In the model Krugman set up, what are we likely to find.
Two separate classes, the patient and the impaitent making different bets on the future. The future is suddenly revealed. Depending upon who bet right or wrong, the relative future change will be apportioned. That is the first apart.
What does it give us? The ability to select two possible classes, match their initial conditions to the real economy, and apply the change to see what should have happened. for example, should housing prices have fallen so far. His model would tell us what happens if we know how many were impatient to buy a house vs those patient to wait. If too many were impatient, then they drive the price up, and the too few who were patient drive is back down; the potential energy of the misplaced betting causes overshoot and undershoot. So far, hydraulic model.
How does he get Fischer debt spiral? The hydraulics must have a leak. That is OK, but we have to recognize that the model starts with a smoothness assumption, then introduces an illiquidity assumption, so use the model with care.
No comments:
Post a Comment