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How could they not know this? "The challenges the world faced in 2010—low home values, credit hard to get, central banks unable or unlikely to lower interest r
by Aloha 13y ago
How could they not know this?
"The challenges the world faced in 2010—low home values, credit hard to get, central banks unable or unlikely to lower interest rates further—“were nonexistent in representative-agent models,” says Christopher Carroll, who teaches at Johns Hopkins. At the ECB’s Frankfurt conference, Carroll presented a paper that bolstered Krusell and Smith’s model with microeconomic data. For Carroll, people differ in one crucial way. “The marginal propensity to consume,” according to the paper, “is substantially larger for low-wealth than for high-wealth households.” Rich people behave like the hyperrational agent. They plan for the future. They save during a stimulus, thinking about the taxes to come. And they can borrow during a fiscal contraction.
Poor people are what economists call “borrowing constrained.” They tend to have more needs than are being met, so when money arrives, they spend it. When the government stops spending and credit is hard to come by, the mythical everyman, like the rich person, continues to spend. But most real people don’t have access to credit, and they hunker down. Carroll’s findings have been confirmed by other academics in the last two years who looked at Italian and U.S. data."
I remember what poor was - I always knew where my paycheck went well before I got it.
- noisysocks 13y agoI can only imagine the ECB ignored this reality so as to justify their recommendation for governments to implement austerity.
- anigbrowl 13y agoTwo possible reasons: 1) they know, but it isn't easy to demonstrate, so it doesn't get published and therefore it doesn't exist because nobody can provide a citation. Alternatively, 2) most people who have economics degrees are fortunate enough never to have struggled with serious poverty
- deleted 13y ago[deleted]
- PeterisP 13y ago"How could they not know this?" -> before 2010, these assumptions held when comparing models to reality. A major issue is that detailed economic models are verified against the limited time period where we have detailed data, so if some factor X is constant during that time, then you can't really know if its modeled appropriately.
- xixi77 13y agoI have not seen the Carroll paper, but actually all the description in the article fully applies to the original Krussel and Smith paper, which I know very well. One problem here is that actually, heterogeneity does not really matter much for the aggregate! In other words, the model may be more realistic, but the aggregate behavior -- such as consumption and economic growth -- tends to be relatively unaffected by inequality. This happens because of two things: (1) the poor people, exactly because they are poor, do not consume enough to create a meaningful economy-wide impact, and (2) people really hate being poor, and save more during good times so that they don't get hit with the constraints in bad times. The second one can be to some extent accounted for by allowing a sizable fraction of people to be somewhat irrational, and by getting rid of the "infinitely lived" consumers; the first would stay though. I am curious about what is exactly done in the Carroll paper to make it matter.