynamic stochastic general equilibrium (DSGE) models…
…imply that… the only effect policy can have is on the amplitude of economic fluctuations, not on the [average] level of output. This assumption is problematic…. The assumption is close to absurd. It is surely reasonable to assume that better policy could have avoided the Depression or the huge output losses associated with the financial crisis without having shaved off some previous or subsequent peak…. Contrary to the now common view that macroeconomics is best understood by studying the stochastic properties of stationary time series, the most important macroeconomic events are in some sense one off. Think of the Depression or the Great Recession or the high inflation of the 1970s. The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention…