Monday, April 23, 2007

More Macro Musing

First off, just so everyone is clear - I am in no way a macroeconomist. My only course in monetary economics was in the core and I had that as an undergrad. These are simply my only mildly educated thoughts, with the hopes that my commenters can point me to good resources.

Now, two markets which introduce much of the messiness into non-neutrality are the labor market and the housing market. Unfortunately these two markets account for the lion's share of economic activity.

However a few facts are striking to me

(1) Both of these markets entail a good deal of matching. You don't just go out and buy a house, you buy a particular house in a particular location. You don't just take a job, you take a particular job.

(2) There seems to be a great deal of surplus associated with both jobs and housing. For example, you lose a job or you lose the house. Being laid off or being foreclosed on are particularly stressful events in people's lives.

(3) Regardless of whether or not these housing and employment contracts have to be nominally rigid they are nominally rigid. That is, people choose to have jobs that pay a certain amount no matter how good business is and people choose to have mortgages that don't move with interest rates.

The second fact is extremely striking because one can choose a mortgage that moves with the market and can save money by doing so. Yet, few people choose this.


My initial feeling is that the matching produces surplus which leads people to try to secure it by writing contracts with nominal rigidity.

So perhaps there is this sort of problem, some of the variance in the labor and housing markets comes from money and some from real shocks. I want to insure against the real shocks, but how can I write a contract that insures against real shocks without insuring against nominal ones?

We could index for inflation, but that assumes that the shock makes its way through to the price level. House else can you insure against a money shock?

15 comments:

dWj said...

The prices of both labor and houses seem to be stickier downward than upward; people refuse to accept that they might have to work for fewer dollars than they did before, and many house sellers, rather than take a loss, will pull their house from the market.

That doesn't seem to be the rigidity you're referring to with the interest rate question. I object a little bit to calling it a housing phenomenon; it's a debt phenomenon, and the fact that the debt is secured by a house is, to exaggerate a teensy bit, irrelevant. But watch me refer in the next paragraph to house price inflation as though it were relevant.

The cash flows associated with a pure ARM -- say one indexed to LIBOR -- are hard to foresee and potentially ruinous; if short-term rates go to 15%, even if I'm getting an annual raise on that level, my mortgage payment is going to rise a lot more suddenly and quickly than my paycheck. If my paycheck and housing prices go up in lockstep, and short-term interest rates keep a constant spread above the rate of housing-and-salary inflation -- which is probably a decent approximation over time periods that aren't too short -- then it makes a world of sense for me to be making debt payments that are ammortized at a rate corresponding to that basis, so that the percent of equity I have in my house is pre-scheduled and the amount of my paycheck that goes to the mortgage is constant for the length of the loan. This, I think, is what you're suggesting.

This will, however, require negative ammortization in nominal dollar terms if inflation picks up early in the loan; my house is gaining value faster than my debt, as a percentage of the value of the house, is shrinking. This is very much not a sign of credit shakiness or, for that matter, a lack of thrift, but I think people are used to thinking in nominal terms, and believe that they're going backward if the debt is increasing, even if both its purchasing power and their ability to pay it are increasing faster.

Incidentally, I read once where an economist -- I want to say it was Bill Poole, but I gave away the book after I finished reading it, so I can't check that -- commented that economists may underestimate the true per se costs of inflation because everyone they know has a ready handle on logarithms. An economist can simply deflate numbers by price indices where appropriate, and allow for expected inflation, and quite possibly do such things almost intuitively, possibly even unconciously, while Farmer Jones is busy enough worrying about the moisture content of his soybeans that his own mechanisms for planning for the future are more notably disrupted by such things as the change in the value of the dollar.

dWj said...

I don't think it was Poole; I think it was John Taylor, of the "Taylor rule".

It was a book from a small symposium on monetary theory, of which the two principal participants were either Taylor or Poole and someone else famous, and the other of Taylor or Poole then had a smaller contribution as well. I think it was from the late nineties.

Anonymous said...

Do you have copy writer for so good articles? If so please give me contacts, because this really rocks! :)

Anonymous said...

Do you have copy writer for so good articles? If so please give me contacts, because this really rocks! :)

Anonymous said...

You have to express more your opinion to attract more readers, because just a video or plain text without any personal approach is not that valuable. But it is just form my point of view

Anonymous said...

turbulence training -
two minute profits -
vincedelmontefitness -
vince del monte fitness -
warp speed fat loss -
web traffic machines -
wedding speech 4u -
wind plans -
xp repair pro -
your fun business -
zygor guides -
500 love making tips -
acid alkaline diet -
acne no more -
advanced defrag -
anti spyware bot -
art of approaching -
banish tinnitus -
beat eczema -
blood pressure normalized -
burnthefat -
burn the fat -
conversationalhypnosis -
conversational hypnosis -
cpa arbitrage -
creative date ideas -
debt free in three -
digital background -
dirty talking guide -
discus fish secrets -
duplicate file cleaner -
dw insider -
earth4energy -
earth 4 energy -

Anonymous said...

easy tv soft -
easy web video -
eatstopeat -
eat stop eat -
end your tinnitus -
error doctor -
evidence smart -
fap winner -
fat burning furnace -
fat loss 4 idiots -
final sync -
final uninstaller -
firewall gold -
fitness model program -
fit over 40 -
fit yummy yummy -
flatten your abs -
forex auto pilot -
gain opinion -
gold secrets -
government records -
governmentregistry -
government registry -
green diy energy -
healthy urban kitchen -
highest pay surveys -
holo think -
homemadeenergy -
home made energy -
i want a teaching job -
joyful tomato -
keyword elite -
learn photoshop videos -
lmt forex formula -

