Miracles happen. Krugman understands a Diamond-Dybvig model
(more or less). We can quibble about the banking panic part, but he essentially gets it right, and applies it to thinking about the Murray Rothbard elements of Ron Paul's thinking. It's roughly consistent with #3 in this piece.
There is hope.
You really need to see a shrink for Krugman Derangement Syndrome.ReplyDelete
Look, I think Krugman is a hack and all of that, but try to limit yourself to one or two Krugman posts a week... His nonsense isn't going to have any effect on academic macroeconomics, and the public has always had a stupid perception of the field anyway.ReplyDelete
The non-Kruggie posts are much more enjoyable.
I totally agree with 3:31...ReplyDelete
Yes, Prof W is not going to persuade the typical reader of Krugman or Thoma - judging from the average commenter on these 2's blogs, the average reader is only interested in polemics and has no grasp of economic theory. In short, the average moron as identified by Caplan in his book The Myth of the Rational Voter.ReplyDelete
Didn't anyone teach you people about free disposal?ReplyDelete
Nope. What's free disposal?ReplyDelete
Someone provides you something for free. You are free to use it or throw it away. In this case, people seem to be complaining that they were forced to read this post. You don't have to read it.ReplyDelete
You are our graduate student now. We implore you to higher standards everyday w/o contributing anything ourselves :)
So you are the guy handing out pamphlets on the strip in Las Vegas? Certainly what you write is more useful than that. It is certainly more useful than what the guy who is the subject of this post is writing.
An economist once said that dog that doesn't wag its own tail is a sorry dog indeed. And a man who doesn't encourage higher quality in the goods he consumes (holding price constant), even at zero price, is a sorry man as well!ReplyDelete
Actually, there is something interesting going on here. Many people like the Diamond-Dybvig model, including Larry Summers:ReplyDelete
In Summers's discussion, he complains about people who use "decision-theoretic" models, but then speaks well of D-D, which of course is all preferences, endowments, technology, and equilibrium concept. Same with Krugman. In some contexts he complains about models with rationality, or with forward-looking agents, but he likes D-D. Neil Wallace likes D-D too. It's one of his favorite models. Plenty of sophisticated theorists have worked on the thing, including Peck and Shell, Ed Green, and Russ Cooper. Ultimately, what we know about the model is that it doesn't actually deliver on some of what was claimed in the original paper, i.e. bank runs and a role for deposit insurance.
your free disposal argument is not fully valid. There are search cost of finding interesting economic arguments and most of your blog offers nice discussions. Having to read through the krugman stuff in the hope of finding an economic argument is like a queuing friction waiting for good economics. Arguably you offer things nicely for free but given, by revealed preferences, you seem to be interested in economic discussions with your "fans" you must put at least some small values on your reader. reducing search frictions should be welfare enhancing. I suggest that you set up a bank account and we pay your utility loss by focussing on interesting economics instead of krugman. Whats your price? there must be a pareto improvement
I actually like the Krugman bashing. The more meaty posts too.ReplyDelete
In fact, I think this one calls for a whole new post (of the non-Krugman type):
SW: "Ultimately, what we know about the model is that it doesn't actually deliver on some of what was claimed in the original paper, i.e. bank runs and a role for deposit insurance."
What do you mean by this? Is the fact that one of the equlibria disappears whith deposit insurance not robust? Should we rather think in terms of global games a la Goldstein and Pauzner?
I completely agree with the fellow above me. Krugman is insane and influential enough that he must be responded to as often as possible. But, since everyone who reads this blog already has their opinion regarding the efficient level of Krugmania, and we all know that we all have these opinions which will not change, can we please stop wasting precious server space by devoting it to this issue?ReplyDelete
"What do you mean by this? Is the fact that one of the equlibria disappears whith deposit insurance not robust? Should we rather think in terms of global games a la Goldstein and Pauzner?"ReplyDelete
There are two versions of the model in the paper: (i) fraction of early consumers in the population known; (ii) that fraction random.
In case (i), there is a bank run equilibrium, but that's only with an exogenous deposit contract. There is a straightforward modification to that contract (suspension of convertibility) that kills the bank run equilibrium, as long as the bank can commit. Lack of commitment is another issue - see Ennis and Keister's work to clear that up. In case (ii), deposit insurance only works in the paper because the government gets to make payments contingent on how many people show up at the bank, but for some reason the bank can't do that. It's a chicken model of deposit insurance, basically.
What survives from D-D is an interesting model of banking based on diversification, preference shocks, and insurance. It's not a model of deposit insurance, and the bank run component needed subsequent work to develop. The bank runs aren't actually done properly in the original paper.
Opinion on Krugman's latest? http://krugman.blogs.nytimes.com/2011/10/11/why-believe-in-keynesian-models/ReplyDelete
Perhaps you could do a short post on the D-D model. There seems to be a demand for it, anyway.
"There are two versions of the model in the paper:..."ReplyDelete
Thanks for the answer. This is very useful. Particularly for us non-banking economists whose only contact with the topic is having read DD and maybe bits of the book by Freixas and Rochet in the past.
Another citation for your is your economics a science debate.
Wow, John Kay is as big a crackpot as Benjamin.ReplyDelete
I like it when these people describe their alternative approaches:ReplyDelete
"But another approach would discard altogether the idea that the economic world can be described by a universally applicable model in which all key relationships are predetermined. Economic behaviour is influenced by technologies and cultures, which evolve in ways that are certainly not random but which cannot be described fully, or perhaps at all, by the kinds of variables and equations with which economists are familiar."
It's different. I just can't describe it.
The thing I'm trying to figure out is whether DD could be applied, with modifications, to a bond market. Firms issue 2 year bonds to finance illiquid 2 year investment projects. A fraction of people need to sell their bonds at the end of the first year.ReplyDelete
Could there be a run? My first instinct is to say "no". Because if there were a run, the price of bonds would drop, and it would be unprofitable to sell them unless you really needed cash right now.
But maybe in a continuous time model it would be different? If you think there will be a run, you rush to sell now, even if you don't need cash now, because you might need cash tomorrow??
A key problem in DD is that the whole banking arrangement unravels if the agents in the model can trade among themselves in the middle period. If you apply this to bond market trade, the equilibrium you will get is the standard one. You have one-period and two-period bonds, and they are priced in the usual competitive equilibrium fashion.ReplyDelete