The Chimera of Macroeconomics

  For the sake of convenience, we copy the following from somewhere else:   [The policy “guidance” called Oku’s law] is sometimes described as g= 3%- 2Δu , where “ g ” is the percentage increase in GDP [( ΔY/ Y ) over two consecutive periods, and Δu is the percentage decrease in human power ( Δu ≒ - ΔL/L ) between two time points apart by a year. The linkage can be justified only when the unemployment ratios at the two points effectively represent the labor input in the respective period. This assumption is counterfactual if in a “cyclical” economy.       Moreover, this law’s prediction that the percentage gap in GDP is twice (2) as big as the gap in the labor input is the polar opposite of the Solow model’s spirit for the long run: the law of diminishing marginal product of labor puts the number small than the unity (1). Incidentally, the elasticity coefficient is hardly larger than 0.8 for the short or long run if the Cobb-Douglas function i...

  Imagine we get incremental money ( Δ M ) from the “ helicopter drop ,” so to speak. What would take place soonest? 1)      The Fisherian way: We spend Δ M as soon as possible because “ Money is of no use until it is spent ” (1930, p.5). A silver lining nevertheless, the increment ( Δ M ) is never excrement. 2)      The Keynesian way: Our “preference” is to hoard the additional “ liquidity ” ( Δ M ) in small rectangular solid pieces of paper or “thin-airy” demand deposits for fear of the “ liquidity trap ” (1936). 3)      The Hicksian way: The real GDP momentarily shoots up as in M= k ∙ P ∙ Y (1937) with P “sticky” and k “constant.” 4)      The Baumolite way: There will be inflation through a double channel; one the increment of Fisherian money of no use ( Δ M ) and the other the “doubling up” of the velocity of spending ( ΔV ) (1952). 5)      The Mankiw style i...

  “For the sake of convenience,” we copy the following from somewhere else: [The Taylor rule] can be rearranged as r= 1.5π+ 0.5(Y– Y*)/ Y*+ 1 from the original version. Here, (Y– Y*)/Y* represents the percentage gap of the real GDP from its natural level. As a result, its coefficient 0.5, with the time dimension (T -1 ), cannot work as an exponent. Unfortunately, however, some macroeconomists expediently associate such a coefficient with logarithm and effectively take Y/ Y* for log Y – log Y* (e.g. G. Mankiw, Macroeconomics , Ch. 15): they seem to fall into the logarithm trap in that there is no place for the time dimension in the exponent.          At any rate, it is not conceptually easy to link a percentage gap [T 0 , ( Y– Y*)/ Y* ] to a percentage rate   (T -1 , r or π ) with a constant coefficient. Even worse, here again in the rule is the natural level. In the first place, there cannot be such a thing as a natural st...

  For the sake of convenience, we copy the following from somewhere else:   The Phillips curve relates the inflation rate ( π ) to the unemployment “rate” ( u ). Basically, there is dimension aberration: the inflation rate has the time dimension (T -1 , or per peiod) while the unemployment rate, a ratio as a matter of fact, does not (T 0 , or at a moment). In order to link the two, we need a “coefficient” with the time dimension, but finding one may not be easy. To tell the truth, a rate (T -1 ) can if ever be bridged to a ratio (T 0 ) with a third variable (T 1 ) rather than a constant coefficient.     The same holds true for any type of level as well. For example, a price level at t 1 ( P t1 ) may be connected to another at t 2 ( P t2 ) with the inflation rate per certain period ( π ) times a multiple or a fraction ( n ) of the period; that is, P t2 = P t1 ∙ (1+ n ∙π) , where n is a variable in the time dimension (T 1 ).       ...

  Opening any textbook, we come across the AS-AD model. The framework has the price level ( P ) on the ordinate (the y axis) and the “real” GDP ( Y= Y N / P , where Y N supposedly for this year’s “nominal” GDP) on the abscissa (the axis of x ).              First of all, there is a great technical problem that the abscissa ( Y N / P ) is defined to be a function of ordinate ( P ). Most macroeconomists, not to mention the rest of us, would have difficulty traveling in such an unusual coordinate system.             Second of all, with the stock of money ( M* ) and the velocity of money ( V* ) “assumed” to be constant in the model as usual “for the sake of convenience,” the rest of us would have a couldn’t-be-simpler equation P ∙ Y ≡ M* ∙ V*= k with k  again “assumed” constant. The relationship is hyperbolic whether called the “AD curve” or the “AS curve.” ...

  Opening any textbook, we come across the AS-AD model . The framework has the price level ( P ) on the ordinate (the y axis) and the real GDP ( Y= Y N / P , where Y N supposedly for this year’s nominal GDP ) on the abscissa (the axis of x ).              First of all, there is a great technical problem that the abscissa ( Y N / P ) is defined to be a function of ordinate ( P ). Most macroeconomists , not to mention the rest of us, would have difficulty traveling in such an unusual coordinate system.              Second of all, with the stock of money ( M ) and the velocity of money ( V ) assumed to be constant in the model as usual “for the sake of convenience,” the rest of us would have a couldn’t-be-simpler equation P ∙ Y ≡ M ∙ V= k with k assumed constant. The relationship is hyperbolic whether called the “AS curve” or the “AD curve.” That’s fro...

  The following is copied from somewhere else and then slightly modified.              Under the assumption that some firms hold their prices sticky, certain macroeconomists including the influential Harvard economist Gregory Mankiw ( Macroeconomics , 8 th ed. § 14-1) illustrate the AS curve to be P= s∙EP+ (1– s)∙[P+ a∙(Y– Y*)] , where EP is the planned price level (“sticky prices”), “ s ” the fraction of firms stuck to EP , Y* the natural level of output, and “ a ” is a coefficient. Incidentally, the coefficient has a very complicated metric but nevertheless has little meaning as a link between indexes.              The equation has many flaws in addition to dimension aberration and being a relationship of indexes of little meaning on their own. First among other additional defects, firms cannot “set” their prices without affecting their outputs. In the ...