tag:blogger.com,1999:blog-3621026.post6467997807881103910..comments2024-03-28T10:25:22.825+01:00Comments on Robert's Stochastic thoughts: Roberthttp://www.blogger.com/profile/14455788499385673507noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-3621026.post-38801650700167810262010-06-07T13:19:39.265+02:002010-06-07T13:19:39.265+02:00Thanks Nick. I put posts here rather than AngryBe...Thanks Nick. I put posts here rather than AngryBear because they are not ready for prime time. I use this blog to vent (and I have been in need of venting like the top hat in the gulf -- don't watch the video -- it's frightening).<br /><br />OK so Cowen is not mixing up aggregate demand and aggregate supply. <br /><br />However, I still suspect that he is using a model in which uncertainty doesn't affect aggregate demand, because investment in fixed capital isn't important. This is not a realistic model. <br /><br />One can tell aggregate demand from aggregate supply by looking at the price level. If the problem is that firms aren't willing to hire and train workers, then firms have very high marginal cost (they making current workers work overtime). So they should raise their prices. <br /><br />The argument that output is limited by aggregates supply is the argument that increased nominal aggregate demand will cause higher prices not higher real output. With core inflation 1% and falling, there is no evidence to support Cowen's argument.Roberthttps://www.blogger.com/profile/14455788499385673507noreply@blogger.comtag:blogger.com,1999:blog-3621026.post-34635215355922316012010-06-06T22:47:49.261+02:002010-06-06T22:47:49.261+02:00Robert:
I thought that Tyler had mixed up AD and ...Robert:<br /><br />I thought that Tyler had mixed up AD and AS too, when I first read his post. The usual argument is that decline in investment immediately reduces AD, and only later (because the capital stock is growing more slowly than it otherwise would be) causes a decline in AS (or AS to grow at a slower rate).<br /><br />Then I read the Pindyck(?) paper Tyler linked to. In that model, an increase in uncertainty really does cause an immediate decline in AS, and not through the normal channel of slower growing K.<br /><br />Every period, some sectors have a positive, and some a negative, productivity shock. If firms reallocate labour from negative to positive sectors every period, aggregate productivity stays the same over time. But if firms stop reallocating labour, aggregate productivity immediately falls in that same period.<br /><br />Because there are costs to reallocating labour, it's an investment decision. An increase in uncertainty causes that investment in reallocating labour to fall (because it increases the chance you would want to reverse it next period). With less reallocation of labour, aggregate productivity falls immediately. So does AS.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com