Anonymous said...

lower body make over -
macro virus -
malware bot -
maternityacupressure -
maternity acupressure -
meet your sweet -
microcap millionaires -
moles warts removal -
money siphon system -
muscle gaining secrets -
my list strategy -
my phone riches -
natural cancer treatments -
online tv pc -
panic away -
pdf creator -
peel away ads -
pips leader -
ppc web spy -
prevent sweating -
privacy control -
publicrecordspro -
public records pro -
questions for couples -
quick article pro -
quick paid surveys -
quit smoking today -
reg defense -
registry winner -
reg tool -
reverse mobile -
richard mackenzie direct -
rocket german -
rotator cuff training -

Anonymous said...

rss feeds submit -
satellite pc box -
save the marriage -
spy no more -
spyware stop -
super seduction power -
surefire trading challenge -
tattoo me now -
the bad breath report -
thedietsolutionprogram -
the diet solution program -
the dog food conspiracy -
the mini site formula -
tmj help -
tonsil stones remedies -
truth about abs -
twitter trick -
vincedelmontefitness -
vince del monte fitness -
warp speed fat loss -
wedding speech 4u -
win clear -
xbox 360 red light fix -
xp repair pro -
500 love making tips -
acid alkaline diet -
advanced defrag -
alpha male system -
amazing cover letters -
anti spyware -
anti spyware bot -
article rewriter -
art of approaching -
auto cash system -

Anonymous said...

burnthefat -
burn the fat -
bv cures -
calling men -
camera dollars -
carb rotation diet -
cash making power sites -
cb mall -
combat the fat -
conversationalhypnosis -
conversational hypnosis -
credit secrets bible -
destroy hemorrhoids -
dirty talking guide -
dotcom income secrets -
duplicate file cleaner -
dvd copy pro -
earth4energy -
earth 4 energy -
easy launcher -
easy system cleaner -
eatstopeat -
eat stop eat -
eczema free forever -
end your tinnitus -
error nuker -
fatburningfurnace -
fat burning furnace -
fat loss 4 idiots -
final sync -
firewall gold -
fitness model program -
fit over 40 -
fit yummy yummy -

Anonymous said...

flattenyourabs -
flatten your abs -
forex candlesticks made easy -
forex killer -
forex megadroid -
get rid of your cellulite -
g money pro -
google shadow -
governmentregistry -
government registry -
gov resources -
health biz in a box -
homemadeenergy -
home made energy -
hybrid water power -
i software tv -
joyful tomato -
keyword spy pro -
kingdom of pets -
macro virus -
malware bot -
maternityacupressure -
maternity acupressure -
meet your sweet -
microcap millionaires -
moles warts removal -
mole wart removal -
muscle gaining secrets -
natural cure for yeast infection -
paid surveys etc -
panic away -
pdf creator -
public records pro -
quick article pro -

Anonymous said...

quick income blueprint -
quit smoking today -
ranking loophole -
reg clean -
reg defense -
regi cleanse -
registry easy -
registry genius -
registry winner -
reg sweep -
reg tool -
reverse mobile -
richard mackenzie direct -
rig worker -
rocket chinese -
rocket french -
rocket german -
rotator cuff training -
rss feeds submit -
save the marriage -
site builder elite -
six figure yearly 2009 -
sleep tracks -
sold in 21 days -
spyware stop -
stop being tired -
stop your hair loss -
the bad breath report -
thedietsolutionprogram -
the diet solution program -
tonsil stones remedies -
top secret magic code -
truth about abs -
turbulence training -

Anonymous said...

turn your photos into cash -
vincedelmontefitness -
vince del monte fitness -
warp speed fat loss -
wedding speech 4u -
win clear -
xbox 360 red light fix -
xp repair pro -
1st promotion -
3 redlight fix -
500 love making tips -
acid alkaline diet -
advanced defrag -
anti spyware -
anti spyware bot -
art of approaching -
banish rosacea -
blog lock down -
brad yates -
building a chicken coop -
burnthefat -
burn the fat -
carb rotation diet -
combat the fat -
conversationalhypnosis -
conversational hypnosis -
copy n profit -
credit secrets bible -
cure angular cheilitis -
cure morning sickness -
dirty talking guide -
domain tweak system -
dotcom income secrets -
duplicate file cleaner -

Anonymous said...

earth4energy -
earth 4 energy -
easy launcher -
easy system cleaner -
eatstopeat -
eat stop eat -
eczema free forever -
email finder -
energy 2 green -
error nuker -
evidence smart -
fat burning furnace -
fat loss 4 idiots -
final sync -
fitness model program -
fit yummy yummy -
flattenyourabs -
forex enterprise -
governmentregistry -
government registry -
home job stop -
homemadeenergy -
home made energy -
how do i get him back -
hyper vre -
keyword spy pro -
kingdom of pets -
mafia war secrets -
malware bot -
master cleanse secrets -
maternityacupressure -
maternity acupressure -
maximum paid surveys -
meet your sweet -

Anonymous said...

mobile tv pro -
musclegainingsecrets -
muscle gaining secrets -
my dish biz -
one minute cure -
paid surveys online -
panic away -
pc tv 4 me -
pdf creator -
perfect optimizer -
pick the gender of your baby -
plr wholesaler -
private niche empire -
project quick cash -
public records pro -
pull your ex back -
quick article pro -
quit smoking today -
reality creation secrets -
reg clean -
regi cleanse -
registry easy -
registry fix -
registry winner -
reg sweep -
reg tool -
reverse mobile -
reverse phone detective -
richard mackenzie direct -
rich garbage man -
rocket chinese -
rocket french -
seize cars -
shop until you drop -